Indexinability to Financial Statements
raise or delays in raising funding necessary to initiate or continue a trial;inability to monitor patients adequately during or after treatment; and
inability or unwillingness of medical investigators to follow our clinical protocols.
In addition, we, the FDA, or other regulatory authorities and ethics committees with jurisdiction over our studies may
terminate or suspend our clinical trials at any time if it appears that we are exposing participants to unacceptable health risks or if the FDA or other authorities find deficiencies in our regulatory submissions or the conduct of these trials. Therefore, we cannot predict with any certainty the schedule for existing or future clinical trials. Any such unexpected expenses or delays in our clinical trials could increase our need for additional capital, which may not be available on favorable terms or at all.
If we are required to conduct additional clinical trials or other testing of our product
candidatescandidate beyond those that we currently contemplate, if we are unable to successfully complete clinical trials of our product
candidatescandidate or other testing, if the results of these clinical trials or tests are not positive or are only modestly positive and/or if there are safety concerns, we may:
be delayed in obtaining marketing approval for our product candidates;
candidate;not obtain marketing approval at all;
obtain approval for indications or patient populations that are not as broad as intended or desired;
obtain approval with labeling that includes significant use or distribution restrictions or safety warnings;
be subject to additional post-marketing testing requirements; or
have our product candidate(s) removed from the market after obtaining marketing approval.
Our development costs will also increase if we experience delays in testing or marketing approvals. We do not know whether any of our preclinical studies or clinical trials will begin as planned, will need to be restructured or will be completed on schedule, or at all. Significant preclinical study or clinical trial delays also could shorten any periods during which we may have the exclusive right to commercialize our product
candidatescandidate or allow our competitors to bring
a product
candidatescandidate to market before we do, and thereby impair our ability to successfully commercialize our product
candidates.candidate.
The results of our clinical trials may not support the intended use of
our products.Qtrypta™ (M207) or any other product candidates we may develop.
Even if our clinical trials are completed as planned, we cannot be certain that the results will support the intended use of our products. Success in preclinical testing and early clinical trials does not ensure that later clinical trials will be successful, and we cannot be sure that the results of later clinical trials will replicate the results of prior clinical trials and preclinical testing. The clinical trial process may fail to demonstrate that our product
candidates arecandidate is safe for humans and effective for indicated uses. This failure would cause us to abandon a product candidate and may delay development of other product candidates. Any delay in, or termination of, our clinical trials will delay the
filingsubmission of our
NDAsNDA with the FDA and, ultimately, our ability to commercialize our product
candidatescandidate and generate revenues. In addition, our clinical trials to date have involved small patient populations. Because of the small sample sizes, the results of these clinical trials may not be indicative of future results.
Clinical failure can occur at any stage of clinical development. Because the results of earlier clinical trials are not necessarily predictive of future results, any product candidate we advance through clinical trials may not have favorable results in later clinical trials or receive regulatory approval.
Clinical failure can occur at any stage of clinical development. Clinical trials may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical or preclinical trials. In addition, data obtained from trials are susceptible to varying interpretations, and regulators may not interpret our data as favorably as we do, which may delay, limit or prevent regulatory approval. Success in preclinical testing, early clinical trials and even later stage clinical trials, like our phase 2/3 ZOTRIP trial, does not ensure that later clinical trials will generate the same results or otherwise provide adequate data to
demonstrate the efficacy and safety of a product candidate. Frequently, product candidates that have shown promising results in early clinical trials have subsequently suffered significant setbacks in later clinical trials. In addition, the design of a clinical trial can determine whether its results will support approval of a product and flaws in the design of a clinical trial may not become apparent until the clinical trial is well advanced. While members of our management team have experience in designing clinical trials, we have limited experience in designing clinical trials and we may be unable to design and execute a clinical trial to support regulatory approval. Further, clinical trials of potential products often reveal that it is not practical or feasible to continue development efforts. If our product candidates arecandidate is found to be unsafe or lack efficacy, we will not be able to obtain regulatory approval for them and our business would be harmed.
We may in the future conduct clinical trials for product candidates in sites around the world, and government regulators, including the FDA in the United States, may choose to not accept data from trials conducted in such locations.
We have conducted, and may in the future choose to conduct, one or more of our clinical trials outside the United States.
There is no guarantee that data from these clinical trials will be accepted by regulators approving our product
candidatescandidate for commercial sale. In the case of the United States, although the FDA may accept data from clinical trials conducted outside the United States, acceptance of this data is subject to certain conditions imposed by the FDA. For example, the clinical trial must be
well designed and conducted
and performed by qualified investigators in accordance with
ethical principles. The trial population must also adequately represent the United States population,GCP and
the data must be applicable to the United States population and United States medical practice in waysconducted such that the FDA
deems clinically meaningful. Generally,is able to validate the
patient population for any clinical trials conducted outside ofdata from the
United States must be representative of the population for whom we intend to label the product in the United States.study through an onsite inspection if deemed necessary. In addition, while these clinical trials are subject to the applicable local laws, FDA acceptance of the data will be dependent upon its determination that the trials also complied with all applicable U.S. laws and regulations. There can be no assurance the FDA will accept data from trials conducted outside of the United States. If the FDA does not accept the data from our clinical trials, it would likely result in the need for additional clinical trials, which would be both costly and time-consuming and likely to delay or permanently halt our development of a product candidate. Similar regulations and risks apply to other jurisdictions as well.
In addition, the conduct of clinical trials outside the United States could have a significant negative impact on us. Risks inherent in conducting international clinical trials include:
foreign regulatory requirements that could restrict or limit our ability to conduct our clinical trials;
administrative burdens of conducting clinical trials under multiple foreign regulatory schema;
foreign exchange fluctuations; and
diminished protection of intellectual property in some countries.
We will not be able to sell our products if we do not obtain required United States regulatory approvals.
We cannot assure you that we will receive the approvals necessary to commercialize M207, our other product candidatesQtrypta™ (M207) or any product candidate we acquire or develop in the future. We will need FDA approval to commercialize our product candidatescandidate in the United States. In order to obtain FDA approval of any product candidate, we expect that we will have to submit to the FDA an NDA demonstrating that the product candidate is safe for humans and effective for its intended indication and indicated use. This demonstration requires significant research and animal tests, which are referred to as preclinical studies, as well as human tests, which are referred to as clinical trials. Satisfaction of the FDA’s regulatory requirements typically takes many years, depends upon the type, complexity and novelty of the product candidate and requires substantial resources for research, development and testing. We cannot predict whether our product candidatescandidate will ultimately be considered safe for humans and effective for indicated uses by the FDA. The FDA has substantial discretion in
the drug approval process and may require us to conduct additional preclinical and clinical testing or to perform post-marketing studies. The approval process may also be delayed by changes in government regulation, future legislation or administrative action or changes in FDA policy that occur prior to or during its regulatory review. Delays in obtaining regulatory approvals may:
delay commercialization of, and our ability to derive product revenues from, our products;
impose costly procedures on us; and
diminish any competitive advantages that we may otherwise enjoy.
We may never obtain regulatory approval for any of our product candidates. Failure to obtain approval of any of our product candidates will severely undermine our business by leaving us without a saleable product, and therefore without any source of revenues, unless other products can be developed. There is no guarantee that we will ever be able to develop or acquire another product.
Even if
M207Qtrypta™ (M207) or any other product candidates we develop in the future receive regulatory approval,
weour business is subject to extensive regulatory requirements which include ongoing and continued regulatory review, which may
still face future developmentresult in significant expense and
regulatory difficulties.limit our ability to commercialize our products.
The manufacturing processes, post-approval clinical data, labeling, advertising and promotional activities for our product candidates will be subject to continual requirements of and review by the FDA and other regulatory authorities. These requirements include submissions of safety and other post-marketing information and reports, registration and listing requirements,
current good manufacturing practices, or cGMP requirements relating to quality control, quality assurance and corresponding maintenance of records and documents, requirements regarding the distribution of samples to physicians and recordkeeping. The regulatory approvals for our product
candidatescandidate may be subject to limitations on the indicated uses for which the products may be marketed or to the conditions of approval or contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the product
candidates.candidate. The FDA closely regulates the post-approval marketing and promotion of drugs and drug delivery devices to ensure they are marketed only for the approved indications and in accordance with the provisions of the approved labeling. The FDA imposes stringent restrictions on manufacturers’ communications regarding
off-label use and, if we do not market our product
candidatescandidate for their approved indications, we may be subject to enforcement action for
off-label marketing.
The FDA has the authority to require a
Risk Evaluation and Mitigation Strategy (“REMS
”) as part of an NDA or after approval, which may impose further requirements or restrictions on the distribution or use of an approved drug, such as limiting prescribing authorization to certain physicians or medical centers that have undergone specialized training, limiting treatment to patients who meet certain
safe-use criteria or requiring patient testing, monitoring and/or enrollment in a registry.
We may also be subject, directly or indirectly through our customers and partners, to various fraud and abuse laws, including, without limitation, the U.S. Anti-Kickback Statute, U.S. False Claims Act, and similar state laws, which impact, among other things, our proposed sales, marketing, and scientific/educational grant programs. If we participate in the U.S. Medicaid Drug Rebate Program, the Federal Supply Schedule of the U.S. Department of Veterans Affairs, or other government drug programs, we will be subject to complex laws and regulations regarding reporting and payment obligations. All of these activities are also
potentially subject to U.S. federal and state consumer protection and unfair competition laws and similar requirements in other countries.
With respect to sales and marketing activities by us or any future partner, advertising and promotional materials must comply with FDA rules in addition to other applicable federal, state and local laws in the United States and similar legal requirements in other countries. In addition, our product labeling, advertising and promotion would be subject to regulatory requirements and continuing regulatory review. The FDA strictly regulates the promotional claims that may be made about prescription products. In particular, a product may not be promoted for uses that are not approved by the FDA as reflected in the product’s approved labeling. If we receive marketing approval for our products, physicians may nevertheless legally prescribe our products to their
patients in a manner that is inconsistent with the approved label. If we are found to have promoted suchoff-label uses, we may become subject to significant liability and government fines. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion ofoff-label uses, and a company that is found to have improperly promotedoff-label uses may be subject to significant sanctions, including revocation of its marketing approval. The federal government has levied large civil and criminal fines against companies for alleged improper promotion and has enjoined several companies from engaging inoff-label promotion. The FDA has also requested that companies enter into consent decrees of permanent injunctions under which specified promotional conduct is changed or curtailed.
In addition, later discovery of previously unknown problems with our product
candidates,candidate, manufacturing processes, or failure to comply with regulatory requirements, may yield various results, including:
restrictions on such product candidate, or manufacturing processes;
restrictions on the labeling or marketing of a product;
restrictions on product distribution or use;
requirements to conduct post-marketing clinical trials;
warning or untitled letters;
withdrawal of the products from the market;
refusal to approve pending applications or supplements to approved applications that we submit;
fines, restitution or disgorgement of profits or revenue;
suspension or withdrawal of marketing approvals;
refusal to permit the import or export of our products;
injunctions or the imposition of civil or criminal penalties.
The occurrence of any event or penalty described above may inhibit our ability to commercialize our products and generate revenue. Adverse regulatory action, whether
pre- or post-approval, can also potentially lead to product liability claims and increase our product liability exposure.
Changes in funding for the FDA and other government agencies could hinder their ability to hire and retain key leadership and other personnel, or otherwise prevent new products and services from being developed or commercialized in a timely manner, which could negatively impact our business.
The ability of the FDA to review and approve new products can be affected by a variety of factors, including government budget and funding levels, ability to hire and retain key personnel and accept the payment of user fees, and statutory, regulatory, and policy changes. Average review times at the agency have fluctuated in recent years as a result. In addition, government funding of other government agencies that fund research and development activities is subject to the political process, which is inherently fluid and unpredictable.
Disruptions at the FDA and other agencies may also slow the time necessary for new drugs to be reviewed and/or approved by necessary government agencies, which would adversely affect our business. For example, over the last several years, including for 35 days beginning on December 22, 2018, the U.S. government has shut down several times and certain regulatory agencies, such as the FDA, have had to furlough critical FDA employees and stop critical activities. If a prolonged government shutdown
occurs, it could significantly impact the ability of the FDA to timely review and process our regulatory submissions, which could have a material adverse effect on our business.
We or any of our future partners may choose not to continue developing
or commercialize a product or product candidate at any time during development or
commercialize it after approval, which would reduce or eliminate our potential return on investment for that product or product candidate.
We currently do not have any products approved for sale and currently are focusing our clinical development efforts solely on
M207.Qtrypta™ (M207). Currently, we do not have any collaborations with any partners for any of our products.
In April 2016, we suspended further development related to our other candidates, Daily B104, Weekly B206 and D107.At any time, we or any partners with whom we collaborate in the future may decide to discontinue the development of a marketed product or product candidate or not to continue commercializing a marketed product or a product candidate for a variety of reasons, including the appearance of new technologies that make our product obsolete, the position of our partner in the market, competition from another product, or changes in or failure to comply with applicable regulatory requirements. If we or our partners terminate a program in which we have invested significant resources, we will not receive any return on our investment and we will have lost the opportunity to allocate those resources to potentially more productive uses. If one of our future partners terminates a development program or ceases to market an approved or commercial product, we will not receive any future milestone payments or royalties relating to that program or product under a partnership agreement with that party.
We may not be able to complete the clinical trials required for our product
candidates.candidate.
We may not be able to complete the clinical trials required for our product
candidatescandidate in a timely manner, or at all, and ultimately obtain regulatory approval for any of our product candidates. If we are unable to complete clinical trials of and obtain regulatory approval for our product
candidates,candidate, our business will be significantly affected.
Our long-term growth will be limited unless we successfully develop a pipeline of additional product candidates.
Our long-term growth will be limited unless we successfully develop a pipeline of additional product candidates. We do not have internal new drug discovery capabilities, and our primary focus is on developing improved intracutaneous drug delivery systems by reformulating drugs previously approved by the FDA using our proprietary technologies.
If we are unable to expand our product candidate pipeline and obtain regulatory approval for our product
candidatescandidate on the timelines we anticipate, we will not be able to execute our business strategy effectively and our ability to substantially grow our revenues will be limited, which would harm our long-term business, results of operations, financial condition and prospects.
If serious
Our product candidate may cause adverse
effects or
inappropriate side effects are identified duringhave other properties that could delay or prevent their regulatory approval or limit the
clinical trialsscope of
our product candidates, we may need to abandon our development of some of these product candidates.M207any approved label or market acceptance, or result in significant negative consequences following market approval, if any.
Qtrypta™ (M207) and any other product candidates we develop in the future may have undesirable side effects or have characteristics that are unexpected.
If any These could be attributed to the active ingredient or class of drug or to our unique formulation of our product candidatescandidate, or other potentially harmful characteristics. Such characteristics could cause use, our IRBs, clinical trial sites, the FDA or other regulatory authorities to interrupt, delay or halt clinical trials, including the imposition of clinical holds, and could result in a more restrictive label or delay, denial or withdrawal of regulatory approval, which may harm our business, financial condition and prospects significantly.
In addition, if our product candidate receives marketing approval, and we or others later identify serious adverse events or undesirable side
effects:regulatory authorities may imposeeffects caused by such product, a clinical hold whichnumber of potentially significant negative consequences could result, in substantial delays and adversely impact our ability to continue development of the product candidate;
including:regulatory authorities may require the addition of labeling statements, specific warnings, a contraindication or field alerts to physicians and pharmacies;
we may be required to change the way the product candidate is administered, conduct additional clinical trials or change the labeling of the product;
we may be required to implement a risk minimization action plan,REMS, which could result in substantial cost increases and have a negative impact on our ability to commercialize the product candidate;
we may be required to limit the patients who can receive the product candidate;
we may be subject to limitations on how we promote the product candidate;
sales of the product candidate may decrease significantly;
regulatory authorities may require us to take our approved product candidate off the market;
we may be subject to litigation or product liability claims; and
our reputation may suffer.
Any of these events could prevent us from achieving or maintaining market acceptance of the affected product candidate or could substantially increase commercialization costs and expenses, which in turn could delay or prevent us from generating significant revenues from the sale of our product
candidates.Currently, we manufacture our products internally andcandidate.
We may encounter manufacturing
risks or failures that could impede or delay supply for our clinical trials of our product
candidates.candidate.
While we currently manufacture Qtrypta™ (M207) internally, we have entered into agreements with third party CMOs related to the development, manufacture, and supply of Qtrypta™ (M207). Any failure or delay in our internal manufacturing operations or those of our CMOs, or the technology transfer process in connection with our plan to transition to rely on such CMOs for manufacture and supply, could cause us to be unablehinder our ability to meet theQtrypta™ (M207) production demand for product candidates for our clinical trials and delay the development or regulatory approval of Qtrypta™ (M207). We and our product
candidates. Our internal manufacturing operationsCMOs may encounter difficulties involving, among other things, material supplies, production yields, regulatory compliance, quality control and quality assurance, and shortages of qualified personnel. The manufacturing facilities in which Qtrypta™ (M207), or our future product candidates, are made could be adversely affected by equipment failures, labor shortages, natural disasters, power failures and numerous other factors. We may incur other charges and expenses for products that fail to meet specifications, undertake costly remediation efforts or seek more costly manufacturing alternatives. Regulatory approval of Qtrypta™ (M207) or our future product candidates could be impeded, delayed, limited or denied if the FDA does not maintain the approval of ourthe manufacturing processes and facilities.
facilities in which such product candidates are made.
Difficulties in
ourrelevant manufacturing processes and facilities
implicated could result in supply shortfalls of
Qtrypta™ (M207) or our
future product candidates, and could delay our preclinical studies, clinical trials and regulatory
submissions.submissions with respect thereto. In addition, Qtrypta™ (M207) (or our future product candidates) that has been produced and is stored for later use, may degrade, become contaminated or suffer other quality defects (including in connection with any shipment thereof), which may cause the affected product candidate to no longer be suitable for its intended use in clinical trials or other development activities. If the defective product candidate cannot be replaced in a timely fashion, we may incur significant delays in our development programs that could adversely affect the value of such product candidate.
We have only manufactured our proposed product
candidatescandidate for our clinical trials and we have no experience manufacturing on a commercial scale.
We have limited experience manufacturing our product candidates, including M207,candidate, Qtrypta™ (M207), and to date have only manufactured our product candidatescandidate for our clinical trials. If any of our product candidates arecandidate is approved, we will need to scale up our own capabilities or contract with third partiesthose of our CMOs to support the production of commercial level quantities of our product candidates,candidate, which may require expensive process improvements. If
While we
decideintend to
rely on CMOs, including Patheon to support commercial scale manufacture
commercial quantities of
Qtrypta™ (M207) and have entered into agreements regarding the same, we may nevertheless not be able to successfully produce, develop and market Qtrypta™ (M207) or our
future product candidates,
ourselves,or we
willmay be
required to devote substantial resources to the construction or purchase of a commercial scale manufacturing facility, the purchase of manufacturing equipment and hiring additional personnel.delayed in doing so. Significant scale up of manufacturing may also require process improvements as well as additional technologies and validation studies, which are costly, may not be successful and which the FDA must review and approve. If we
or our CMOs are unable to establish a new manufacturing facility or expand
our existing manufacturing facilities, purchase equipment, hire adequate personnel to support our manufacturing efforts,
or comply with cGMPs, or implement necessary process improvements, we may be unable to produce commercial materials or meet demand, if any should develop, for
Qtrypta™ (M207) or our
future product candidates. Any such failure would have a material adverse effect on our business, financial condition and results of operations.
If we instead decide to contract with third parties to support commercial scale manufacture of our product candidates and we are unable to arrange for such a third-party manufacturing source for any of our product candidates, or fail to do so on commercially reasonable terms, we may not be able to successfully produce, develop and market one or more of our product candidates, or we may be delayed in doing so.
Reliance on third-party manufacturersCMOs also entails risks to which we would not be subject if we manufactured the product candidatescandidate ourselves, including reliance on the third party for regulatory compliance and quality control and assurance, volume production, the possibility of breach of the manufacturing agreement by the third party because of factors beyond our control (including a failure to synthesize and manufacture our product candidatescandidate in accordance with our product specifications) and the possibility of termination or nonrenewal of the agreement by the third party at a time that is costly or damaging to us. In addition, the FDA and other regulatory
authorities require that our product candidatescandidate be manufactured according to cGMP and similar foreign standards. Any failure by our third-party manufacturersCMOs to comply with cGMP or failure to scale up manufacturing processes, including any failure to deliver sufficient quantities of our product candidatescandidate in a timely manner, could lead to a delay in, or failure to obtain, regulatory approval of any of our product candidates. Contract manufacturerscandidate, or a recall or withdrawal of approval in the future. CMOs may not be able to manufacture our product candidatescandidate at a cost or in quantities or in a timely manner necessary to develop and commercialize them.it. If our third-party manufacturersCMOs are unable to successfully scale up the manufacture of any of our product candidatescandidate in sufficient quality and quantity and at commercially reasonable prices, and we are unable to find one or more replacement manufacturers capable of production at a substantially equivalent cost in substantially equivalent volumes and quality, and we are unable to successfully transfer the processes on a timely basis, the development of that product candidate and regulatory approval or commercial launch for any resulting products may be delayed, or there may be a shortage in supply, either of which could significantly harm our business, financial condition, operating results and prospects. Our reliance on contract manufacturersCMOs will further expose us to the possibility that they, or third parties with access to their facilities, will have access to and may misappropriate our trade secrets or other proprietary information.
Even if we receive regulatory approval for any product candidate, we still may not be able to successfully commercialize it and the revenue that we generate from its sales, if any, may be limited.
If approved for marketing, the commercial success of
M207Qtrypta™ (M207) or any product candidates we develop in the future will depend upon their acceptance by the medical community, including physicians, patients and health care payers. The degree of market acceptance of any product candidate will depend on a number of factors, including:
demonstration of clinical safety and efficacy of our products generally;
relative convenience and ease of administration;
prevalence and severity of any adverse effects;
willingness of physicians to prescribe our product and of the target patient population to try new therapies and routes of administration;
efficacy and safety of our products compared to competing products;
introduction of any new products, including generics, that may in the future become available to treat indications for which our products may be approved;
new procedures or methods of treatment that may reduce the incidences of any of the indications in which our products may show utility;
pricing and cost-effectiveness;
effectiveness of our or any future collaborators’ sales and marketing strategies;
limitations or warnings contained inFDA-approved labeling; and
our ability to obtain and maintain sufficient third-partythird party coverage or reimbursement from government health care programs, including Medicare and Medicaid, private health insurers and other third-partythird party payers.
If
any of our product
candidates arecandidate is approved but
dodoes not achieve an adequate level of acceptance by physicians, health care payers and patients, we may not generate sufficient revenue and we may not be able to achieve or sustain profitability. Our efforts to educate the medical community and
third-partythird party payers on the benefits of our product
candidatescandidate may require significant resources and may never be successful.
Even if we obtain regulatory approvals, the timing or scope of any approvals may prohibit or reduce our ability to commercialize our product candidatescandidate successfully. For example, if the approval process takes too long, we may miss market opportunities and give other companies the ability to develop competing products or establish market dominance. Any regulatory approval we ultimately obtain may be limited or subject to restrictions or post-approval commitments that render our product candidatescandidate not commercially viable. For example, regulatory authorities may approve our product candidatescandidate for fewer or more limited indications than we request, may not approve the price we intend to charge for our product candidates,candidate, may grant approval contingent on the performance of costly post-marketing clinical trials, or may approve our product candidatescandidate with a label that does not include the labeling claims necessary or desirable for the successful commercialization of that indication. Further, the FDA may place conditions on approvals including potential requirements or risk management plans and the requirement for a REMS to assure the safe use of the drug or ablack-box warning (which is a warning required by the FDA that appears on the package insert for or in literature describing certain prescription drugs, signifying that medical studies indicate that the drug carries a significant risk of serious adverse effects). If the FDA concludes a REMS is needed, the sponsor of the NDA must submit a proposed
REMS; the FDA will not approve the NDA without an approved REMS, if required. A REMS could include medication guides, physician communication plans, or elements to assure safe use, such as restricted distribution methods, patient registries and other risk minimization tools. Ablack-box warning will limit how we are able to market and advertise our product. Any of these limitations on approval or marketing could restrict the
commercial promotion, distribution, prescription or dispensing of our product candidates.candidate. Moreover, approvals may be withdrawn fornon-compliance with regulatory standards or if problems occur following the initial marketing of product candidates.candidate. Any of the foregoing scenarios could materially harm the commercial success of our product candidates.
candidate.
We may expend our limited resources to pursue a particular product candidate and fail to capitalize on
a product
candidatescandidate that may be more profitable or for which there is a greater likelihood of success.
Because we have limited financial and managerial resources, we have decided to focus on developing our product candidate
M207Qtrypta™ (M207) for treatment of migraine. As a result, we may forego or delay pursuit of opportunities with other product candidates or for other indications that later prove to have greater commercial potential. Our resource allocation decisions may cause us to fail to capitalize on viable commercial product candidates or profitable market opportunities. Our spending on current and future research and development programs and product
candidatescandidate for specific indications may not yield any commercially viable products. If we do not accurately evaluate the commercial potential or target market for a particular product candidate, we may relinquish valuable rights to that product candidate through collaboration, licensing or other royalty arrangements in cases in which it would have been more advantageous for us to retain sole development and commercialization rights to such product candidate.
RISKS RELATED TO OUR DEPENDENCE ON THIRD PARTIES
We use customized equipment to coat and package our microneedle patch system; any production or equipment performance failures could negatively impact our clinical trials of
ourQtrypta™ (M207) or any other product candidates
we may develop or sales of our product
candidates,candidate(s), if approved.
We presently use customized equipment to coat and package our microneedle patch system. We also rely on third parties to manufacture our equipment. If we experience equipment malfunctions and we do not have adequate inventory of spare parts or qualified personnel to repair the equipment, we may encounter delays in the manufacture of our microneedle patch system and may not have sufficient inventory to meet the demands of our clinical development programs
or, ifof any
of ourfuture product candidates
isand if approved, our customers’ demands
for Qtrypta™ (M207) or our future approved product candidate(s), if any each of which could adversely affect our business, financial condition and results of operations.
We rely on
third party manufacturersCMOs for various components of our microneedle patch system, and our business could be harmed if those third parties fail to provide us with sufficient quantities of those components at acceptable quality levels and
prices.prices or fail to maintain or achieve satisfactory regulatory compliance.
We rely on
third-party manufacturersCMOs for various components of our microneedle patch system, including API raw materials used in manufacturing, and capital equipment. Reliance on third party manufacturers entails additional risks, including reliance on the third party for regulatory compliance and quality assurance. In addition,
third party manufacturersCMOs may not be able to comply with cGMP, or similar regulatory requirements outside the United States. Our
failure, or thereliance on these third parties reduces our control over these activities but does not relieve us of our responsibility to ensure compliance with all required legal, regulatory and scientific standards. The failure of our third party manufacturers, to comply with applicable regulations could result in sanctions being imposed on us, including fines, injunctions, civil penalties, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of products, operating restrictions and criminal prosecutions, any of which could significantly and adversely affect supplies of our product
candidatescandidate or any other product candidates that we may develop.
There can be no assurance that our supply of these various components will not be limited, interrupted, or of satisfactory quality or continue to be available at acceptable prices. Additionally, we do not have any control over the process or timing of the acquisition or manufacture of materials by our manufacturers and cannot ensure that they will deliver to us the components we order on time, or at all. Any failure or refusal to supply the components for our product candidatesQtrypta™ (M207) or any other product candidates that we may develop could delay, prevent or impair our clinical development or commercialization efforts. If our contract manufacturersCMOs were to fail to fill our purchase orders, the development or commercialization of the affected product candidatescandidate could be delayed, which could have an adverse effect on our business. Any change in our manufacturers could be costly because the commercial terms of any new arrangement could be less favorable, the lead time needed to establish a new relationship can be lengthy, and because the expenses relating to the transfer of necessary technology and processes could be significant. It may take several years to establish
an alternative source of supply for our product candidate and to have any such new source approved by the FDA, the European Medicines Agency, or EMA, or any other relevant regulatory authorities.
We rely on third parties to conduct our clinical trials and those third parties may not perform satisfactorily, including failing to
comply with applicable regulatory requirements or to meet deadlines for the completion of such trials.
We rely on a
third-partythird party contract research organization, or CRO, to manage our clinical trials. In addition, we rely on other third parties, such as clinical data management organizations, medical institutions and clinical investigators, to conduct those clinical trials. While we have agreements governing their activities, we will have limited influence over their actual performance and we will control only certain aspects of their activities.
In addition, the use of third party service providers requires us to disclose our proprietary information to these parties, which could increase the risk that this information will be misappropriated. Further, agreements with such third parties might terminate for a variety of reasons, including a failure to perform by the third parties. If there is any dispute or disruption in our relationship with our CROs or if we need to enter into alternative arrangements, that would delay our product development activities.
There are limited number of third party service providers that specialize or have the expertise required to achieve our business objectives. In particular, there would be a significant increase in clinical trial expenses, including adopting a new electronic data capture platform or other technology platforms, the need to enter into new contracts and costs associated with the transfer of data, as well as an increased risk of the loss of data. Identifying, qualifying and managing performance of third party service providers can be difficult, time-consuming and may cause delays in our development programs. These investigators and CROs will not be our employees and we will not be able to control, other than by contract, the amount of resources, including time, which they devote to our product candidate and clinical trials. Our reliance on these third parties for research and development activities will reduce our control over these activities but will not relieve us of our responsibilities. For example, we will remain responsible for ensuring that each of our clinical trials is conducted in accordance with the general investigational plan and protocols for the trial. If any of our CROs’ processes, methodologies or results were determined to be invalid or inadequate, our own clinical data and results and related regulatory approvals could be adversely affected. Moreover, the FDA requires us to comply with standards, commonly referred to as
good clinical practices (“GCPs”)GCPs for conducting, recording and reporting the results of clinical trials to assure that data and reported results are credible and accurate and that the rights, integrity and confidentiality of trial participants are protected. The FDA enforces these GCPs through periodic inspections of trial sponsors, principal investigators and clinical trial sites. If we or our CRO
or trial sites fail to comply with applicable GCPs, the clinical data generated in our clinical trials may be deemed unreliable and the FDA may require us to perform additional clinical trials before approving any marketing applications. Upon inspection, the FDA may determine that our clinical trials did not comply with GCPs. In addition, our clinical trials will require a sufficiently large number of test subjects to evaluate the safety and effectiveness of a product candidate. Accordingly, if our CROs fail to comply with these regulations or fail to recruit a sufficient number of patients, our clinical trials may be delayed, or we may be required to repeat such clinical trials, which would delay the regulatory approval process.
Furthermore, these third parties may also have relationships with other entities, some of which may be our competitors. If these third parties do not successfully carry out their contractual duties, meet expected deadlines, or if the quality of the clinical data they obtain is compromised due to the failure to conduct our clinical trials in accordance with regulatory requirements or our stated protocols, we will not be able to obtain, or may be delayed in obtaining, marketing approvals for our product
candidatescandidate and will not be able to, or may be delayed in our efforts to, successfully commercialize our product
candidates.candidate.
We currently depend primarily on one supplier for manufacture of our product. If this manufacturer fails to provide us or our collaborators with adequate supplies of materials for clinical trials or commercial product or fails to comply with the requirements of regulatory authorities, we may be unable to develop or commercialize Qtrypta™ (M207) or any other product candidates we may develop.
We have contracted with CMOs (including Patheon) to produce, in collaboration with us, Qtrypta™ (M207), for commercial use in the United States. We have not entered into any agreements with any alternate suppliers for Qtrypta™ (M207) product or API. Even if we were able to enter into other long-term agreements for manufacture of commercial supply on reasonable terms, we may face delays or increased costs in our supply chain that could jeopardize the commercialization of Qtrypta™ (M207). Additionally, if Qtrypta™ (M207) or any other future product candidates is approved by the FDA or other regulatory agencies for commercial sale or if Qtrypta™ (M207) is approved for commercial sale in jurisdictions outside the United States, we will need to contract with a third party to manufacture such products for commercial sale in the United States and/or in such other jurisdictions.
Our dependence on single source suppliers with respect to our supply chain for Qtrypta™ (M207) exposes us to certain risks, including the following:
our supplier may cease or reduce production or deliveries, raise prices or renegotiate terms;
we may be unable to locate a suitable replacement on acceptable terms or on a timely basis, if at all;
delays caused by supply issues may harm our reputation; and
our ability to progress our business could be materially and adversely impacted if our single-source supplier upon which we rely were to experience a significant business challenge, disruption or failure due to issues such as financial difficulties or bankruptcy, issues relating regulatory or quality compliance issues, or other legal or reputational issues.
Even though we have an agreement with a CMO, Patheon, to supply Qtrypta™ (M207), and even if we enter into other long-term agreements with other CMOs, the FDA may not approve the facilities of such CMOs, the CMOs may not perform as agreed or the CMOs may terminate their agreements with us. If any of the foregoing circumstances occur, we may need to find alternative manufacturing facilities, which would significantly impact our ability to develop, maintain or obtain, as applicable, regulatory approval for or market Qtrypta™ (M207) or any other future product candidate. In the event that we seek such alternative sources, we may not be able to enter into replacement arrangements without delays or additional expenditures. We cannot estimate these delays or costs with certainty but, if they were to occur, they could cause a delay in our development and commercialization efforts.
The manufacturer(s) of Qtrypta™ (M207) are obliged to operate in accordance with FDA-mandated or cGMPs, and we have limited control over the ability of CMOs to maintain adequate quality control, quality assurance and qualified personnel to ensure compliance to cGMPs. In addition, the facilities used by our CMOs to manufacture Qtrypta™ (M207) must be approved by the FDA pursuant to inspections that will be conducted prior to any grant or regulatory approval by the FDA. If any of our CMOs are unable to successfully manufacture material that conform to our specifications and the FDA’s strict regulatory requirements, and pass regulatory inspections, they will not be able to secure or maintain approval for the manufacturing facilities. Additionally, a failure by any of our CMOs to establish and follow cGMPs or to document their adherence to such practices may negatively impact our commercialization or lead to significant delays in the launch and commercialization of any other products that we may have in the future. Failure by our CMOs or us to comply with application regulations could result in sanctions being imposed on us, including fines, injunctions, civil penalties, failure of the government to grant pre-market approval of drugs, delays, suspensions or withdrawal of approvals, seizures or recalls of product, operating restrictions, and criminal prosecutions.
The manufacturer of pharmaceutical products requires significant expertise and capital investment, including the development of advanced manufacturing techniques and process controls. Manufacturers of pharmaceutical products often encounter difficulties in production. These problems include difficulties with production costs and yields, quality control, including stability of the product, quality assurance testing, shortages of qualified personnel, as well as compliance with strictly-enforced federal, state and foreign regulations. We cannot assure you that any issues relating to the manufacture of Qtrypta™ (M207) will not occur in the future. Additionally, our CMOs may experience manufacturing difficulties due to resource constraints or as a result of labor disputes. If our CMOs were to encounter difficulties, or otherwise fail to comply with their contractual obligations, our ability to commercialize Qtrypta™ (M207) in the United States would be jeopardized. Any delay or interruption in our ability to meet commercial demand for Qtrypta™ (M207) will result in the loss of potential revenue and could adversely affect our ability to gain market acceptance for these products.
Failures or difficulties faced at any level of our supply chain could materially adversely affect our business and delay or impede commercialize of Qtrypta™ (M207) and could have a material adverse effect on our business, results of operations, financial conditions and prospects.
If we are not able to establish collaborations, we may have to alter our development plans.
Our product development programs and the potential commercialization of our product candidates will require substantial additional cash to fund our expenses. We may seek to collaborate with third parties for certain of our development programs, and potentially for the commercialization of our lead product candidate,
M207.Qtrypta™ (M207).
We face significant competition in seeking appropriate collaborators. Whether we reach a definitive collaborative agreement will depend, among other things, upon our assessment of the collaborator’s resources and expertise, the terms and conditions of the proposed collaboration and the proposed collaborator’s evaluation of a number of factors. Those factors may include the design or results of clinical trials, the likelihood of approval by the FDA or similar regulatory authorities outside the United States, the potential market for the subject product candidate, the costs and complexities of manufacturing and delivering such product candidate to patients, the potential existence of competing drugs, the existence of uncertainty with respect to our ownership of
technology, which can exist if there is a challenge to such ownership without regard to the merits of the challenge and industry and market conditions generally. The collaborator may also consider alternative product candidates or technologies for similar indications that may be available on which to collaborate and whether such a collaboration could be more attractive than the one with us for our product candidate. In addition, there have been a significant number of recent business transactions among large pharmaceutical companies that have resulted in a reduced number of potential future collaborators.
We face significant competition in seeking appropriate collaborators. Collaborations are complex and time-consuming to negotiate and document. We may also be restricted under collaboration agreements from entering into agreements with other potential collaborators. We may not be able to negotiate collaborations on acceptable terms, or at all. If that were to occur, we may have to curtail, reduce or delay the development of a particular product candidate, or one or more of our other development programs, delay its or their potential commercialization or reduce the scope of our sales or marketing activities, or increase our expenditures and undertake development or commercialization activities at our own expense. If we elect to increase our expenditures to fund development or commercialization activities on our own, we may need to obtain additional capital, which may not be available to us on acceptable terms or at all. If we do not have sufficient funds, we will not be able to bring our product candidatescandidate to market and generate revenue.
The use of our product
candidatescandidate in clinical trials and the sale of any
productsproduct candidate for which we may obtain marketing approval expose us to the risk of product liability claims. Product liability claims may be brought against us by participants enrolled in our clinical trials, patients, healthcare providers or others using, administering or selling our product candidate. If we cannot successfully defend ourselves against any such claims, we would incur substantial liabilities. Regardless of merit or eventual outcome, product liability claims may result in:
withdrawal of clinical trial participants;
termination of clinical trial sites or entire trial programs;
costs of related litigation;
substantial monetary awards to patients or other claimants;
decreased demand for an approved product and loss of revenue;
impairment of our business reputation;
diversion of management and scientific resources from our business operations; and
the inability to commercialize an approved product candidate.
Insurance coverage is becoming increasingly expensive, and, in the future, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to product liability. We intend to expand our insurance coverage to include the sale of commercial products if we obtain marketing approval for our product
candidates,candidate, but we may be unable to obtain commercially reasonable product liability insurance for any product
candidatescandidate approved for marketing. Large judgments have been awarded in class action lawsuits based on drugs that had unanticipated side effects. A successful product liability claim or a series of claims brought against us, particularly if judgments exceed our insurance coverage, could cause our stock price to decline and could adversely affect our results of operations and business.
We may be exposed to liability claims associated with the use of hazardous materials and chemicals.
Our research and development activities may involve the controlled use of hazardous materials and chemicals. Although we believe that our safety procedures for using, storing, handling and disposing of these materials comply with federal, state and local laws and regulations, we cannot completely eliminate the risk of accidental injury or contamination from these materials. In the event of such an accident, we could be held liable for any resulting damages and any liability could materially adversely affect our business, financial condition and results of operations. In addition, the federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of hazardous materials and waste products may require us to incur substantial compliance costs that could materially adversely affect our business, financial condition and results of operations.
Business disruptions could seriously harm our future revenues, results of operations and financial condition and increase our costs and expenses.
Our operations could be subject to earthquakes, power shortages, telecommunications failures, water shortages, floods, fires, extreme weather conditions, medical epidemics and other natural or manmade disasters or business interruptions, for which we are predominantly self-insured. We do not carry insurance for all categories of risk that our business may encounter. The occurrence of any of these business disruptions could seriously harm our operations and financial condition and increase our costs and expenses.
RISKS RELATED TO OUR INTELLECTUAL PROPERTY
If we fail to comply with our obligations to our licensor in our intellectual property license, we could lose license rights that are important to our business.
We are a party to an Intellectual Property License Agreement dated October 5, 2006, as amended, with ALZA Corporation and we may enter into additional license agreements in the future. Our existing license agreement imposes, and we expect that any future license agreements will impose, various diligence, product payment, royalty, insurance and other obligations on us. If we fail to comply with these obligations, our licensors may have the right to terminate these agreements, in which event we might not be able to develop and market any product candidate that is covered by these agreements. Termination of these licenses or reduction or elimination of our licensed rights may result in our having to negotiate new or reinstated licenses with less favorable terms. These risks could delay or prevent us from offering our product candidate. We might not have the necessary rights or the financial resources to develop, manufacture or market our current or future product candidates without the rights granted under these licenses, and the loss of sales or potential sales in such product candidate(s) could have a material adverse effect on our business, financial condition, results of operations and prospects. The occurrence of such events could have a material adverse effect on our business, financial condition and results of operations.
disputes between us and the licensor. Disputes may arise regarding intellectual property subject to a licensing agreement, including:the scope of rights granted under a license agreement and other interpretation-related issues;
the extent to which our technology and processes infringe on intellectual property of the licensor that is not subject to the licensing agreement;
the sublicensing of patent and other rights under our collaborative development relationships;
our diligence obligations under the license agreement and what activities satisfy those diligence obligations;
the inventorship or ownership of inventions and know-how resulting from the joint creation or use of intellectual property by our licensors and us and our partners; and
the priority of invention of patented technology.
Additionally, the agreement under which we currently license intellectual property is complex, and certain provisions may be susceptible to multiple interpretations. The resolution of any contract interpretation disagreement that may arise could narrow what we believe to be the scope of our rights to the relevant intellectual property or technology, increase what we believe to be our financial or other obligations under the relevant agreement, or decrease the third party’s financial or other obligations under the relevant agreement, any of which could have a material adverse effect on our business, financial condition, results of operations and prospects.
Our failure to obtain and maintain patent protection for our technology and our product candidates could permit our competitors to develop and commercialize technology and products similar or identical to ours, and our ability to successfully commercialize our technology and product
candidatescandidate may be adversely affected.
Our commercial success is significantly dependent on intellectual property related to our product candidate portfolio. We are either the licensee or assignee of numerous issued and pending patent applications that cover various aspects of our assets, including, most importantly, our microneedle patch system and our product
candidates.candidate.
Our success depends in large part on our and our licensor’s ability to obtain and maintain patent protection in the United States and other countries with respect to our proprietary technology and product
candidates.candidate. In some circumstances, we may not have the right to control the preparation, filing and prosecution of patent applications, or to maintain the patents, covering technology or
productsproduct that we license from third parties. Therefore, we cannot be certain that these patents and applications will be prosecuted and enforced in a manner consistent with the best interests of our business. In addition, if third parties who license patents to us fail to maintain such patents, or lose rights to those patents, the rights we have licensed may be reduced or eliminated.
The patent prosecution process is expensive, time-consuming and complex, and we may not be able to file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner or in all jurisdictions where protection may be commercially advantageous, or we may not be financially able to protect our proprietary rights at all. It is also possible that we may fail to identify patentable aspects of our research and development output before it is too late to obtain patent protection. We may not be able to obtain or maintain patent protection from our pending patent applications, from those we may file in the future, or from those we may license from third parties. There is no assurance that all potentially relevant prior art relating to our patents and patent applications has been found. We may be unaware of prior art that could be used to invalidate an issued patent or prevent
our pending patent applications from issuing as patents. Moreover, even if we are able to obtain patent protection, such patent protection may be of insufficient scope to achieve our business objectives or provide any competitive advantage. In addition, although we enter into non-disclosure and confidentiality agreements with parties who have access to patentable aspects of our research and development output, any of these parties may breach such agreements and disclose such output before a patent application is filed, thereby jeopardizing our ability to seek patent protection.
The patent position of biotechnology and pharmaceutical companies generally is highly uncertain, involves complex legal and factual questions and has in recent years been the subject of much litigation. As a result, theissuance,theissuance, scope, validity, enforceability and commercial value of our and our licensor’s patent rights are highly uncertain. Our and our licensor’s pending and future patent applications may not result in patents being issued which protect our technology or products or which effectively prevent others from commercializing competitive technologies and products. Changes in either the patent laws or interpretation of the patent laws in the United States and other countries may diminish the value of our patents or narrow the scope of our patent protection. The standards which the United States Patent and Trademark Office ("USPTO") and foreign patent offices use to grant patents are not always applied predictably or uniformly and can change. There is also no uniform, worldwide policy regarding the subject matter and scope of claims granted or allowable in pharmaceutical or biotechnology patents. The laws of foreign countries may not protect our rights to the same extent as the laws of the United States, and many companies have encountered significant problems and costs in protecting their proprietary information in these non-U.S. countries. Outside the United States, patent protection must be sought in individual jurisdictions, further adding to the cost and uncertainty of obtaining adequate patent protection outside of the United States. Accordingly, we cannot predict whether additional patents protecting our product candidates will issue in the United States or in non-U.S. jurisdictions, or whether any patents that do issue are valid, enforceable and have claims of adequate scope to provide competitive advantage. Publications of discoveries in the scientific literature often lag behind the actual discoveries, and patent applications in the United States and other jurisdictions are typically not published until 18 months after filing, or in some cases not at all. Therefore, we cannot be certain that we or our licensor were the first to make the inventions claimed in our owned and licensed patents or pending patent applications, or that we or our licensor were the first to file for patent protection of such inventions. Assuming the other requirements for patentability are met, the first to file a patent application is entitled to the patent. We may become involved in opposition or interference proceedings challenging our patent rights or the patent rights of others. An adverse determination in any such proceeding could reduce the scope of, or invalidate our patent rights, allow third parties to commercialize our technology or product candidates and compete directly with us, without payment to us, or result in our inability to manufacture or commercialize our product candidatescandidate without infringing third-partythird party patent rights. Even if our owned and licensed patent applications issue as patents, they may not issue in a form that will provide us with any meaningful protection, prevent competitors from competing with us or otherwise provide us with any competitive advantage. Our competitors may be able to circumvent our owned or licensed patents by developing similar or alternative technologies or products in anon-infringing manner. Third parties may have patents that could prevent us from marketing our own patented product candidate. Third parties may also seek to market generic versions of any of our approved product. Even if we have valid and enforceable patents, these patents still may not provide protection against competing products or processes sufficient to achieve our business objectives. The issuance of a patent is not conclusive as to its scope, validity or enforceability, and our owned and licensed patents may be challenged in the courts or patent offices in the United States and abroad. Such challenges may result in patent claims being narrowed, invalidated or held unenforceable, which could limit our ability to stop or prevent us from stopping others from using or commercializing similar or identical technology and products, or limit the duration of the patent protection of our technology and product candidates.candidate. Given the amount of time required for the development, testing and regulatory review of new product candidates, patents protecting such candidates might expire before or shortly after such candidates are commercialized. As a result, our owned and licensed patent portfolio may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours.
Bearing the costs and other requirements associated with prosecution of pending patent applications and maintenance of issued patents are
material to us. Bearing these costs and complying with these requirements are essential to procurement and maintenance of patents integral to our product
candidates.candidate, and our patent protection could be reduced or eliminated for non-compliance for these requirements.
Periodic maintenance fees, renewal fees, annuity fees and various other governmental fees on patents and/or patent applications will come due for payment periodically throughout the lifecycle of patent applications and issued patents. In order to help ensure that we comply with any required fee payment, documentary and/or procedural requirements as they might relate to any patents for which we are an assignee or
co-assignee, we employ legal help and related professionals as needed to comply with those requirements. Failure to meet a required fee payment, document production or procedural requirement can result in the abandonment of a pending patent application or the lapse of an issued patent. In some instances, the defect can be cured through late compliance, but there are situations where the failure to meet the required deadline cannot be cured. Such an occurrence could compromise the intellectual property protection around a preclinical or clinical product candidate and possibly weaken or eliminate our ability to protect our eventual market share for that product candidate.
Our business will be harmed if we do not successfully protect the confidentiality of our trade secrets.
In addition to our patented technology and product candidates, we rely on trade secrets, including unpatented
know-how, technology and other proprietary information, to maintain our competitive position. We seek to protect these trade secrets, in part, by entering into
non-disclosure and confidentiality agreements with parties that have access to them, such as our corporate collaborators, outside scientific collaborators, sponsored researchers, contract manufacturers, consultants, advisors and other third parties. We also enter into confidentiality and invention or patent assignment agreements with our employees and consultants.
In addition,However, any of these parties may breach the agreements and disclose our proprietary information, and we may not be able to obtain adequate remedies for such breaches. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and the outcome is unpredictable. In addition, some courts inside and outside the United States are less willing or unwilling to protect trade secrets. If any of our trade secrets were to be lawfully obtained or independently developed by a competitor, we would have no right to prevent them from using that technology or information to compete with us. If any of our trade secrets were to be disclosed to or independently developed by a competitor, our competitive position would be harmed.
In addition to contractual measures, we try to protect the confidential nature of our proprietary information using commonly accepted physical and technological security measures. Such security measures may not provide adequate protection for our proprietary information, for example, in the case of misappropriation of a trade secret by an employee, consultant, or third party with authorized access. Monitoring unauthorized uses and disclosures is difficult, and we do not know whether the steps we have taken to protect our proprietary technologies will be effective. Unauthorized parties may also attempt to copy or reverse engineer certain aspects of our products that we consider proprietary. Even though we use commonly accepted security measures, the criteria for protection of trade secrets can vary among different jurisdictions.
We could be prevented from selling
our product
candidates,candidate, if approved, and could be forced to pay damages and defend against litigation, if we infringe the rights of third parties.
We conduct
freedom-to-operate studies to guide our early-stage research and development away from areas where we are likely to encounter obstacles in the form of third party intellectual property conflicts, and to assess the advisability of licensing third party intellectual property or taking other appropriate steps to address any
freedom-to-operate or development issues. However, with respect to third party intellectual property, it is impossible to establish with certainty that
any of our product
candidatescandidate will be free of claims by third party intellectual property holders or whether we will require licenses from such third parties. Even with modern databases and
on-line search engines, literature searches are imperfect and may fail to identify relevant patents and published applications.
In the pharmaceutical industry, significant litigation and other proceedings, including interferences, oppositions, reexamination, inter partes review, derivation and post-grant review proceedings before the USPTO and corresponding foreign patent offices, regarding patents, patent applications, trademarks and other intellectual property rights have become commonplace. The types of situations in which we may become a party to such proceedings include:
we or our collaborators may initiate litigation or other proceedings against third parties seeking to invalidate the patents held by those third parties or to obtain a judgment that our products or processes do not infringe those third parties’ patents;
if our competitors file patent applications that claim technology also claimed by us or our licensors, we or our licensors may be required to participate in interference or opposition proceedings to determine the priority of invention, which could jeopardize our patent rights and potentially provide a third party with a dominant patent position;
if third parties initiate litigation claiming that our processes or products infringe their patent or other intellectual property rights, we and our collaborators will need to defend against such proceedings; and,
if a license to necessary intellectual property is terminated, the licensor may initiate litigation claiming that our processes or products infringe, misappropriate or otherwise violate their patent or other intellectual property rights and/or that we breached our obligations under the license agreement, and we and our collaborators would need to defend against such proceedings.
Third parties may assert that we are employing their proprietary technology without authorization or have infringed upon, misappropriated or otherwise violated their intellectual property or other rights. Even if we believe third party claims of infringement against us or our collaborators are without merit, there is a risk that a court would decide that we or our collaborators are infringing the third party’s valid and enforceable patents. If our product candidates, methods, processes or other technologies infringe the proprietary rights of other parties, we could incur substantial costs and may have to:
obtain licenses, which may not be available on commercially reasonable terms, if at all;
abandon an infringing product;
redesign our product candidatescandidate or processes to avoid infringement;
stop using the subject matter claimed in the patents held by others;
defend litigation or administrative proceedings which may be costly whether we win or lose and which could result in a substantial diversion of our financial and management resources.
We intend to pursue Section 505(b)(2) regulatory approval filings with the FDA for Qtrypta™ (M207) and potentially for our future product candidates where applicable. Such filings involve significant costs, and we may also encounter difficulties or delays in obtaining regulatory approval for ourQtrypta™ (M207) or any future product candidates under Section 505(b)(2).
We intend to pursue regulatory approval
of certain of ourfor Qtrypta™ (M207) and potentially for any future product candidates,
including M207, pursuant to Section 505(b)(2) of
the Federal Food, Drug and Cosmetic Act, or the FDCA. A Section 505(b)(2) application is a type of NDA that enables the applicant to rely, in part, on the FDA’s findings of safety and efficacy of a previously approved product for which the applicant has no right of reference, or published literature, in support of its application. Section 505(b)(2) NDAs often provide an alternate path to FDA approval for new or improved formulations or new uses of previously approved products. Such applications involve significant costs, including filing fees.
To the extent that a Section 505(b)(2) NDA relies on clinical trials conducted for a previously approved product or the FDA’s prior findings of safety and effectiveness for a previously approved product, the Section 505(b)(2) applicant must submit patent certifications in its Section 505(b)(2) application with respect to any patents for the previously approved product on which the applicant’s application relies and that are listed in the FDA’s Approved Drug Products with Therapeutic Equivalence Evaluations, commonly known as the Orange Book. Specifically, the applicant must certify for each listed patent that, in relevant part, (1) the required patent information has not been filed by the original applicant; (2) the listed patent has expired; (3) the listed patent has not expired, but will expire on a particular date and approval is not sought until after patent expiration; or (4) the listed patent is invalid, unenforceable or will not be infringed by the proposed new product. A certification that the new product will not infringe the previously approved product’s listed patent or that such patent is invalid or unenforceable is known as a Paragraph IV certification. If the applicant does not challenge one or more listed patents through a Paragraph IV certification, the FDA will not approve the Section 505(b)(2) NDA application until all the listed patents claiming the referenced product candidate have expired.
If the Section 505(b)(2) NDA applicant has provided a Paragraph IV certification to the FDA, the applicant must also send notice of the Paragraph IV certification to the owner of the referenced NDA for the previously approved product and relevant patent holders within 20 days after the Section 505(b)(2) NDA has been accepted for filing by the FDA. The NDA and patent holders may then initiate a patent infringement suit against the Section 505(b)(2) applicant. Under the FDCA, the filing of a patent infringement lawsuit within 45 days of receipt of the notification regarding a Paragraph IV certification automatically prevents the FDA from approving the Section 505(b)(2) NDA until the earliest to occur of 30 months beginning on the date the patent holder receives notice, expiration of the patent, settlement of the lawsuit, or until a court deems the patent unenforceable, invalid or not infringed.
If we rely in our Section 505(b)(2) regulatory filings on clinical trials conducted, or the FDA’s prior findings of safety and effectiveness, for a previously approved product that involves patents referenced in the Orange Book, then we will need to make the patent certifications or the Paragraph IV certification described above. If we make a Paragraph IV certification and the holder of the previously approved product that we referenced in our application initiates patent litigation within the time periods described above, then any FDA approval of our Section 505(b)(2) application would be delayed until the earlier of 30 months, resolution of the lawsuit, or the other events described above. Accordingly, our anticipated dates of commercial introduction of our product
candidatescandidate would be delayed. In addition, we would incur the expenses, which could be material, involved with any such patent litigation. As a result, we may invest a significant amount of time and expense in the development of our product
candidatescandidate only to be subject to significant delay and patent litigation before our product
candidatescandidate may be commercialized, if at all.
In addition, even if we submit a Section 505(b)(2) application that relies on clinical trials conducted for a previously approved product where there are no patents referenced in the Orange Book for such other product with respect to which we have to provide certifications, we are subject to the risk that the FDA could disagree with our reliance on the particular previously approved product, conclude that such previously approved product is not an acceptable reference product, and require us instead to rely as a reference product on another previously approved product that involves patents referenced in the Orange Book, requiring us to make the certifications described above and subjecting us to additional delay, expense and the other risks described above.
We may become involved in costly and time-consuming lawsuits with uncertain outcomes to protect or enforce our patents.
Competitors may infringe our patents. To counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time consuming. In addition, in an infringement proceeding, a court may decide that a patent of ours is invalid or unenforceable or may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover the technology in question. If we initiate legal proceedings against a third party to enforce a patent covering our product candidate, the defendant could counterclaim that the patent covering our product candidate is invalid or unenforceable. In patent litigation in the United States, defendant counterclaims alleging invalidity or unenforceability are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, including a lack of novelty, obviousness, written description or non-enablement. Grounds for an unenforceability assertion could be an allegation that someone connected with prosecution of the patent withheld information material to patentability from the USPTO, or made a misleading statement, during prosecution. Third parties also may raise similar claims before administrative bodies in the United States or abroad, even outside the context of litigation. Such mechanisms include ex parte reexamination, post-grant review, inter partes review, interference proceedings, derivation proceedings, and equivalent proceedings in foreign jurisdictions (e.g., opposition proceedings).
There is a risk that a court or administrative body would decide to revoke, cancel or amend our patents in such a way that they no longer cover and protect a product candidate. In addition, a court or administrative body may decide that our patents are invalid, unenforceable or not infringed by a third party’s activities. The outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to the validity question, for example, we cannot be certain that there is no invalidating prior art of which the patent examiner and we or our licensing partners were unaware during prosecution. An adverse result in any litigation
or proceeding could put one or more of our patents at risk of being invalidated or interpreted narrowly. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. In addition, our licensors may have rights to file and prosecute such claims and we may be reliant on them to do so.
An adverse outcome in a litigation or proceeding involving our patents could limit our ability to assert our patents against competitors, affect our ability to receive royalties or other licensing consideration from our licensees, and may curtail or preclude our ability to exclude third parties from making, using and selling similar or competitive products. Any of these occurrences could have a material adverse effect on our business, financial condition, results of operations and prospects.
We may be subject to claims that our employees have wrongfully used or disclosed alleged trade secrets of their former employers.
Some of our employees were previously employed at universities or other biotechnology or pharmaceutical companies, including our competitors or potential competitors. Although we try to ensure that our employees do not use the proprietary information or
know-how of others in their work for us, we may be subject to claims that we or our employees have used or disclosed intellectual property, including trade secrets or other proprietary information, of any such employee’s former
employer, or that patents and applications we have filed to protect inventions of these employees, even those related to our product candidate, are rightfully owned by their former or concurrent employer. Litigation may be necessary to defend against these claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management.
Our agreements with employees and our personnel policies also provide that any inventions conceived by the individual in the course of rendering services to us shall be our exclusive property. Although our policy is to have all employees complete these agreements, we may not obtain these agreements in all circumstances, and individuals with whom we have these agreements may not comply with their terms. The assignment of intellectual property may not be self-executing and despite such agreement, such inventions may become assigned to third parties. In the event of unauthorized use or disclosure of our trade secrets or proprietary information, these agreements, even if obtained, may not provide meaningful protection, particularly for our trade secrets or other confidential information. To the extent that our employees, consultants or contractors use technology or know-how owned by third parties in their work for us, disputes may arise between us and those third parties as to the rights in related inventions. We may also be subject to claims that former employees, collaborators, or other third parties have an ownership interest in our patents or other intellectual property. In addition, we may face claims by third parties that our agreements with employees, contractors, or consultants obligating them to assign intellectual property to us are ineffective or in conflict with prior or competing contractual obligations of assignment, which could result in ownership disputes regarding intellectual property we have developed or will develop and interfere with our ability to capture the commercial value of such intellectual property. To the extent that an individual who is not obligated to assign rights in intellectual property to us is rightfully an inventor of intellectual property, we may need to obtain an assignment or a license to that intellectual property from that individual, or a third party or from that individual’s assignee. Such assignment or license may not be available on commercially reasonable terms or at all.
Intellectual property litigation could cause us to spend substantial resources and distract our personnel from their normal responsibilities.
There is a great deal of litigation concerning intellectual property in our industry, and we could become involved in litigation. Even if resolved in our favor, litigation or other legal proceedings relating to intellectual property claims may cause us to incur significant expenses and could distract our technical and management personnel from their normal responsibilities. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments, and if securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock. Such litigation or proceedings could substantially increase our operating losses and reduce our resources available for development activities. We may not have sufficient financial or other resources to adequately conduct such litigation or proceedings. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their substantially greater financial resources. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our business, financial condition, results of operations and ability to compete in the marketplace.
Recent patent reform legislation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents.
On September 16, 2011, the Leahy-Smith America Invents Act or the ("Leahy-Smith Act,Act") was signed into law. The Leahy-Smith Act includes a number of significant changes to U.S. patent law. These include provisions that affect the way patent applications will be prosecuted and may also affect patent litigation. In particular, under the Leahy-Smith Act, the United States transitioned in March 2013 to a “first to file” system in which the first inventor to file a patent application will be entitled to the patent. Third parties are allowed to submit prior art before the issuance of a patent by the U.S. Patent and Trademark Office (“USPTO”)USPTO and may become involved in opposition, derivation, reexamination, inter-parties review or interference proceedings challenging our patent rights or the patent rights of others. An adverse determination in any such submission, proceeding or litigation could reduce the scope of, or invalidate, our patent rights, which could adversely affect our competitive position.
The USPTO is currently developingimplementing regulations and procedures to govern administration of the Leahy-Smith Act, and many of the substantive changes to patent law associated with the Leahy-Smith Act, and in particular, the first to file provisions, did not become effective until March 16, 2013. In addition, courts continue to decide how to interpret and enforce patent law. Accordingly, it is not clear what, if any, impact the Leahy-Smith Act will have on the operation of our business. However, the Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business, results of operations, financial condition and cash flows and future prospects.
In addition, the patent positions of companies in the development and commercialization of biologics and pharmaceuticals are particularly uncertain. Recent U.S. Supreme Court rulings have narrowed the scope of patent protection available in certain circumstances and weakened the rights of patent owners in certain situations. This combination of events has created uncertainty with respect to the validity and enforceability of patents, once obtained. Depending on future actions by the U.S. Congress, the federal courts, and the USPTO, the laws and regulations governing patents could change in unpredictable ways that could have a material adverse effect on our existing patent portfolio and our ability to protect and enforce our intellectual property in the future. Similarly, statutory or judicial changes to the patent laws of other countries may increase the uncertainties and costs surrounding the prosecution of patent applications and the enforcement or defense of issued patents.
We may not be successful in obtaining necessary rights to future product candidates through acquisitions and in-licenses.
Any future programs we choose to pursue may require the use of proprietary rights held by third parties, and the growth of our business will likely depend in part on our ability to acquire, in-license, maintain or use these proprietary rights. We may be unable to acquire or in-license any compositions, methods of use, processes, or other third party intellectual property from third parties that we later identify as necessary for our future product candidates or such intellectual property may not be available on commercially reasonable terms. The licensing and acquisition of third party intellectual property rights is a competitive area, and a number of more established companies are also pursuing strategies to license or acquire third party intellectual property rights that we may consider attractive. These established companies may have a competitive advantage over us due to their size, financial resources, and greater clinical development and commercialization capabilities.
For example, we may in the future collaborate with non-profit and academic institutions to accelerate our preclinical research or development under written agreements with these institutions. These institutions may provide us with an option to negotiate a license to any of the institution’s rights in technology resulting from the collaboration. Regardless of such option, we may be unable to negotiate a license within the specified time frame or under terms that are acceptable to us. If we are unable to do so,
the institution may offer the intellectual property rights to other parties, potentially blocking our ability to pursue our applicable product candidate or program.
In addition, companies that perceive us to be a competitor may be unwilling to assign or license rights to us. We also may be unable to license or acquire third party intellectual property rights on terms that would allow us to make an appropriate return on our investment. If we are unable to successfully obtain a license to third party intellectual property rights necessary for the development of a product candidate or program on reasonable terms or at all, we may have to abandon development of that product candidate or program and our business and financial condition could materially adversely suffer.
We may not be able to protect our intellectual property rights throughout the world.
Filing, prosecuting, and defending patents on our product candidate in all countries throughout the world may be prohibitively expensive, and our intellectual property rights in some countries outside the United States and Europe can be less extensive than those in the United States and Europe. In addition, the laws of some countries outside the United States and Europe do not protect intellectual property rights to the same extent as federal and state laws in the United States and laws in Europe. Consequently, we may not be able to prevent third parties from practicing our inventions in all countries outside the United States and Europe, or from selling or importing products made using our inventions in and into the United States, Europe or other jurisdictions. Third parties may use our technologies in jurisdictions where we have not obtained or are unable to adequately enforce patent protection to develop their own products and further, may export otherwise infringing products to territories where we have patent protection, but enforcement is not as strong as that in the United States and Europe. These products may compete with our product and our patents or other intellectual property may not be effective or sufficient to prevent them from competing.
Many companies have encountered significant problems in protecting and defending intellectual property rights in jurisdictions outside the United States and Europe. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents, trade secrets, and other intellectual property protection, particularly those relating to biotechnology products, which could make it difficult for us to stop the infringement of our patents, the reproduction of our manufacturing or other know-how or marketing of competing products in violation of our proprietary rights generally. Proceedings to enforce our intellectual property rights in jurisdictions outside the United States and Europe, whether or not successful, could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate, and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license.
Many countries have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties. In addition, many countries limit the enforceability of patents against government agencies or government contractors. In these countries, the patent owner may have limited remedies, which could materially diminish the value of such patent. If we or any of our licensors is forced to grant a license to third parties with respect to any patents relevant to our business, our competitive position may be impaired, and our business, financial condition, results of operations and prospects may be adversely affected.
If we do not obtain patent term extensions and data exclusivity for Qtrypta™ (M207) or any of our future product candidates, our business may be materially harmed.
Depending upon the timing, duration and conditions of any FDA marketing approval of our product candidate, one or more of our U.S. patents may be eligible for limited patent term extension under the Hatch-Waxman Act and similar legislation in the EU. The Hatch-Waxman Act permits a patent term extension of up to five years for a patent covering an approved product as compensation for effective patent term lost during the FDA regulatory review process. A patent term extension cannot extend the remaining term of a patent beyond a total of 14 years from the date of product approval, only one patent may be extended and only those claims covering the approved drug, a method for using it or a method for manufacturing it may be extended. However, we may not receive an extension, for example, if we fail to apply within applicable deadlines, fail to apply prior to expiration of relevant patents or otherwise fail to satisfy applicable requirements. Moreover, the length of the extension could be less than we request. If we are unable to obtain patent term extension or the term of any such extension is less than we request, the period during which we can enforce our patent rights for that product will be shortened and our competitors may obtain approval to market competing products sooner. As a result, our business, financial condition, results of operations, and prospects may be adversely affected.
If our trademarks and trade names are not adequately protected, then we may not be able to build name recognition in our markets of interest and our business may be adversely affected.
Our pending or future registered or unregistered trademarks or trade names may not issue and may be challenged, infringed, circumvented or declared generic or determined to be infringing on other marks. We may not be able to protect our rights to these trademarks and trade names, which we need to build name recognition by potential partners or customers in our markets of interest. At times, competitors may adopt trade names or trademarks similar to ours, thereby impeding our ability to build brand identity and possibly leading to market confusion. Over the long term, if we are unable to establish name recognition based on our trademarks and trade names, then we may not be able to compete effectively, and our business may be adversely affected.
Intellectual property rights do not necessarily address all potential threats to any competitive advantage we may have.
The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have limitations, and may not adequately protect our business, or permit us to maintain our competitive advantage. The following examples are illustrative:
Others may be able to make compounds that are the same as or similar to our product candidates,candidate, which are aimed initially at the generic market and are not covered by the claims of the patents that we own or have exclusively licensed;
We or any of our licensors or strategic partners might not have been the first to make the inventions covered by the issued patent or pending patent application that we own or have exclusively licensed;
Others may independently develop similar or alternative technologies or duplicate any of our technologies without infringing our intellectual property rights;
It is possible that our pending patent applications will not lead to issued patents;
Issued patents that we own or have exclusively licensed may not provide us with any competitive advantages, or may be held invalid or unenforceable, as a result of legal challenges by our competitors;
Our competitors might conduct research and development activities in the United States and other countries that provide a safe harbor from patent infringement claims for certain research and development activities, as well as in countries where we do not have patent rights, and then use the information learned from such activities to develop competitive products for sale in our major commercial markets.
RISKS RELATED TO LEGISLATION AND ADMINISTRATIVE ACTIONS
Our relationships with customers and
third-partythird party payers will be subject to applicable anti-kickback, fraud and abuse and other healthcare laws and regulations, which could expose us to criminal sanctions, civil penalties, contractual damages, reputational harm and diminished profits and future earnings.
Healthcare providers, physicians and
third-partythird party payers will play a primary role in the recommendation and prescription of any product candidates for which we obtain marketing approval. Our future arrangements with third party payers and customers may expose us to broadly applicable fraud and abuse and other healthcare laws and regulations that may constrain the business or financial arrangements and relationships through which we market, sell and distribute any products for which we obtain marketing approval. Restrictions under applicable federal and state healthcare laws and regulations include the following:
the federal Anti-Kickback Statute prohibits, among other things, persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward, or in return for, either the referral of an individual for, or the purchase, order or recommendation of, any good or service, for which payment may be made under a federal healthcare program such as Medicare and Medicaid;
The term “remuneration” has been broadly interpreted to include anything of value. Although there are a number of statutory exceptions and regulatory safe harbors protecting some common activities from prosecution, the exceptions and safe harbors are drawn narrowly. Practices that involve remuneration that may be alleged to be intended to induce prescribing, purchases or recommendations may be subject to scrutiny if they do not qualify for an exception or safe harbor. A person or entity does not need to have actual knowledge of the federal Anti-Kickback Statute or specific intent to violate it to have committed a violation; in addition, the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the False Claims Act. Violations of the federal Anti-Kickback Statute may result in civil monetary penalties up to $100,000 for each violation, plus up to three times the remuneration involved. Civil penalties for such conduct can further be assessed under the federal False Claims Act. Violations can also result in criminal penalties, including criminal fines and imprisonment of up to 10 years. Similarly, violations can result in exclusion from participation in government healthcare programs, including Medicare and Medicaid; | • | | the federal False Claims Act imposes criminal and civil penalties, including civil whistleblower orqui tam actions, against individuals or entities for, among other things, knowingly presenting, or causing to
|
| be presented false or fraudulent claims for payment by a federal government program, or making a false statement or record material to payment of a false claim or avoiding, decreasing or concealing an obligation to pay money to the federal government;
|
the federal False Claims Act imposes criminal and civil penalties, including civil whistleblower or qui tam actions, against individuals or entities for, among other things, knowingly presenting, or causing to be presented false or fraudulent claims for payment by a federal government program, or making a false statement or record material to payment of a false claim or avoiding, decreasing or concealing an obligation to pay money to the federal government. When an entity is determined to have violated the federal civil False Claims Act, the government may impose civil fines and penalties and exclude the entity from participation in Medicare, Medicaid and other government healthcare programs;
the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, imposes criminal and civil liability for executing a scheme to defraud any healthcare benefit program and also imposes obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individually identifiable health information;
HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act and its implementing regulations, also imposes obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individually identifiable health information;
the federal false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false statement in connection with the delivery of or payment for healthcare benefits, items or services;
federal law requires applicable manufacturers of covered drugs to report payments and other transfers of value to physicians and teaching hospitals;
the federal transparency requirements under the ACA requirePhysician Payments Sunshine Act, which requires certain manufacturers of drugs, devices, biologics, and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program (with certain exceptions) to report annually to the Department of Health and Human Servicesgovernment information related to physician payments or other “transfers of value” made to physicians, certain other healthcare providers, and other transfers of valueteaching hospitals, and physicianrequires applicable manufacturers and group purchasing organizations to report annually to the government ownership and investment interests;interests held by the physicians described above and
their immediate family members and payments or other “transfers of value” to such physician owners (covered manufacturers are required to submit reports to the government by the 90th day of each calendar year); and analogous state laws and regulations, such as state anti-kickback and false claims laws and analogousnon-U.S. fraud and abuse laws and regulations, may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed bynon-governmental third-party third party payers, including private insurers, and some state laws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government in addition to requiring drug manufacturers to report information related to payments to physicians and other health care providers or marketing expenditures.
analogous state laws and regulations, such as state anti-kickback and false claims laws and analogous non-U.S. fraud and abuse laws and regulations, may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third party payers, including private insurers, and some state laws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government in addition to requiring drug manufacturers to report information related to payments to physicians and other health care providers or marketing expenditures.
State and
non-U.S. laws also govern the privacy and security of health information in some circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.
Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs. It is possible that governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, imprisonment, exclusion of products from government funded healthcare programs, such as Medicare and Medicaid, and the curtailment or restructuring of our operations.
The implementation
Our ability to generate revenue from the sale of our product candidate will be diminished if we are unable to obtain third party coverage and adequate levels of reimbursement for any approved product candidate.
Our ability to commercialize any product candidate for which we receive regulatory approval, alone or with collaborators, will depend in part on the reportingextent to which coverage and disclosure obligationsreimbursement for the product candidate will be available from:
government and health administration authorities;
The final rule implementing
private health maintenance organizations and health insurers; and
other healthcare payers.
A substantial portion of our potential future revenue depends or will depend, in part, on the Physician Payments Sunshine Act is complex, ambiguous,extent to which the costs of our products, purchased by our customers are reimbursed by third party payers, including Medicare, Medicaid, other U.S. government sponsored programs, non-U.S. governmental payers and broadprivate payers. Our customers’ ability to obtain adequate reimbursement for products and services from these third party payers affects the selection of products they purchase and the prices they are willing to pay. Some of our target customers may be unwilling to adopt our products in scope. When and if M207 and any other product candidateslight of the additional associated cost. If we develop inare forced to lower the future are approved,price we will within a defined time period become subjectcharge for our US product candidate, if approved, our profitmargins will decrease, which will adversely affect our ability to invest in and grow our business. With the reportingglobal pressure on healthcare costs, payers are attempting to contain costs by, for example, limiting coverage of, and disclosure provisionsthe level of reimbursement for, new therapies. Any limitations on, decreases in or elimination of payments by third party payers may have an adverse effect on our financial condition, business, prospects and/or results of operations.
Additionally, healthcare payers, including Medicare, are challenging the prices charged for medical products and services. Government and other healthcare payers increasingly attempt to contain healthcare costs by limiting both coverage and the level of reimbursement for drugs. Even if our product candidate is approved by the FDA, insurance coverage may not be available, and reimbursement levels may be inadequate, to cover the product candidate. If government and other healthcare payers do not provide adequate coverage and reimbursement levels for our product candidate, once approved, market acceptance of the
Physician Payments Sunshine Act. Accordingly, we willproduct could be
required to collect and report detailed information regarding certain financial relationships we have with physicians, dentists and teaching hospitals. It is difficult to predict how the new requirements may impact existing relationships among manufacturers, distributors, physicians, dentists and teaching hospitals. The Physician Payments Sunshine Act preempts similar state reporting laws, although we may also be required to continue to report under certain provisions of such state laws. While we expect to have substantially compliant programs and controls in place to comply with the Physician Payments Sunshine Act requirements, our compliance with the new final rule will impose additional costs on us. Additionally, failure to comply with the Physician Payment Sunshine Act may subject the Company to civil monetary penalties.reduced.
Healthcare reform may have a material adverse effect on our industry and our results of operations.
Significant uncertainty exists as to the reimbursement status of newly approved healthcare products. The regulations that govern marketing approvals, pricing and reimbursement for new drug products vary widely from country to country. In the United States, the ACA is significantly changing the way healthcare is financed by both governmental and private insurers. From time to time, legislation is implemented to rein in rising healthcare expenditures.
In March 2010, President Obama signed into law the ACA, as amended by the Health Care and Education Reconciliation Act. The ACA included a number of provisions affecting the pharmaceutical industry, including annual,
non-deductible fees on any entity that manufactures or imports certain branded prescription drugs and biologics and increases in Medicaid rebates owed by manufacturers under the Medicaid Drug Rebate Program.
The ACA included new fees or taxes on certain health-related industries, including medical device manufacturers. Beginning in 2013, entities that manufacture, produce or import medical devices were required to pay an excise tax in an amount equal to 2.3% of the price for which such devices are sold in the United States. Through a series of legislative amendments, the tax was suspended for 2016 through 2019, but is scheduled to return beginning in 2020, absent further Congressional action. In addition, among other things, the ACA also established a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in and conduct comparative clinical effectiveness research.
Congress has alsoThe increased funding and focus on comparative clinical effectiveness research, which compares and evaluates the risks and benefits, clinical outcomes, effectiveness and appropriateness of products, may result in lower reimbursements by payers for our product and decreased profits to us. Other federal legislative changes have been proposed
a number of legislative initiatives, including possible repeal of the ACA. At this time, it remains unclear whether there will be any changes made to certain provisions ofand adopted since the ACA
or its entirety.was enacted. These changes included an aggregate reduction in Medicare payments to providers of 2% per fiscal year, which went into effect on April 1, 2013 and will remain in effect through 2027 unless additional Congressional action is taken. These new laws may result in additional reductions in Medicare and other healthcare funding, which could have a material adverse effect on customers for our out-licensed products and product candidates (if and when approved) and accordingly, our financial results.
As noted above, the ACA is significantly changing the way healthcare is financed by both governmental and private insurers. While we cannot predict what impact on federal reimbursement policies this law or any amendment to it will continue to have in general or specifically on any product that we may commercialize, the ACA or any such amendment may result in downward pressure on pharmaceutical reimbursement, which could negatively affect market acceptance of new products. In addition, although the United States Supreme Court has upheld the constitutionality of most of the ACA, several states have not implemented certain sections of the ACA, including 19 that have rejected the expansion of Medicaid eligibility for low income citizens, and some members of the U.S. Congress are still working to repeal the ACA. More recently, President Trump and the Republican majorities in both houses of the U.S. Congress have beenis seeking to repeal or replace all or portions of the ACA but to date they have been unable to agree on any such legislation. While Congress has not passed repeal legislation, the Tax Cuts and Jobs Act of 2017 includes a provision repealing, effective January 1, 2019, thetax-based shared responsibility payment imposed by the ACA on certain individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate”. On December 14, 2018, a U.S. District Court Judge in the Northern District of Texas, ruled that the individual mandate is a critical and inseverable feature of the ACA, and therefore, because it was repealed as part of the Tax Act, the remaining provisions of the ACA are invalid as well. While the Trump Administration and CMS have both stated that the ruling will have no immediate effect, it is unclear how this decision, subsequent appeals, if any, and other efforts to repeal and replace the ACA will impact the ACA and our business. Congress may consider other legislation
to repeal or replace elements of the ACA in the future. We cannot predict what legislation, if any, to repeal or replace the ACA will become law, or what impact any such legislation may have on our product
candidates.candidate.
If
any of our product
candidates becomecandidate becomes subject to recall it could harm our reputation, business and financial results.
The FDA and similar foreign governmental authorities have the authority to require the recall of commercialized products in the event of material deficiencies or defects in design, manufacture or labeling. In the case of the FDA, the authority to require a recall must be based on an FDA finding that there is a reasonable probability that the product would cause serious injury or death. In addition, foreign governmental bodies have the authority to require the recall of our productsproduct in the event of material deficiencies or defects in design or manufacture. Manufacturers may, under their own initiative, recall a product if any material deficiency in a product is found. A government-mandated or voluntary recall by us could occur as a result of component failures, manufacturing errors, design or labeling defects or other deficiencies and issues. Recalls of any of our product candidates would divert managerial and financial resources and have an adverse effect on our financial condition
and results of operations. The FDA requires that certain classifications of recalls be reported to the FDA within 10 working days after the recall is initiated. Companies are required to maintain records of recalls, even if they are not reportable to the FDA. We may initiate voluntary recalls involving our product candidatescandidate in the future that we determine do not require notification of the FDA. If the FDA disagrees with our determinations, we could be required to report those actions as recalls. A recall announcement could harm our reputation with customers and negatively affect our sales. In addition, the FDA could take enforcement action for failing to report the recalls when they were conducted.
Governments outside the United States may impose strict price controls, which may adversely affect our revenue, if any.
In some countries, particularly in the European Union, the pricing of prescription pharmaceuticals is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a product. To obtain coverage and reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our product candidate to other available therapies. If reimbursement for our product
candidatescandidate is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, our business could be harmed, possibly materially.
RISKS RELATED TO EMPLOYEE MATTERS, OUR OPERATIONS AND MANAGING GROWTH
We may enter into or seek to enter into business partnerships, combinations and/or acquisitions which may be difficult to integrate, disrupt our business, divert management attention or dilute stockholder value.
We may enter into business partnerships, combinations and/or acquisitions. We have limited experience in making acquisitions, which are typically accompanied by a number of risks, including:
the difficulty of integrating the operations and personnel of the acquired companies;
the potential disruption of our ongoing business and distraction of management;
potential unknown liabilities and expenses;
the failure to achieve the expected benefits of the combination or acquisition;
the maintenance of acceptable standards, controls, procedures and policies; and
the impairment of relationships with employees as a result of any integration of new management and other personnel.
If we are not successful in completing acquisitions that we may pursue in the future, we would be required to reevaluate our business strategy and we may have incurred substantial expenses and devoted significant management time and resources in seeking to complete the acquisitions. In addition, we could use substantial portions of our available cash as all or a portion of the purchase price, or we could issue additional securities as consideration for these acquisitions, which could cause our stockholders to suffer significant dilution.
We rely on key executive officers and their knowledge of our business and technical expertise would be difficult to replace.
We are highly dependent on our chief executive officer and our chief
businessfinancial officer. We do not have “key person” life insurance policies for any of our officers. The loss of the technical knowledge and management and industry expertise of any of our key personnel could result in delays in product development and diversion of management resources, which could have a material adverse effect on our business, financial condition and results of operations.
If we are unable to hire additional qualified personnel, our ability to grow our business may be harmed.
We will need to hire additional qualified personnel with expertise in preclinical testing, clinical research and testing, government regulation, formulation and manufacturing and sales and marketing. We compete for
qualified individuals with numerous biopharmaceutical companies, universities and other research institutions. Competition for such individuals is intense, and we cannot be certain that our search for such personnel will be successful. Attracting and retaining qualified personnel will be critical to our success.
Our employees may engage in misconduct or other improper activities, including
non-compliance with regulatory standards and requirements.
We are exposed to the risk of employee fraud or other misconduct. Misconduct by employees could include intentional failures to comply with FDA regulations, to provide accurate information to the FDA, to comply with manufacturing standards we have established, to comply with federal and state healthcare fraud and abuse laws and regulations, to report financial information or data accurately or to disclose unauthorized activities to us. In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Employee misconduct could also involve the improper use of individually identifiable information, including, without limitation, information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to our reputation. We have adopted a code of business conduct and ethics, but it is not always possible to identify and deter employee misconduct, and the precautions we take to detect and prevent improper activities may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of significant fines or other sanctions, including civil, criminal or administrative.
We may not successfully manage our growth.
Our success will depend upon the effective management of our growth, which will place a significant strain on our management and on administrative, operational and financial resources. To manage this growth, we may be required to expand our facilities, augment our operational, financial and management systems and hire and train additional qualified personnel. Our inability to manage this growth could have a material adverse effect on our business, financial condition and results of operations.
Our business and operations would suffer in the event of computer system failures or security breaches.
Despite the implementation of security measures, our internal computer systems, and those of our CROs and other third parties on which we rely, are vulnerable to damage from computer viruses, unauthorized access, natural disasters, fire, terrorism, war and telecommunication and electrical failures. If such an event were to occur and cause interruptions in our operations, it could result in a material disruption of our development and manufacturing programs. For example, the loss of clinical trial data from completed, ongoing or planned clinical trials could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. To the extent that any disruption or security breach results in a loss of or damage to our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability and development of our product
candidatescandidate could be delayed.
Risks associated with use of our company-wide enterprise resource planning (“ERP”) system may adversely affect our business and results of operations or the effectiveness of internal control over financial reporting.
We began implementing a company-wide ERP system in the third fiscal quarter of 2018 to handle the business and financial processes within our operations and corporate functions. To reap the benefits of our ERP system, we were required to change certain business and financial processes. Our business and results of operations may be adversely affected if we experience operating problems or cost overruns during the implementation process, or if the systems and the associated process changes do not give rise to the benefits that we expect. If we do not effectively implement, maintain or integrate the ERP system as planned or if the systems do not operate as intended, it may adversely affect our ability to manage and run our business operations, file reports with the SEC in a timely manner, and/or otherwise affect our internal control environment. Any of these consequences could have an adverse effect on our results of operations and financial condition.
Failure in our information technology systems, including by cybersecurity attacks or other data security incidents, could significantly disrupt our operations.
Our operations depend, in part, on the continued performance of our information technology systems. Our information technology systems are potentially vulnerable to physical or electronic break-ins, computer viruses and similar disruptions. Failure of our information technology systems could adversely affect our business, profitability and financial condition. Although we have information technology security systems, a successful cybersecurity attack or other data security incident could result in the misappropriation and/or loss of confidential or personal information, create system interruptions, or deploy malicious software that attacks our systems. It is possible that a cybersecurity attack might not be noticed for some period of time. The occurrence of a cybersecurity attack or incident could result in business interruptions from the disruption of our information technology systems, or negative publicity resulting in reputational damage with our shareholders and other stakeholders and/or increased costs to prevent, respond to or mitigate cybersecurity events. In addition, the unauthorized dissemination of sensitive personal information or proprietary or confidential information could expose us or other third parties to regulatory fines or penalties, litigation and potential liability, or otherwise harm our business.
RISKS RELATING TO AN INVESTMENT IN OUR COMMON STOCK
The trading price of our common stock has been volatile with substantial price fluctuations on heavy volume, which could result in substantial losses for purchasers of our common stock and existing stockholders.
Our stock price has been and, in the future, may be subject to substantial volatility. During the period from January 26,2, 2018 through March 8,December 31, 2018, for example, our stock has traded in a range with a low of $3.61$1.85 and a high of $25.70.
The stock market in general and the market for biopharmaceutical companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. We do not, for example, have any explanation for the volatility in our stock price or the heavy volume of trading (on some days exceeding six times the number of shares currently outstanding) that has occurred in our common stock in February and March of 2018. As a result of this volatility, investors may not be able to sell their common stock at or above the price paid for the shares. The market price for our common stock may be influenced by many factors, including:
announcements relating to development, regulatory approvals or commercialization of our product candidates or those of competitors;
results of clinical trials of our product candidates or those of our competitors;
announcements by us or our competitors of significant strategic partnerships or collaborations or terminations of such arrangements;
actual or anticipated variations in our operating results;
changes in financial estimates by us or by any securities analysts who might cover our stock;
conditions or trends in our industry;
changes in laws or other regulatory actions affecting us or our industry;
stock market price and volume fluctuations of comparable companies and, in particular, those that operate in the biopharmaceutical industry;
announcements of investigations or regulatory scrutiny of our operations or lawsuits filed against us;
investors’ general perception of our company and our business;
disputes concerning our intellectual property or other proprietary rights;
recruitment or departure of key personnel; and
sales of our common stock, including sales by our directors and officers or specific stockholders.
In the past, stockholders have initiated class action lawsuits against pharmaceutical and biotechnology companies following periods of volatility in the market prices of these companies’ stock. Such litigation, if instituted against us, could cause us to incur substantial costs and divert management’s attention and resources from our business.
If we are unable to maintain listing of our securities on the Nasdaq Capital Market or another reputable stock exchange, it may be more difficult for
the Company’sour stockholders to sell their securities.
Nasdaq requires listing issuers to comply with certain standards in order to remain listed on its exchange. On November 28, 2017,
the Companywe received a letter from the Nasdaq Stock Market, LLC (the “Letter”) stating that
the Companywe had failed to maintain at least a $1.00 minimum bid price for
itsour common stock (the “Minimum Bid Requirement”) as required for continued listing of
the Company’sour common stock on the Nasdaq Capital Market.
The CompanyWe subsequently effected a
1-for-20 reverse stock split of
the Company’sour outstanding common stock and, on February 9, 2018,
the Companywe received a letter from the Director of Nasdaq Listing Qualifications indicating that
the Companywe had regained compliance with the Minimum Bid Requirement under Nasdaq Rule 5550(a)(2).
If, for any reason, Nasdaq should delist
the Company’sour securities from trading on its exchange (including if
the Company failswe fail to comply with the Minimum Bid Requirement in the future) and
the Company iswe are unable to obtain listing on another reputable national securities exchange, a reduction in some or all of the following may occur, each of which could materially adversely affect our stockholders:
the liquidity of our common stock;
the market price of our common stock;
our ability to obtain financing for the continuation of our operations;
the number of institutional and general investors that will consider investing in our common stock;
the number of market makers in our common stock;
the availability of information concerning the trading prices and volume of our common stock; and
the number of broker-dealers willing to execute trades in shares of our common stock.
Substantial future sales of shares by existing stockholders, or the perception that such sales may occur, could cause our stock price to decline.
If our existing stockholders, particularly our directors and executive officers,
or are perceived by the public market as intending to sell substantial amounts of our common stock, the trading price of our common stock could decline significantly. As of March
1, 20187, 2019, we had
1,973,03911,973,039 shares of common stock outstanding. Sales of a substantial number of shares of our common stock in the public market, or the perception that these sales might occur may reduce the prevailing market price of our common stock and make it more difficult for you to sell your common stock at a time and price that you deem appropriate. In addition, certain holders of our common stock
and warrants to purchase our common stock are entitled to rights with respect to the registration of their shares under the Securities Act of 1933, as amended (“Securities Act”).
RegistrationAs long as the registration statements covering the resale of
thesesuch shares
under the Securities Act would resultremain in
theeffect, such shares
becomingshall be freely tradable without restriction under the Securities Act, except for shares held by affiliates, as defined in Rule 144 under the Securities Act. Any sales of securities by existing stockholders could have a material adverse effect on the market price of our common stock.
If equity research analysts do not publish research or reports, or publish unfavorable research or reports about us, our business or our market, our stock price and trading volume could decline.
The trading market for our common stock depends in part on the research and reports that securities and industry analysts publish about us or our business. If one or more of the analysts who covers us downgrades our stock or publishes unfavorable research about our business, or if our clinical trials or operating results fail to meet the analysts’ expectations, our stock price would likely decline. If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price and trading volume to decline.
Requirements associated with being a public reporting company will continue to increase our costs significantly, as well as divert significant company resources and management attention.
We have only been subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (“Exchange Act”) and the other rules and regulations of the SEC since January 2015. We are working with our legal, independent accounting, and financial advisors to identify those areas in which changes should be made to our financial and management control systems to manage our growth and our obligations as a public reporting company. These areas include corporate governance, corporate control, disclosure controls and procedures, and financial reporting and accounting systems. We have made, and will continue to make, changes in these and other areas. Compliance with the various reporting and other requirements applicable to public reporting companies will require considerable time, attention of management, and financial resources.
Further, the listing requirements of the Nasdaq Capital Market require that we satisfy certain corporate governance requirements relating to director independence, stockholder meetings, approvals and voting, soliciting proxies, conflicts of interest and a code of conduct. Our management and other personnel will need to devote a substantial amount of time and financial resources to ensure that we comply with all of these requirements. These reporting and corporate governance requirements, coupled with the increase in potential litigation exposure associated with being a public company, could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors or board committees or to serve as executive officers, or to obtain certain types of insurance, including directors’ and officers’ insurance, on acceptable terms.
Any changes we make to comply with these obligations may not be sufficient to allow us to satisfy our obligations as a public company on a timely basis, or at all.
We do not currently intend to pay cash dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.
We have never declared or paid any cash dividends on our common stock, and we currently intend to retain future earnings, if any, to fund the development and growth of our business. Additionally, our existing debt agreements contain covenants that restrict our ability to pay dividends. Therefore, we do not expect to declare or pay any dividends on our common stock for the foreseeable future. As a result, your ability to receive a return on an investment in our common stock will depend on any future appreciation in the market value of our common stock. There is no guarantee that our common stock will appreciate or even maintain the price at which you purchased it.
Our principal stockholders and management own a significant percentage of our stock and will be able to exert significant control over matters subject to stockholder approval.
Our directors, executive officers, and the holders of more than 10% of our common stock together with their affiliates beneficially own a significant number of shares of our common stock. These stockholders, acting together, may be able to determine all matters requiring stockholder approval. For example, these stockholders may be able to control elections of directors, amendments of our organizational documents, or approval of any merger, sale of assets, or other major corporate transaction. This may prevent or discourage unsolicited acquisition proposals or offers for our common stock that you may feel are in your best interest as one of our stockholders.
If we fail to maintain proper and effective internal controls, our ability to produce accurate financial statements on a timely basis could be impaired.
We are subject to the reporting requirements of the Exchange Act, certain provisions of the Sarbanes-Oxley Act and the rules and regulations of the Nasdaq Capital Market. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal controls over financial reporting.
If we are not able to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner, or if we are unable to maintain proper and effective internal controls, we may not be able to produce timely and accurate financial statements. If that were to happen, the market price of our stock could decline, and we could be subject to sanctions or investigations by Nasdaq, the SEC or other regulatory authorities.
Our disclosure controls and procedures may not be effective to ensure that we make all required disclosures.
As a public reporting company, we are subject to the periodic reporting requirements of the Exchange Act. Our disclosure controls and procedures are designed to reasonably assure that information required to be disclosed by us in reports we file or submit under the Exchange Act is accumulated and communicated to management, recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. We believe that any disclosure controls and procedures or internal controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control system, misstatements or insufficient disclosures due to error or fraud may occur and not be detected.
Anti-takeover provisions in our amended and restated certificate of incorporation and amended and restated bylaws, as well as provisions in Delaware law, might discourage, delay or prevent a change of control of our company or changes in our management and, therefore, depress the trading price of our common stock.
Our amended and restated certificate of incorporation, amended and restated bylaws and Delaware law contain provisions that could have the effect of rendering more difficult or discouraging an acquisition deemed undesirable by our board of directors. Our corporate governance documents include provisions:
providing for three classes of directors with the term of office of one class expiring each year, commonly referred to as a staggered board;
authorizing blank check preferred stock, which could be issued with voting, liquidation, dividend and other rights superior to our common stock;
limiting the liability of, and providing indemnification to, our directors;
limiting the ability of our stockholders to call and bring business before special meetings and to take action by written consent in lieu of a meeting;
requiring advance notice of stockholder proposals for business to be conducted at meetings of our stockholders and for nominations of candidates for election to our board of directors;
controlling the procedures for the conduct and scheduling of board and stockholder meetings;
limiting the determination of the number of directors on our board and the filling of vacancies or newly created seats on the board to our board of directors then in office; and
providing that directors may be removed by stockholders only for cause.
These provisions, alone or together, could delay hostile takeovers and changes in control or changes in our management.
As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation law, which prohibits a publicly-held Delaware corporation from engaging in a business combination with an interested stockholder, generally a person which together with its affiliates owns, or within the last three years has owned, 15% of our voting stock, for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner.
The existence of the foregoing provisions and anti-takeover measures could limit the price that investors might be willing to pay in the future for shares of our common stock. They could also deter potential acquirers of our company, thereby reducing the likelihood that our stockholders could receive a premium for their common stock in an acquisition.
We are an “emerging growth company,” and as a result of the reduced disclosure and governance requirements applicable to emerging growth companies, our common stock may be less attractive to investors.
We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012
or the ("JOBS
Act,Act"), and we intend to take advantage of some of the exemptions from reporting requirements that are applicable to other public companies that are not emerging growth companies, including:
| • | | being permitted to provide only two years of audited financial statements, in addition to any required unaudited interim financial statements, with correspondingly reduced “Management’s Discussion and Analysis of Financial Condition and Results of Operations ” disclosure;
|
being permitted to provide only two years of audited financial statements, in addition to any required unaudited interim financial statements, with correspondingly reduced “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure;
not being required to comply with the auditor attestation requirements in the assessment of our internal control over financial reporting;
not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements;
reduced disclosure obligations regarding executive compensation; and
not being required to hold anon-binding advisory vote on executive compensation or obtain stockholder approval of any golden parachute payments not previously approved.
We cannot predict whether investors will find our common stock less attractive because we will rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile. We may take advantage of these reporting exemptions until we are no longer an emerging growth company. We will remain an emerging growth company until the earliest of (i) the end of the fiscal year in which the market value of our common stock that is held by
non-affiliates exceeds $700 million as of the end of the second fiscal quarter, (ii) the end of the fiscal year in which we have total annual gross revenue of $1.07 billion or more during such fiscal year, (iii) the date on which we issue more than $1 billion in
non-convertible debt in a three-year period or (iv) December 31,
2019,2020, the end of the fiscal year following the fifth anniversary of the first sale of our common equity securities pursuant to an effective registration statement filed under the Securities Act.
Under Section 107(b) of the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.
Item 1B. | UNRESOLVED STAFF COMMENTS |
Item 1B. UNRESOLVED STAFF COMMENTS
Item 2. PROPERTIES
Our principal executive offices are located at 34790 Ardentech Court, Fremont, California 94555.
The Company hasWe have an operating lease for
itsour headquarters in Fremont, California. Under the Seventh Amendment,
the Companywe extended the term of the
Leaselease for
the Company’sour headquarters for an additional 65 months from March 31, 2019 through August 31, 2024, with an option to further extend the lease for an additional 60 months, subject to certain terms and conditions. We do not own any real property. We believe our present facilities are sufficient for our current and planned near-term operations.
Item 3. LEGAL PROCEEDINGS
We are not party to any material pending legal proceedings. However, we may from time to time become involved in litigation relating to claims arising in the ordinary course of our business.
Item 4. | MINE SAFETY DISCLOSURES |
Item 4. MINE SAFETY DISCLOSURES
Not applicable.
Item 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is publicly traded and listed on the Nasdaq Capital Market under the symbol “ZSAN.”
On January 25, 2018, we effected a1-for-20 reverse stock split. The share prices in the table below are shown on a post-split basis. Unless otherwise indicated, all per share amounts have been adjusted for this reverse stock split. The following table sets forth on a per share basis, for the periods indicated, the low and high sale prices of our common stock as reported by the Nasdaq Capital Market. | | | | | | | | |
| | | High | | | Low | |
2017 | | | | | | | | |
First quarter | | $ | 70.80 | | | $ | 15.60 | |
Second quarter | | $ | 38.60 | | | $ | 24.00 | |
Third quarter | | $ | 28.20 | | | $ | 15.20 | |
Fourth quarter | | $ | 25.80 | | | $ | 10.00 | |
| | |
| | | High | | | Low | |
2016 | | | | | | | | |
First quarter | | $ | 56.60 | | | $ | 39.00 | |
Second quarter | | $ | 49.80 | | | $ | 20.60 | |
Third quarter | | $ | 40.00 | | | $ | 13.20 | |
Fourth quarter | | $ | 23.40 | | | $ | 9.00 | |
As of March 1,
2018,2019, there were
179 holders of record of our common stock.
We have never declared or paid any cash dividends on our common stock. We currently expect to retain all future earnings, if any, for use in the operation and expansion of our business, and therefore do not anticipate paying any cash dividends in the foreseeable future.
Additionally, our secured term loan facility with Hercules contains covenants that restrict our ability to pay dividends.Securities Authorized for Issuance under Equity Compensation Plans
See Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” for information with respect to our compensation plans under which equity securities are authorized for issuance.
We are a smaller reporting company, as defined by Rule
12b-2 of the Securities Exchange Act of 1934, as amended, and are not required to provide a performance graph.
Recent Sale of Unregistered Securities
We did not sell any unregistered equity securities during the period covered by this Annual Report on
Form 10-K that have not already been reported in a Quarterly Report on
Form 10-Q or in a Current Report on
Form 8-K.Issuer Purchases of Equity Securities
We did not purchase any of our equity securities during the period covered by this Annual Report onForm 10-K.
Item 6. | SELECTED FINANCIAL DATA |
Item 6. SELECTED FINANCIAL DATA
The selected financial data in the tables below should be read together with our financial statements and accompanying notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this Annual Report onForm 10-K. The selected financial data in this section is not intended to replace our financial statements and the accompanying notes. Our historical results are not necessarily indicative of our expected future results. The statements of operations data for 20172018 and 20162017 and the balance sheet data as of December 31, 20172018 and 20162017 were derived from our audited financial statements included elsewhere in this Annual Report on Form 10-K.
|
| | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 |
| | (in thousands, except per share and share data) |
| Statements of Operations Data: | | | |
| Revenue | $ | — |
| | $ | — |
|
| Operating expenses: | | | |
Research and development (1) | 25,508 |
| | 20,118 |
|
General and administrative (1) | 9,357 |
| | 8,182 |
|
Impairment loss (1) | 511 |
| | 70 |
|
| Total operating expenses | 35,376 |
| | 28,370 |
|
| Loss from operations | (35,376 | ) | | (28,370 | ) |
| Other income (expense): | | | |
Interest income (1) | 381 |
| | 75 |
|
Interest expense (1) | (379 | ) | | (817 | ) |
Other income, net (1) | 16 |
| | 7 |
|
| Net loss | $ | (35,358 | ) | | $ | (29,105 | ) |
| Net loss per common share — basic and diluted | $ | (3.74 | ) | | $ | (16.82 | ) |
| Weighted-average common shares outstanding — basic and diluted | 9,452,491 |
| | 1,730,388 |
|
| | | | |
| | | | |
| | December 31, |
| | 2018 | | 2017 |
| | (in thousands) |
| Balance Sheets Data: | | | |
| Cash and cash equivalents | $ | 9,140 |
| | $ | 11,651 |
|
Marketable securities at fair value (2) | $ | 13,862 |
| | $ | — |
|
Working capital (2) | $ | 12,073 |
| | $ | 2,936 |
|
| Total assets | $ | 35,780 |
| | $ | 18,000 |
|
Build-to-suit obligation, net of debt issuance costs and discount (3) | $ | 6,804 |
| | $ | — |
|
Secured promissory note (including accrued interest), net of issuance costs (4) | $ | — |
| | $ | 6,687 |
|
| Accumulated deficit | $ | (261,232 | ) | | $ | (225,874 | ) |
| Total stockholders’ equity | $ | 18,710 |
| | $ | 7,048 |
|
10-K.(1) | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2017 | | | 2016 | |
| | | (in thousands, except per share data) | |
Consolidated Statements of Operations Data: | | | | | | | | |
Revenue | | $ | - | | | $ | - | |
Operating expenses: | | | | | | | | |
Research and development | | | 20,188 | | | | 20,457 | |
General and administrative | | | 8,182 | | | | 8,176 | |
| | | | | | | | |
Total operating expenses | | | 28,370 | | | | 28,633 | |
| | | | | | | | |
Loss from operations | | | (28,370 | ) | | | (28,633 | ) |
Other income (expense): | | | | | | | | |
Interest expense, net | | | (742 | ) | | | (1,192 | ) |
Other income (expense), net | | | 7 | | | | (7 | ) |
| | | | | | | | |
Net loss | | $ | (29,105 | ) | | $ | (29,832 | ) |
| | | | | | | | |
Net loss per common share — basic and diluted | | $ | (16.82 | ) | | $ | (43.36 | ) |
| | | | | | | | |
Weighted-average common shares outstanding — basic and diluted | | | 1,730 | | | | 688 | |
| | | | | | | | |
| |
| | | December 31, | |
| | | 2017 | | | 2016 | |
| | | (in thousands) | |
Selected Balance Sheets Data: | | | | | | | | |
Cash and cash equivalents | | $ | 11,651 | | | $ | 15,003 | |
Working capital | | | 2,936 | | | | 5,457 | |
Total assets | | | 18,000 | | | | 20,906 | |
Total promissory note | | | 6,687 | | | | 12,542 | |
Accumulated deficit | | | (225,874 | ) | | | (196,769 | ) |
Total stockholders’ equity | | $ | 7,049 | | | $ | 4,485 | |
(2) In April 2018, we issued common stock in a public offering. We invested a portion of the cash proceeds from the public offering in marketable securities.
(3) In September 2018, we entered into a build-to-suit arrangement with Trinity with an aggregate value of $14.0 million. As of December 31, 2018, we had drawn $7.8 million on the build-to-suit arrangement.
(4) In September 2018, we paid all of our outstanding obligations under a term loan with Hercules Capital, Inc.
Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the notes to those statements included elsewhere in this Annual Report on
Form 10-K. In addition to historical financial information, this discussion and analysis contains forward-looking statements
that that reflect our plans, estimates and beliefs. You should not place undue reliance on these forward-looking statements, which involve risks and uncertainties. As a result of many factors, including but not limited to those set forth under ‘‘Risk Factors,’’ our actual results may differ materially from those anticipated in these forward-looking statements. See “Cautionary Note Regarding Forward-Looking Statements.”
On January 23, 2018, our stockholders approved an increase to the number of authorized shares of
the Company’sour common stock from 100,000,000 to 250,000,000 shares. Our stockholders also approved a proposal authorizing the board of directors, in its discretion, to effect a reverse stock split of our outstanding shares of common stock at a ratio ranging from
1-for-5 to
1-for-20 to be determined by the board of directors and effected, if at all, no later than November 23, 2018. On January 23, 2018, our board of directors approved a
1-for-20 reverse stock split of our outstanding common stock, which was effected on January 25, 2018. At the effective time, every
twenty20 shares of common stock issued and outstanding were automatically combined into one share of issued and outstanding common stock. The par value of our stock remained unchanged at $0.0001 per share. No fractional shares of our common stock were issued in the reverse stock split, but in lieu thereof, each holder of our common stock who would otherwise have been entitled to a fraction of a share in the reverse stock split received a cash payment. In addition, by reducing the number of our outstanding shares, our loss per share in all prior periods increased by a factor of
twenty. In addition, a20. A proportionate adjustment was
also made to the per share exercise price and the number of shares issuable upon the exercise of our outstanding equity awards, options and warrants to purchase shares of our common stock and to the number of shares reserved for issuance pursuant to our equity incentive compensation plans. The reverse stock split affected all stockholders of our common stock uniformly and did not affect any stockholder’s percentage of ownership interest. Unless otherwise noted, all share and per share information included in this report has been retroactively adjusted to give effect to the reverse stock split.
The reverse stock split did not affect the number of authorized shares of common stock, which, after giving effect to the authorized share increase, is 250,000,000 shares.
Zosano Pharma Corporation is a clinical stage biopharmaceutical company focused on providing rapid systemic administration of therapeutics to patients using our proprietary Adhesive Dermally-Applied Microarray, or ADAM, technology. In February 2017, we announced positive results from our ZOTRIP pivotal efficacy trial, or ZOTRIP trial, that evaluated
M207,Qtrypta™ (M207), which is our proprietary formulation of zolmitriptan delivered via our ADAM technology, as an acute treatment for migraine.
In February 2019, we announced the completion of the final milestone in our long-term safety study for Qtrypta™ (M207). We are focused on developing products where rapid administration of established molecules with known safety and efficacy profiles provides an increased benefit to patients,
forin markets where patients remain underserved by existing therapies. We anticipate that many of our current and future development programs may enable us to utilize a regulatory pathway that would streamline clinical development and accelerate the path towards commercialization.
ADAM is our proprietary, investigational technology platform designed to offer rapid drug absorption into the bloodstream, which can result in an improved pharmacokinetic profile compared to original dosage forms. ADAM consists of an array of drug-coated titanium microprojections mounted on an adhesive backing that is pressed on to the skin using a reusable handheld applicator. The microprojections penetrate the stratum corneum and allow the drug to be absorbed into the microcapillary system of the skin. We focus on developing products based on our ADAM technology for indications in which rapid onset, ease of use and stability offer significant therapeutic and practical advantages,
forin markets where there is a need for more effective therapies.
Our development efforts are focused on our product candidate, M207. M207Qtrypta™ (M207). Qtrypta™ (M207) is our proprietary formulation of zolmitriptan delivered utilizing our ADAM technology. Zolmitriptan is one of a class of serotonin receptor
agonists known as triptans and is used as an acute treatment for migraine. Migraine is a debilitating neurological disease, symptoms of which include moderate to severe headache pain, nausea and vomiting, and abnormal sensitivity to light and sound. The objective of M207Qtrypta™ (M207) is to provide faster onset of efficacy and sustained freedom from migraine symptoms by delivering rapid absorption while avoiding the GI tract. Feedback from the United States Food and Drug Administration, or FDA on M207’sQtrypta™ (M207)’s regulatory path has also been encouraging. The agency has indicated that one positive pivotal efficacy study, in addition to the required safety study, would be sufficient for approval of M207Qtrypta™ (M207) for the treatment of migraine.
We will use contract manufacturers for the production of Qtrypta™. These contract manufacturers include companies that will produce our applicator, the various components that comprise our patch, as well as the final packaging of the finished product. Where required, these contract manufacturers will operate within the specifications and in accordance with good manufacturing
practices as defined by the FDA. These companies are located in the United States and have expertise and experience in contract manufacturing.
We have no product sales to date, and we will not have product sales unless and until we receive approval from the
United States Food and Drug Administration (“FDA”)FDA, or equivalent foreign regulatory bodies, to market and sell our product candidate. Accordingly, our success depends not only on the development, but also on our ability to finance the development of the product. We will require substantial additional funding to complete development and seek regulatory approval for these products. Additionally, we currently have no sales, marketing or distribution capabilities and thus our ability to market our products in the future will depend in part on our ability to develop such capabilities either alone or with collaboration partners.
Critical Accounting Policies and Significant Judgments and Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our audited
consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting
principles.principles ("U.S. GAAP"). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported
revenue generated and expenses incurredresults of operations during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates under different assumptions or conditions. While our significant accounting policies are described in more detail in the notes to our
consolidated financial statements included elsewhere in this Annual Report on
Form 10-K, we believe that the accounting policies discussed below are those that are most critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.
We are an “emerging growth company” as defined in
the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. Emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards, and, therefore, will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.
Research and Development Expenses
Research and development costs are charged to expense as incurred and consist of costs related to (i)
servicing our collaborative development efforts with other pharmaceutical companies, (ii) furthering our research and development efforts,
(ii) seeking regulatory approval of our primary drug candidate, Qtrypta™ (M207), and (iii)
designing and manufacturing our intracutaneous applicatorpre-commercialization efforts for
our clinical and nonclinical studies.Qtrypta™ (M207). Research and development costs include salaries and related employee benefits, costs associated with clinical trials, nonclinical research and development activities, regulatory activities, costs of active pharmaceutical ingredients and raw materials, research and development related overhead expenses
fees paid to contract research organizations that conduct clinical trials on behalf of the Company, and fees paid to contract manufacturing organizations that conduct manufacturing activities on
behalf of the Company.our behalf.
We account for its stock-based compensation, recorded as an expense, based on the fair value of the stock- basedstock-based awards aton the grant date that the grants are ultimately expected to vest. The fair value of employee stock option grants is estimated on the date of grant using the Black-Scholes option pricing model and areis recognized as expense on
a straight- linestraight-line basis over the employee’s requisite service period (generally the vesting period), net of estimated forfeitures.
We record the expense attributed tonon-employee services paid with stock-based awards based on the estimated fair value of the awards determined using the Black-Scholes option pricing model. The measurement of stock-based compensation fornon-employees is subject tore-measurement as the options vest, and the expense is recognized over the period during which services are received.
Financial Operations Overview
As of December 31,
2017,2018, we had an accumulated deficit of approximately
$225.9$261.2 million. We have incurred significant losses and expect to incur significant and increasing losses in the foreseeable future as we advance our
Qtrypta™ (M207) product
candidatescandidate into later stages of development and, if approved, commercialization. We cannot assure you that we will receive additional capital or collaboration revenue in the future,
pursuant toas a result of any partnership that we might pursue.
We expect our research and development expenses and manufacturing expenses related to the development of our
M207Qtrypta™ (M207) product candidate to increase as we continue to advance this program towards regulatory filing and approval. Because of the numerous risks and uncertainties associated with our technology and drug development, we cannot forecast with any degree of certainty the timing or amount of expenses incurred or when, or if, we will be able to achieve profitability.
We will require additional capital to undertake our planned research and development activities and to meet our operating requirements beyond 2017.2018. We intend to raise such capital through the issuance of additional equity through public or private
offerings, debt financing, strategic alliances with pharmaceutical partners, or any combination of the above. However, if such financing is not available at adequate levels or on acceptable terms, we could be required to further reduce our operating expenses and suspend, delay or reduce the scope of our
M207Qtrypta™ (M207) development program,
out-license intellectual property rights to our intracutaneous delivery technology, or a combination of the above, which may have a material adverse effect on our business, results of operations, financial condition and/or our ability to fund our scheduled obligations on a timely basis or at all.
Debt
In September 2018, we entered into a build-to-suit arrangement with Trinity with a maximum funding amount of $14.0 million for the third party construction of our commercial coating and primary packaging system, expected to be completed in the second quarter of 2020. In September 2018, we drew $5.0 million with a stated interest rate of 9.43% and an effective interest rate of 26.28%. In December 2018, we drew $2.8 million with a stated interest rate of 9.68% and an effective interest rate of 19.58%. Each drawdown has a 36-month-term beginning the first day of the month following the drawdown. The remaining $6.2 million is available to us in increments of not less than $500,000 until March 30, 2020. Any unused portion of the $14.0 million at March 30, 2020, is subject to a non-utilization fee equal to 3% of the unused amount. In consideration of the financing arrangement, as collateral, Trinity has a first-priority lien and security interest in substantially all of our assets.
Under the financing arrangement, each individual drawdown represents a separate financing arrangement with its own 36-month-term and stated interest rate. Each drawdown is non-cancelable, with no prepayment options. Each drawdown has embedded optional purchase options to (i) extend the term for an additional three months, with the option to purchase the equipment at 4% of the total cost, which is equal to the drawdown amount, following the end of such extended term, or (ii) purchase the equipment at 12% of total cost, which is equal to the drawdown amount, at the end of the 36-month-term. We have funded,intend to exercise the optional purchase option of 12% at the end of each 36-month-term ("Purchase Option Fee"). The transfer of title from Trinity to us will occur at the end of the final 36-month-term, provided that the purchase option was executed and the Purchase Option Fee was paid in full at the end of each 36-month-term. Failure to pay any of the Purchase Option Fees will continueresult in Trinity retaining title to fund, our operations in part through debt financing. the commercial coating and primary packaging system and a 6% restocking fee.
In June 2014, we entered into a $4.0 million term loan facility with Hercules Capital, Inc. (“Hercules”), previously known as Hercules Technology Growth Capital, Inc. In June 2015, we entered into a first amendment to the loan and security agreement with Hercules to increase the aggregate principal amount of the loan toCapital, Inc. ("Hercules"). Hercules provided us a $15.0 million (the loan ("Hercules Term Loan). Upon the executionLoan") of the first amendment to the loan and security agreement, we used approximately $11.4 million of the Hercules Term Loan to prepay all amounts owing under the secured promissory note held by BMV Direct SOTRS LP, an affiliate of BioMed Realty Holdings, Inc. The first amendment to the loan and security agreement with Hercules provides that the $15.0 million principal balance will be subject to a12-month interest-only period beginning July 1, 2015, followed bywhich equal monthly installment payments of principal and interest were due monthly, with all outstanding amounts due and payable ona scheduled maturity date of December 1, 2018. The outstanding principal balance bears interest at a variable rate of the greater of (i) 7.95%, or (ii) 7.95% plus the prime rate as quoted in the Wall Street Journal minus 5.25%. The interest rate on the secured term loan with Hercules was 7.95% for the years ended December 31, 2017 and 2016. On June 1, 2017,September 25, 2018, we paid a $100,000 legacyall of our outstanding obligations under the Hercules Term Loan, including an end of term charge and is requiredof approximately $0.4 million.
On April 3, 2018, we closed a public offering of 10,000,000 shares of common stock at a public offering price of $5.00 per share. We received approximately $45.6 million of net proceeds from this offering. We primarily used the net proceeds to pay an additional $351,135 end of term charge on the earlier of loan maturity or at the date we prepay the Hercules Term Loan. We may prepay all, but not less than all, of the Hercules Term Loan with no prepayment charge. The Hercules Term Loan is secured by a first priority security interest and lien in and to allfund continued advancement of our tangibleQtrypta™ (M207) product candidate, to service our debt obligation with Hercules, to fund clinical development, and intangible propertiesfor working capital and assets, including intellectual properties.other general corporate purposes.
Research and Development Expenses
Research and development expenses represent costs incurred to conduct research, such as the discovery and development of our proprietary product candidates. We recognize all research and development
costsexpenses as they are incurred.
Research and development expenses consist of:
production costs which include, but are not limited to, employee-related expenses, including salaries, benefits and stock-based compensation expense, and fees paid to conduct clinical studies, drug formulation, and cost of consumables used in nonclinical and clinical trials;
expenses related to the purchase of active pharmaceutical ingredients and raw materials for the production of our intracutaneous delivery system, including fees paid to contract manufacturing organizations;
fees paid to contract research organizations (“CROs”),CROs, clinical consultants, clinical trial sites and vendors, including institutional review boards (“IRBs”),IRBs, in conjunction with implementing and monitoring our clinical trials and acquiring and evaluating clinical trial data, including all related fees, such as for investigator grants, patient screening fees, laboratory work and statistical compilation and analysis;
fees paid to conduct clinical studies, drug formulation, and cost of consumables used in nonclinical and clinical trials;
other consulting fees paid to third parties; and
allocation of certain shared costs, such as facilities-related costs and IT support services.
costs.The following table summarizes our research and development expenses incurred during the years ended December 31, 2017 and 2016, and from our inception to December 31, 2017:
| | | | | | | | | | | | |
| | | | | | | | | For the Period
from
inception
to
December 31,
2017 | |
| | | Year Ended December 31, | | |
| | | 2017 | | | 2016 | | |
| | | (In thousands) | |
Product candidate: | | | | | | | | | | | | |
M207 (1) | | $ | 15,569 | | | $ | 13,281 | | | $ | 34,676 | |
Suspended programs(2) | | | 7 | | | | 126 | | | | 52,409 | |
Other research projects(3) | | | 173 | | | | 1,984 | | | | 12,746 | |
Collaborative development support(4) | | | - | | | | - | | | | 2,630 | |
Unallocated research and development expenses (5) | | | 4,439 | | | | 5,066 | | | | 79,573 | |
| | | | | | | | | | | | |
Total research and development expenses | | $ | 20,188 | | | $ | 20,457 | | | $ | 182,034 | |
| | | | | | | | | | | | |
| (1) | We initiated our M207 project in September 2013.
|
| (2) | In April 2016, we suspended further development related to Daily B104, Weekly B104 and D107.
|
| (3) | Our other research projects include programs other than our lead development candidate, M207.
|
| (4) | Collaborative development support consists of support services provided to Asahi in 2011 and 2012 and to Novo Nordisk in 2014 and 2015 in connection with our collaboration and license agreements with Asahi and Novo Nordisk.
|
| (5) | Unallocated costs include research and development expenses not allocated to a specific program or product candidate, and personnel-related costs prior to the implementation of our timesheet tracking system in 2011.
|
The project-specific expenses summarized in the table above include costs directly attributable to our product candidates. We allocate research and development salaries, benefits, stock-based compensation and indirect costs to our product candidates on a project-specific basis, and we include these costs in the project- specific expenses. We expect our research and development expenses to increase in the future. The process of conducting the necessary clinical trials to obtain regulatory approval is costly and time consuming. We consider the active management and development of our
clinical pipeline to be crucial to our long-term success. The actual probability of success for each product candidate and clinical program may be affected by a variety of factors, including, but not limited to: the quality of the product candidate, early clinical data, investment in the program, competition, manufacturing capability and commercial viability. In situations in which third parties have control over the clinical development of a product candidate, the estimated completion dates are largely under the control of such third parties and not under our control. Additionally, a future collaborative partner may only be interested in applying our technology in the development and advancement of their own product candidates.
In
2017,2018, our research and development efforts and resources focused primarily on advancing the development of
M207.Qtrypta™ (M207). While we currently intend to continue clinical development of
M207Qtrypta™ (M207) through commercialization in the United States ourselves, we remain open to opportunities with potential strategic partners to ensure
M207Qtrypta™ (M207) will receive the best chance of commercial success. We are actively seeking opportunities to evaluate collaborations with strategic partners to further the clinical and commercial development of our other product candidates. We cannot forecast with any degree of certainty if
M207Qtrypta™ (M207) or any of our future product candidates, if any, will be subject to future collaborations or how such arrangements would affect our development plans or capital requirements. As a result of these uncertainties, we are unable to determine the duration and completion costs of our research and development projects or when and to what extent we will generate revenue from the commercialization and sale of any of our product candidates.
General and Administrative Expenses
General and administrative expenses consist principally of personnel-related costs, professional fees for legal, consulting, audit and tax services, rent and other general operating expenses not otherwise included in research and development. As a public company, we expect to invest significant resources to comply with evolving laws, regulations and standards, including the implementation of effective internal controls over financial reporting and compliance with
the Sarbanes-Oxley Act.
Impairment Loss
We evaluate our long-lived assets for indications of possible impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets is measured by a comparison of the carrying amount of the asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of the asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset.
Interest income. Interest income consists primarily of interest, dividends and amortization of purchase premiums and discounts related to our marketable securities.
Interest expense.Interest expense net. Interest expense, net consists primarily of interest costs related to our short-term borrowings and long-term debt and the amortization of debt discount and issuance costs. Interest expense for the year ended December 31, 2017 and 2016 consisted of accrued interest related to the Hercules Term Loan and the related amortization of debt discount and issuance costs.
Other expense,income, net. Other expense,income, net consists of miscellaneous income or expenses that are not included in other categories of the consolidated statement of operations(See detailed explanations under the next subheading, Results of Operations) and comprehensive loss. Comparison of the year ended December 31, 20172018 and 2016 | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | Change | |
| | | 2017 | | | 2016 | | | Amount | | | % | |
| | | (In thousands) | | | | | | | |
Research and development | | $ | 20,188 | | | $ | 20,457 | | | $ | (269 | ) | | | (1%) | |
2017
Research and development expenses decreased approximately $0.3
|
| | | | | | | | | | | | | | |
| | Year Ended December 31, | | Change |
| | 2018 | | 2017 | | Amount | | % |
| | (In thousands) | | |
| Research and development | $ | 25,508 |
| | $ | 20,118 |
| | $ | 5,390 |
| | 27 | % |
For the year ended December 31, 2018, the increase in research and development expense of $5.4 million or 1%was primarily due to an increase of $4.4 million in clinical trial costs related to the long-term safety study of Qtrypta™ (M207), $1.6 million in increased compensation expenses and an increase of $1.1 million for facility set-up and technology transfer fees to our commercial
manufacturing organization. The increase in research and development expense was partially offset by $1.8 million related to lower depreciation expense due to manufacturing related leasehold improvement assets becoming fully amortized in 2017.
General and administrative expenses
|
| | | | | | | | | | | | | | |
| | Year Ended December 31, | | Change |
| | 2018 | | 2017 | | Amount | | % |
| | (In thousands) | | |
| General and administrative | $ | 9,357 |
| | $ | 8,182 |
| | $ | 1,175 |
| | 14 | % |
For the year ended December 31, 2018, the increase in general and administrative expense was due to an increase in compensation expense of $0.8 million and an increase in corporate taxes of $0.4 million.
|
| | | | | | | | | | | | | | |
| | Year Ended December 31, | | Change |
| | 2018 | | 2017 | | Amount | | % |
| | (In thousands) | | |
| Impairment loss | $ | 511 |
| | $ | 70 |
| | $ | 441 |
| | 630 | % |
For the year ended December 31, 2018, the impairment loss was due to our focus on our Qtrypta™ (M207) commercial manufacturing strategy. Certain assets related to a former D107 program and custom manufacturing equipment that will be replaced by new commercial production manufacturing equipment were determined to be impaired. For the year ended December 31, 2017, $70,000 was recorded for the impairment of laboratory equipment.
Other income and expense
|
| | | | | | | | | | | | | | |
| | Year Ended December 31, | | Change |
| | 2018 | | 2017 | | Amount | | % |
| | (In thousands) | | |
| Interest income | $ | 381 |
| | $ | 75 |
| | $ | 306 |
| | 408 | % |
| Interest expense | $ | (379 | ) | | $ | (817 | ) | | $ | 438 |
| | (54 | )% |
| Other income, net | $ | 16 |
| | $ | 7 |
| | $ | 9 |
| | 129 | % |
For the years ended December 31, 2018 and 2017, interest income resulted primarily from interest recognized related to our marketable securities. The increase for the year ended December 31, 2017 as compared to the year ended December 31, 2016. The decrease was due to lower clinical
trial costs based on our decision to primarily focus our resources on M207, which is our proprietary formulation of zolmitriptan delivered via our ADAM technology, as an acute treatment for migraine. We also completed our efficacy study in February 2017 and in November 2017, we initiated the required long-term safety study in the development of M207.
General and administrative expenses
| | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | Change | |
| | | 2017 | | | 2016 | | | Amount | | | % | |
| | | (In thousands) | | | | | | | |
General and administrative | | $ | 8,182 | | | $ | 8,176 | | | $ | 6 | | | | 0% | |
General and administrative expenses increased slightly by $6,000 for the year ended December 31, 20172018 as compared to the same period in 2016.
Other income and expense
| | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | Change | |
| | | 2017 | | | 2016 | | | Amount | | | % | |
| | | (In thousands) | | | | | | | |
Interest expense, net | | $ | (742 | ) | | $ | (1,192 | ) | | $ | 450 | | | | 38% | |
Other income (expense), net | | | 7 | | | | (7 | ) | | | 14 | | | | 200% | |
Interest expense, net, decreased approximately $0.5 million for2017 resulted from investing the yearproceeds of the April 2018 public offering in marketable securities in the second quarter of 2018.
For the years ended December 31,
2018 and 2017,
as compared to the same period in 2016. Interestinterest expense
consistsconsisted primarily of interest, amortization of debt discount and amortization of deferred financing
costs associated withcosts. The decrease in interest expense resulted from the decrease in the Hercules
Term Loan
Agreement. We expect that our interest expense will decrease forprincipal balance in 2018 as compared to
20172017. Interest of $0.3 million related to our build-to-suit arrangement with Trinity was capitalized as
a result of the repayment of the Hercules Loan Agreementconstruction-in-progress in
December 2018.
Other expense, net, increased approximately $14,000 for the year ended December 31, 2017 as compared to the same period in 2016.
For the year ended December 31,
2018 and 2017,
we recorded aother income, net
gainconsisted primarily of
approximately $9,000 on agains from the sale of equipment.
For the year ended December 31, 2016, we recorded a gain of approximately $51,000 on a sale of equipment, offset by a loss in other expenses of approximately $57,000 on the sale of Zosano Inc., a public shell corporation that was a subsidiary of the Company with no operations and no assets.As of December 31, 2017,2018, we had net deferred tax assets of $16.9$16.5 million. The deferred tax assets primarily consisted of federal and state tax net operating losses and research and development tax credit carryforwards. Due to uncertainties surrounding our ability to generate future taxable income to realize these tax assets, a full valuation allowance has been established to offset our deferred tax assets. As of December 31, 2018, we had federal net operating loss carryforwards of approximately $41.1 million and state net operating loss carryforwards of approximately $33.2 million. As of December 31, 2017, we had federal net operating loss carryforwards of approximately $43.8 million and state net operating loss carryforwards of approximately $43.5 million. If not utilized, certain of the federal net operating loss carryforwards will begin to expire from 2017 through 2038,beginning in 2026, and state net operating loss carryforwards will begin to expire beginning in 2028.
As of December 31, 2018,
through 2038.we had federal and state research and development credit carryforwards of approximately $0.6 million and $5.1 million, respectively. As of December 31, 2017, we had federal and state research and development credit
carryforwards of approximately $0.4 million and $4.6
million, respectively. As of December 31, 2016, we had federal and state research and development credit carryforwards of approximately $0.5 million and $4.2 million, respectively. If not utilized, the federal tax credits will begin to expire in 2026; state tax credits currently do not expire.
Utilization of net operating loss carryforwards and research and development credit carryforwards may also be subject to an annual limitation due to the ownership change limitations. These annual limitations may result in the expiration of the net operating loss carryforwards and research and development credit carryforwards before
utilization. We have performed an analysis under Internal Revenue Code SectionSections 382 and 383 to determine the amount of our net operating loss carryforwards and research and development credit carryforwards that will be subject to annual limitation. As a result of the analysis, a portion of the net operating loss carryforwards and research and development credit carryforwards have been derecognized due to the annual limitation.
Refer to
See Note 11. 12. IncomeTaxes, for discussions ondiscussion of the impact of the Tax Cuts and Jobs Act, (the “2017 Tax Act”) which was enacted in December 2017. Liquidity and Capital Resources
As of December 31, 2017,2018, we had an accumulated deficit of $225.9$261.2 million as well asand $29.1 million of negative cash flows from operating activities.activities for the year ended December 31, 2018. As of December 31, 2018, we had approximately $23.0 million in cash, cash equivalents and marketable securities. Presently, we do not have sufficient cash, resourcescash equivalents and marketable securities to enable us to fund our anticipated level of operations and meet our plans inobligations as they become due during the next twelve months fromfollowing the date of issuance of these financial statements. We will continue to require substantial fundsthis Annual Report on Form 10-K. Further, to continue research and development, including clinical trials of M207 and any future product candidates. Management’s plans in order to meet its operating cash flow requirements include financing activities such as public or private offerings of its common stock, preferred stock offerings, issuances of debt and convertible debt instruments and collaborative or other arrangements with corporate sources. Accordingly, on December 22, 2017, we filed a registration statement with the SECoperations for the offerremainder of 2019, we will need to, and salewe are actively seeking to, obtain additional capital resources by the end of the third quarter of 2019 through an equity offering, a debt financing, a license or collaboration agreement, or through a combination of such sources of capital. The aforementioned factors raise substantial doubt about our common stock. ability to continue as a going concern.
Our ability to complete the sale and access the market as a source of liquidity is dependent on investor demand, market conditions and other factors. Therefore, we can provide no assurance that any such offering will be on terms favorable to us or our stockholders, or that such offering will be successful at all.
We also have an equity line of credit pursuant to a purchase agreement with Lincoln Park, which provides for the purchase of up to $35.0 million worth of our common stock over the term of the purchase agreement, subject to certain conditions and limitations.Our accumulated deficit, negative cash flows and insufficient cash resources raise substantial doubt regarding the Company’s ability to continue as a going concern. There are no assurances that additional funding will be achieved and that we will succeed in our future operations. Our inability to obtain required funding in the near future or our inability to obtain funding on favorable terms will have a material adverse effect on our operations and strategic development plan for future growth. If we cannot successfully raise additional capital and implement our strategic development plan, our liquidity, financial condition and business prospects will be materially and adversely affected, and we may have to cease operations.
Since our inception in October 2006, we have funded our operations primarily through a combination of equity offerings, secured and unsecured borrowings from private investors, bank credit facilities, and licensing and service revenue from our license and collaboration agreements. We also have incurred recurring operating lossesan equity line of credit pursuant to a purchase agreement with Lincoln Park, which provides for the purchase of up to $35.0 million worth of our common stock over the term of the purchase agreement, subject to certain conditions and negative cash flowslimitations. Additionally, we have access to $6.2 million from operating activities since inception,our Trinity arrangement to fund the manufacture of our commercial coating and as of December 31, 2017, had an accumulated deficit of $225.9 million. primary packaging machine.
We expect to incur additional losses in the future
to conduct research and
development of our M207 product candidate and to conductpre-commercialization manufacturing activities.In accordance with ASUNo. 2014-15 Presentation of Financial Statements – Going Concern (Subtopic205-40), our management evaluates whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued.
As of December 31, 2017, we had approximately $11.7 million in cash and cash equivalents. Presently, we do not have sufficient cash resources to meet our obligations as they become due within one year after the issuance date of this filing.
We will continue to require additional financing to develop our Qtrypta™ (M207) product candidatescandidate, conduct pre-commercialization manufacturing activities and fund our operations. We will seek funds through equity or debt financings, collaborative or other arrangements with corporate partners, or through other sources of financing. Adequate additional funding may not be available to us on acceptable terms or at all. Our failureFailure to raise capital as and when needed could have a negative impact on our
financial condition and our ability to pursue our business strategies. We anticipate that we will need to raise substantial additional capital, the requirements of which will depend on many factors, including:
the scope, progress, expansion and costs of manufacturing our product candidates;
the scope, progress, expansion, costs and results of our clinical trials;
the scope, progress, expansion, and costs of manufacturing our product candidates;
the timing of and costs involved in obtaining regulatory approvals;
the scope, progress, expansion, costs and results of our clinical trials;
the type, number, costs and results of the product candidate development programs which we are pursuing or may choose to pursue in the future;
our ability to establish and maintain development partnering arrangements;
the timing, receipt and amount of contingent, royalty and other payments from any of our future development partners;
the emergence of competing technologies and other adverse market developments;
the costs of maintaining, expanding and protecting our intellectual property portfolio, including potential litigation costs and liabilities;
the resources we devote to marketing and, if approved, commercializing our product candidates;
our ability to draw funds from our loanbuild-to-suit arrangement; and security agreement; and
the costs associated with being a public company.
If we are unable to raise additional funds when needed, we may be required to suspend, delay, reduce, or terminate our development programs and clinical trials. We may also be required to sell or license
to othersour technologies,
or clinical product candidates, or programs, if any,
thatwhich we would prefer to develop and commercialize ourselves.
This raises substantial doubt about our ability to continue as a going concern. As of December 31, 2017, we had an accumulated deficit of $225.9 million and we do not have sufficient cash resources to meet our plans in the next twelve months following the issuance of these financial statements.The following table shows a summary of our cash flows for the years ended December 31,
20172018 and
2016: | | | | | | | | |
| | | 2017 | | | 2016 | |
| | | (In thousands) | |
Net cash (used in) provided by: | | | | | | | | |
Operating activities | | $ | (27,119 | ) | | $ | (25,686 | ) |
Investing activities | | | (1,228 | ) | | | 30,272 | |
Financing activities | | | 24,995 | | | | 3,771 | |
| | | | | | | | |
Net (decrease) in cash and cash equivalents | | $ | (3,352 | ) | | $ | 8,357 | |
| | | | | | | | |
2017:
|
| | | | | | | |
| | 2018 | | 2017 |
| | (In thousands) |
| Net cash (used in) provided by: | | | |
| Operating activities | $ | (29,122 | ) | | $ | (26,839 | ) |
| Investing activities | (19,213 | ) | | (1,228 | ) |
| Financing activities | 45,824 |
| | 24,995 |
|
| Decrease in cash, cash equivalents, and restricted cash | $ | (2,511 | ) | | $ | (3,072 | ) |
Operating Cash Flow: Net cash used in operating activities was $27.1$29.1 million and $25.7$26.8 million for the years ended December 31, 2018 and 2017, respectively. Net cash used during 2018 was primarily due to clinical trial costs related to the long-term safety study of Qtrypta™ (M207) and 2016, respectively.general and administrative costs. Net cash used during 2017 was primarily due to the costs of completion of the ZOTRIP trial and start up and initiation costs related to our long-term safety study, in addition to other professional fees and administrative expenses incurred in the course of continuing operations.
Investing Cash Flow: Net cash used for investing activities was $19.2 million and $1.2 million for the years ended December 31, 2018 and 2017, respectively. Net cash used in 20162018 was primarily due to the resultpurchase of clinicalmarketable securities andnon-clinical development costs the investment in our commercial coating and primary packaging machine, partially offset by maturities of the ZOTRIP trial, personnel costsmarketable securities. In 2017, our cash used for investments was primarily related to hiring key personnel with critical manufacturingequipment purchases.
know-how to ramp up our production of clinical trial material of our Phase 2 and Phase 3 clinical trials, professional fees and administrative expenses incurred in the course of continuing operations.Investing Cash Flow: Net cash used by investing activities was $1.2 million for the year ended December 31, 2017, and net cash provided by investing activities was $30.3 million for the year ended December 31, 2016. Net cash used by investing activities during 2017 was mostly the result of purchases of property and equipment. Net cash provided by investing activities during 2016 resulted primarily from $30.2 million in proceeds from maturities of our investments in marketable securities.
Financing Cash Flow: Net cash provided by financing activities was $25.0$45.8 million and $3.8$25.0 million for the years ended December 31, 2018 and 2017, and 2016, respectively. Net cash provided by financing activities for 2018 was primarily due to net proceeds of $45.6 million from a registered public offering of common stock. Net cash provided by financing activities for 2017 was primarily due to net proceeds from a registered public offering of $26.6 million net of underwriter’s discounts,
commissions, and offering expenses and proceeds of $4.0 million from the exercise of warrants to purchase 136,301 shares of common stock. These increases were partially offset by payments on the Hercules Term Loan of approximately $5.8 million. Net cash generated from financing activities during 2016 included $6.6 million of net proceeds from our private investment in public equity (“PIPE”) financing, partially offset by $2.9 million in repayment of loan principal and accrued interest to Hercules.
The following table summarizes our contractual obligations as of December 31,
2017: | | | | | | | | | | | | | | | | | | | | |
| | | Payment Due by Period | |
| | | Total | | | Less than
One Year | | | 1-3 Years | | | 3-5 Years | | | More than
5 Years | |
| | | (in thousands) | |
Contractual Obligations | | | | | | | | | | | | | | | | | | | | |
Short and long-term debt obligations (including interest) (1) | | $ | 6,947 | | | $ | 6,947 | | | $ | - | | | $ | - | | | $ | - | |
Operating lease obligations (2) | | | 12,204 | | | | 1,558 | | | | 3,561 | | | | 7,085 | | | | - | |
| | | | | | | | | | | | | | | | | | | | |
Total contractual obligations | | $ | 19,151 | | | $ | 8,505 | | | $ | 3,561 | | | $ | 7,085 | | | $ | - | |
| | | | | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | |
| | Payment Due by Period |
| | Total | | Less than One Year | | 1-3 Years | | 3-5 Years | | More than 5 Years |
| | (in thousands) |
| Contractual Obligations | | | | | | | | | |
Operating lease obligations (1) | $ | 10,664 |
| | $ | 1,762 |
| | $ | 3,678 |
| | $ | 5,224 |
| | $ | — |
|
| Capital lease obligation | 34 |
| | 10 |
| | 20 |
| | 4 |
| | — |
|
Build-to-suit obligation (2) | 9,113 |
| | 2,909 |
| | 6,204 |
| | — |
| | — |
|
Equipment purchase commitments (3) | 11,763 |
| | 8,115 |
| | 3,648 |
| | — |
| | — |
|
Contract manufacturing commitments (4) | 3,919 |
| | 3,919 |
| | — |
| | — |
| | — |
|
| Total contractual obligations | $ | 35,493 |
| | $ | 16,715 |
| | $ | 13,550 |
| | $ | 5,228 |
| | $ | — |
|
(1) |
Short and long-term debt obligations
|
|
Secured financing with Hercules
In June 2014, we entered into a loan and security agreement with Hercules Capital Inc. for a $4.0 million term loan facility. In June 2015, we entered into a first amendment
(1)Operating leases
12-month interest-only period beginning July 1, 2015, followed by equal monthly installment payments of principal and interest, with all outstanding amounts due and payable on December 1, 2018. The outstanding principal balance bears interest at a variable rate of the greater of (i) 7.95%, or (ii) 7.95% plus the prime rate as quoted in the Wall Street Journal minus 5.25%. In addition, we paid a $100,000 legacy end of term charge on June 1, 2017 and is required to pay a $351,135 end of term charge on the earlier of loan maturity or at the date we prepay the Hercules Term Loan. We may prepay all, but not less than all, of Hercules Term Loan with no prepayment charge. The Hercules Term Loan is secured by a first priority security interest and lien in and to all of our tangible and intangible properties and assets, including intellectual properties.The loan and security agreement with Hercules contains customary conditions related to borrowing, events of default, and covenants, including covenants limiting our ability to dispose of collateralized assets, undergo a change of control, incur debt or incur liens, subject to certain exceptions. The loan and security agreement also requires us to comply with certain basic affirmative covenants, such as maintenance of financial records, insurance and prompt payment of taxes.
We have anOur operating lease obligations primarily consist of a lease withBMR-34790 Ardentech Court LP, an affiliate of BMR Holdings, and related party, for itsour office, research and development, and manufacturing facilities in Fremont, California. On June 6, 2017,In addition to the minimum rental commitments, our leases may require us to pay additional amounts for taxes, insurance, maintenance and other operating expenses. See Note 9. Commitments and Contingencies, of the Notes to Financial Statements included in Item 8 of this Annual Report on Form 10-K for additional information.
(2)Build-to-suit obligation
The build-to-suit obligation consists of principal and interest payments and Purchase Option Fees related to our build-to-suit obligation with Trinity. See Note 7. Debt Financing, of the Notes to Financial Statements included in Item 8 of this Annual Report on Form 10-K for additional information.
(3)Equipment purchase commitments
Equipment purchase commitments primarily relate to a purchase commitment with a manufacturer to build a commercial coating and primary packaging system for the production of our product candidate, Qtrypta™ (M207), and additional commitments with manufacturers to build pre-commercialization equipment. The terms of the purchase commitments are generally contingent upon performance of certain milestones. We anticipate that the obligations will be paid over an 18-month period. In February 2019, we entered into the seventhan amendment to our purchase order with the existing lease (“Seventh Amendment”), effective asmanufacturer of May 30, 2017.Underour commercial coating and primary packaging machine to increase the Seventh Amendment, we extended the termaggregate purchase price by $1.3 million. See Note 9.
Commitments and Contingencies and Note 14. Subsequent Event, of the Lease for our headquarters in Fremont, California through August 31, 2024, with an option to further extend the lease for an additional 65 months, subject to certain terms and conditions. We agreed to pay a monthly base rent included in Item 8 of $136,191this Annual Report on Form 10-K for additional information.
(4)Contract manufacturing commitments
Our contract manufacturing commitments consist of non-cancelable commitments with our contract manufacturing organizations for the
period commencing September 1, 2017,construction of dedicated manufacturing space and
ending on August 31, 2018, with an increase on September 1, 2018, and annual increases on September 1 of each subsequent year until the lease year beginning September 1, 2023. The Seventh Amendment also provides for rent abatements, subject to certain conditions, totaling $275,552 and certain tenant improvements to be completed at the Landlord’s expense (not to exceed $975,000 or, under certain conditions, $1,100,000). We may incur additional expenses under the lease in connection with roof repairs that will be treated as additional rent and paid over the term of the lease.technology transfer fees.
Off-Balance Sheet Arrangements
We have not entered into any
off-balance sheet arrangements and do not have any holdings in variable interest entities.
Recently Issued Accounting Pronouncements
See Note 22. Summary of Significant Accounting Policies, to the accompanying condensed consolidated financial statements for Recently Issued Accounting Pronouncements.
Item 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks in the ordinary course of our business. Some of the securities that we invest in have market risk where a change in prevailing interest rates may cause the principal amount of the marketable securities to fluctuate. Financial instruments which potentially subject us to concentrations of credit risk consist principally of cash and cash equivalents, as well as investments in marketable securities. We had cash and cash equivalents of $9.1 million as of December 31, 2018, which consisted of bank deposits, money market funds and investments in marketable securities with an original maturity of 90 days or less. We had investments in marketable securities at fair value of $13.9 million as of December 31, 2018, which consisted primarily of commercial paper, corporate notes and bonds, and U.S. treasuries. The primary objectives of our investment activities are to ensure liquidity and to preserve principal while at the same time maximizing the income we receive from our marketable securities without significantly increasing risk. Additionally, we established guidelines regarding approved investments and maturities of investments, which are designed to maintain safety and liquidity.
Our cash and cash equivalents are held for working capital purposes. Cash balances are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to regulatory limits, and we are exposed to credit risk when our cash balances exceed FDIC insurance limits. Our total cash and cash equivalent balances exceed the maximum amounts insured by the FDIC.
Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of
U.S.United States interest
rates, particularly because our investments are in short-term securities.rates. We
had cash and cash equivalents of $11.7 million and $15.0 million as of December 31, 2017 and 2016, respectively,hold interest-earning instruments, which
consist of bank deposits and money market funds. Any interest-bearing instruments carry a degree of
risk; however, weinterest rate risk. In addition, the monthly rent factor on additional drawdowns from our build-to-suit arrangement is determined and indexed to the Prime Lending Rate as reported in the Wall Street Journal. To date, fluctuations in interest income and expense have not been
exposed to, nor do we anticipate being exposed to, material risks due to changessignificant. However, fluctuations in
interest rates. Due to the short-term duration of our investment portfolio and the low risk profile of our investments, a hypothetical immediate 10% change inmarket interest rates
during any ofin the
periods presented would notfuture could have
had a material impact on our financial
statements.condition and results of operations.
Item 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required to be filed pursuant to this Item 8 of Part II of this Annual Report on
Form 10-K are appended to this report and are incorporated herein by reference. An index of those financial statements is found in Item 15 of Part IV of this Annual Report on
Form 10-K.
Item 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Item 9A. | CONTROLS AND PROCEDURES |
Item 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our
Chief Business Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31,
2017.2018. The term “disclosure controls and procedures,” as defined in
Rule 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the
Companycompany in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.
Based on the evaluation of our disclosure controls and procedures as of December 31, 2017,2018, our Chief Executive Officer and our Chief Business Officer and Chief Financial Officer concluded that, as of such date, our
disclosure controls and procedures are designed to, and are effective to, provide assurance at a reasonable level that the information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Business Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate controls over financial reporting, as such term is defined in Exchange ActRules 13a-15(f) and15d-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Business Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 20172018 based on the guidelines establishedin Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).Commission. Our internal control over financial reporting includes policies and procedures that provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with U.S. GAAP. Based on the results of our evaluation, our management concluded that our internal control over financial reporting was effective as of December 31,
2017.2018. We reviewed the results of management’s assessment with our
Audit Committee.audit committee.
This Annual Report on Form
10-K does not include an attestation report of our independent registered public accounting firm on internal control over financial reporting due to the deferral allowed under the JOBS Act for emerging growth companies.
Changes in Internal Control over Financial Reporting
There
werehave been no changes in our internal control over financial reporting
(as defined in Rule 13a-15(f) and 15d-15(f) under the Securities and Exchange Act of 1934, as amended) during the
fourth fiscal quarter of the annual reporting periodyear ended December 31,
20172018, that
have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations of Controls
In designing and evaluating our disclosure controls and procedures, management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and all fraud. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of error or fraud, if any, within the Company have been detected.
Item 9B. | OTHER INFORMATION |
Item 9B. OTHER INFORMATION
None.
