We evaluated XHANCE in the following five clinical trials comprised of over 1,500 patients:
Our Phase 3 clinical development program included a population of patients generally reflective of our intended patient population, with approximately 90% having previously tried INS therapy and almost one-third having previously undergone sinus surgery. Key results from our Phase 3 clinical trial program include:
We strive to protect our proprietary technology that we believe is important to our business, including seeking and maintaining patents intended to cover our product candidates and technologies that are important to the development of our business. We also rely on trade secrets to protect aspects of our business that are not amenable to, or that we do not consider appropriate for, patent protection, as well as know-how, trademarks, continuing technological innovation and in-licensing opportunities to develop and maintain our proprietary position. We internally developed our intellectual property related to the Optinose EDS, AVP-825, XHANCE, Onzetra Xsail, our product candidates and our product candidates.EDS devices. We have sought and intend to continue to seek appropriate patent protection for our product candidates, as well as other proprietary technologies and their uses by filing patent applications in the U.S. and selected other select countries.
Our XHANCE U.S. patent portfolio consists of 13 issued device and method of use patents expiring between 2021 and 2035, three issued design patents and 10 pending patent applications. The 13 device and method of use patents expire between 2020 and 2034, the three design patents expireexpiring between 2029 and 2030 and the 10 pending patent applications would be projected to expire, subject to issuance, between 2022 and 2034, with potential patent term adjustments that would extend the patent term.applications. The 13 device and method of use patents are published in the FDA's Approved Drug Products with Therapeutic Equivalence Evaluations, commonly known as the Orange Book. Drugs listed in the Orange Book can, in turn, be cited by potential generic competitors in support of approval of an abbreviated NDA (ANDA), or a 505(b)(2) NDA. If any of these potential generic competitors claim that their product will not infringe XHANCE's listed patents, or that such patents are invalid, then they must send notice to us once the ANDA or 505(b)(2) NDA has been accepted for filing by the FDA. We may then initiate a patent infringement lawsuit in response to the notice of the Paragraph IV certification, which would automatically prevent the FDA from approving the ANDA or 505(b)(2) NDA until the earlier of 30 months, expiration of the patent, settlement of the lawsuit, or a decision in the infringement case that is favorable to the ANDA or 505(b)(2) NDA applicant.
The rest of our patent portfolio largely relates to patents and applications owned by us and directed to AVP-825Onzetra Xsail and other product candidates, including OPN-300, and our EDS devices and related technologies.
We seek to protect our proprietary information, including our trade secrets and proprietary know-how, by requiring our employees, consultants and other advisors to execute confidentiality agreements upon the commencement of their employment or engagement. These agreements generally provide that all confidential information developed or made known during the course of the relationship with us be kept confidential and not be disclosed to third parties except in specific circumstances. In the case of our employees, the agreements also typically provide that all inventions resulting from work performed for us, utilizing our property or relating to our business and conceived or completed during employment shall be our exclusive property to the extent permitted by law. Where appropriate, agreements we obtain with our consultants also typically contain similar assignment of invention provisions. Further, we generally require confidentiality agreements from business partners and other third parties that receive our confidential information.
primarily with another receptor, other than the Orexin 1 and Orexin 2 receptors. Inexia is solely responsible for all costs and activities related to its identification, development and commercialization of products under the Inexia License Agreement.
Under the terms of the Inexia License Agreement, we received a $0.5 million upfront payment. For each product developed under the Inexia License Agreement, we are eligible to receive up to $8.0 million of development milestone payments and up to $37.0 million of sales milestone payments. In addition, we are eligible to receive tiered, low-to-mid single digit royalties based on net sales of any products successfully developed and commercialized under the Inexia License Agreement. Other than the upfront payment, weWe do not anticipate the receipt of any milestone or royalty payments from Inexia in the near term.
We are subject to extensive regulation by the FDA and other federal, state, and local regulatory agencies. The Federal Food, Drug and Cosmetic Act (the FD&C Act) and the FDA's implementing regulations set forth, among other things, requirements for the testing, development, manufacture, quality control, safety, effectiveness, approval, labeling, storage, record-keeping, reporting, distribution, import, export, sale, advertising and promotion of our products and product candidates. Although the discussion below focuses on regulation in the U.S., because that is currently our primary focus, we anticipate seekingmay seek approval for, and marketing,market, our products in other countries in the future. Generally, our activities in other countries will be subject to regulation that is similar in nature and scope as that imposed in the U.S., although there can be important differences.
Under the FD&C Act, FDA approval of an NDA is required before any new drug can be marketed in the U.S. NDAs require extensive studies and submission of a large amount of data by the applicant.
investigators, and IRBs also must comply with, as applicable, regulations and guidelines for obtaining informed consent from the study patients, following the protocol and investigational plan, adequately monitoring the clinical trial, and timely reporting of AEs.adverse events (AEs). Foreign studies conducted under an IND must meet the same requirements that apply to studies being conducted in the U.S. Data from a foreign study not conducted under an IND may be submitted in support of an NDA if the study was conducted in accordance with GCP and the FDA is able to validate the data.
A study sponsor is required to publicly post specified details about certain clinical trials and clinical trial results on government or independent websites (e.g., http://clinicaltrials.gov). Human clinical trials typically are conducted in three sequential phases, although the phases may overlap, be combined, or be subdivided in some cases:
The sponsoring company, the FDA, or the IRB may suspend or terminate a clinical trial at any time on various grounds, including a finding that the patients are being exposed to an unacceptable health risk. Further, success in early-stage clinical trials does not assure success in later-stage clinical trials. Data obtained from clinical activities are not always conclusive and may be subject to alternative interpretations that could delay, limit or prevent regulatory approval.
Section 505(b)(2) of the FD&C Act provides an alternate regulatory pathway to obtain FDA approval for new formulations or new uses of previously approved drug products. Specifically, Section 505(b)(2)that permits the filing of an NDA where at least some of the information required for approval comes from studies not conducted by or for the applicant and for which the applicant has not obtained a right of reference. The applicant may rely to some extent upon the FDA's findings of safety and effectiveness for an approved product that acts as the reference listed drug (RLD) and submit its own product-specific data — which may include data from preclinical studies or clinical trials conducted by or on behalf of the applicant — to address differences between the product candidate and the RLD.reference drug. We obtained FDA approval of XHANCE through the Section 505(b)(2) regulatory approval pathway, with FlonaseFlonase™ and Flovent HFAHFA™ as the RLDs. Flonasereference drugs. Flonase™ and Flovent HFAHFA™ contain fluticasone propionate, which is also usedthe active ingredient in XHANCE.
The submission of an NDA under either Section 505(b)(1) or Section 505(b)(2) generally requires payment of a substantial user fee to the FDA. The FDA reviews applications to determine, among other things, whether a product is safe and effective for its intended use and whether the manufacturing controls are adequate to assure and preserve the product's identity, strength, quality, and purity. For some NDAs, the FDA may convene an advisory committee to seek insights and recommendations on issues relevant to approval of the application. Although the FDA is not bound by the recommendation of an advisory committee, the agency usually has followedconsiders such recommendations.
Our product and product candidates include products that combine drug and device components in a manner that the FDA considers to meet the definition of a "combination product" under FDA regulations. The FDA exercises significant discretion over the regulation of combination products, including the discretion to require separate marketing applications for the drug and device components in a combination product. For XHANCE, FDA's Center for Drug Evaluation and Research (CDER) had primary jurisdiction for review of the NDA, and both the drug and device were reviewed under one marketing application. However, for a drug-device combination product CDER typically consults with the Center for Devices and Radiological Health in the NDA review process.
The FDA may determine that a Risk Evaluation and Mitigation Strategy (REMS) is necessary to ensure that the benefits of a new product outweigh its risks, and the product can therefore be approved. A REMS may include
various elements, ranging from a medication guide or patient package insert to limitations on who may prescribe or dispense the drug, depending on what the FDA considers necessary for the safe use of the drug. Under the Pediatric Research Equity Act, certain applications for approval must also include an assessment, generally based on clinical study data, of the safety and effectiveness of the subject drug in relevant pediatric populations. Before approving an NDA, the FDA will inspect the facility or facilities where the product is manufactured. The FDA will not approve an application unless it determines that the manufacturing processes and facilities are in compliance with current Good Manufacturing Practice (cGMP) requirements and adequate to assure consistent production of the product within required specifications.
Once the FDA accepts an NDA submission — which occurs, if at all, within 60 days after submission of the NDA — the FDA's goal for a non-priority review of an NDA is ten months. The review process can be and often is significantly extended, however, by FDA requests for additional information, studies, or clarification. After review of an NDA and the facilities where the product is manufactured, the FDA may decide to not approve the applicationeither issues an approval letter or may issue a complete response letter (CRL) outlining the deficiencies in the submission. The complete response letter alsoCRL may requestrequire additional testing or information, including additional preclinical or clinical data. Even if such additional information and data are submitted, the FDA may decide that the NDA still does not meet the standards for approval. Data from clinical trials are not always conclusive and the FDA may interpret data differently than the sponsor.
Obtaining regulatory approval often takes a number of years, involves the expenditure of substantial resources, and depends on a number of factors, including the severity of the disease in question, the availability of alternative treatments, and the risks and benefits demonstrated in clinical trials. Additionally, as a condition of approval, the FDA may impose restrictions that could affect the commercial success of a drug or require post-approval commitments, including the completion within a specified time period of additional clinical studies, which often are referred to as "Phase 4" or "post-marketing" studies. For example, the FDA originally required us to conduct a randomized, double-blind, placebo controlled, parallel group clinical study in children and adolescents 6 to 17 years of age with bilateral nasal polyps associated with nasal congestion to assess the safety, efficacy, pharmacokinetics, and pharmacodynamics of XHANCE in improving nasal polyp grade and symptoms (nasal congestion/obstruction, sense of smell, rhinorrhea and facial pain or pressure). On October 30, 2017, the FDA notified us that in response to our request it had modified the required age range to 12 to 17 years of age. We submitted our final protocol to the FDA with respect to the pediatric study by January 2018 as required, and we have since contracted with various clinical trial sites and begun patient enrollment. We are required to complete the study by January 2022 and submit a final report with respect to the study by July 2022.
Post-approval modifications to the drug, such as changes in indications, labeling, or manufacturing processes or facilities, may require a sponsor to develop additional data or conduct additional preclinical studies or clinical trials, to be submitted in a new or supplemental NDA, which would require FDA approval.
makes a material change in manufacturing equipment, location, or process (all of which are, to some degree, incorporated in the NDA), additional regulatory review and approval may be required. The FDA also conducts regular, periodic visits to re-inspect equipment, facilities, and processes following the initial approval of a product. Failure to comply with applicable cGMP requirements and conditions of product approval may lead the FDA to take enforcement action or seek sanctions, including fines, issuance of warning letters, civil penalties, injunctions, suspension of manufacturing operations, operating restrictions, withdrawal of FDA approval, seizure or recall of products, and criminal prosecution. Although we periodically monitor the FDA compliance of our third-party manufacturers, we cannot be certain that our present or future third-party manufacturers will consistently comply with cGMP and other applicable FDA regulatory requirements.
The Drug Price Competition and Patent Term Restoration Act of 1984 (the Hatch-Waxman Act) establishes two abbreviated approval pathways for pharmaceutical products that are in some way follow-on versions of already approved products.
with the same active moiety. An ANDA or 505(b)(2) application may be submitted after four years, however, if the sponsor of the application makes a Paragraph IV certification.
A product that is not an NCE may qualify for a three-year period of exclusivity if the NDA contains new clinical data, (other than bioavailability studies) derived from studies conducted by or for the sponsor, that were necessary for approval. In that instance, the exclusivity period does not preclude filing or review of an ANDA or 505(b)(2) application; rather, the FDA is precluded from granting final approval to the ANDA or 505(b)(2) application until three years after approval of the RLD. Additionally, the exclusivity applies only to the conditions of approval that required submission of the clinical data.
Once the FDA accepts for filing an ANDA or 505(b)(2) application containing a Paragraph IV certification, the applicant must within 20 days provide notice to the RLD or listed drug NDA holder and patent owner that the application has been submitted, and provide the factual and legal basis for the applicant's assertion that the patent is invalid or not infringed. If the NDA holder or patent owner files suit against the ANDA or 505(b)(2) applicant for patent infringement within 45 days of receiving the Paragraph IV notice, the FDA is prohibited from approving the ANDA or 505(b)(2) application for a period of 30 months or the resolution of the underlying suit, whichever is earlier. If the RLD has NCE exclusivity and the notice is given and suit filed during the fifth year of exclusivity, the 30-monthregulatory stay does not beginextends until five7.5 years after the RLD approval. The FDA may approve the proposed product before the expiration of the 30-monthregulatory stay if a court finds the patent invalid or not infringed or if the court shortens the period because the parties have failed to cooperate in expediting the litigation.
approve any other application for the same product for the same indication, although there are exceptions, most notably when the later product is shown to be clinically superior to the product with exclusivity. The FDA can revoke a product’s orphan drug exclusivity under certain circumstances, including when the product sponsor is unable to assure the availability of sufficient quantities of the product to meet patient needs. Orphan drug exclusivity does not prevent the FDA from approving a different drug for the same disease or condition, or the same drug for a different disease or condition.
U.S. Healthcare Reform
Some states have elected not to expand their Medicaid programs to individuals with an income of up to 133% of the federal poverty level, as is permitted under the Affordable Care Act. For each state that does not choose to expand its Medicaid program, there may be fewer insured patients overall, which could impact our sales of products and product candidates for which we receive regulatory approval, and our business and financial condition. Where new patients receive insurance coverage under any of the new Medicaid options made available through the Affordable Care Act, the possibility exists that manufacturers may be required to pay Medicaid rebates on drugs used under these circumstances, a decision that could impact manufacturer revenues.
Coverage and Reimbursement
Significant uncertainty exists as to the coverage and reimbursement status of our products and any product candidates for which we may obtain regulatory approval. Sales of any of our products and product candidates, if approved, will depend, in part, on the extent to which the costs of the products will be covered by third-party payors, including government healthcare programs such as Medicare and Medicaid, and private payors, such as commercial health insurers and managed care organizations. Third-party payors determine which drugs they will cover and the amount of reimbursement they will provide for a covered drug. In the U.S., there is no uniform system among payors for making coverage and reimbursement decisions. In addition, the process for determining whether a payor will provide coverage for a product may be separate from the process for setting the price or reimbursement rate that the payor will pay for the product once coverage is approved. Third-party payors may limit coverage to specific products on an approved list, or formulary, which might not include all of the FDA-approved products for a particular indication.
In order to secure coverage and reimbursement for our products we may need to conduct expensive pharmacoeconomic studies in order to demonstrate the medical necessity and cost-effectiveness of the product, in addition to the costly studies required to obtain FDA or other comparable regulatory approvals. Even if we conduct pharmacoeconomic studies, our products and product candidates may not be considered medically necessary or cost-effective by payors. Further, a payor's decision to provide coverage for a product does not imply that an adequate reimbursement rate will be approved.
In the past, payors have implemented reimbursement metrics and periodically revised those metrics as well as the methodologies used as the basis for reimbursement rates, such as average sales price (ASP), average manufacturer price (AMP), and actual acquisition cost. The existing data for reimbursement based on these metrics is relatively limited, although certain states have begun to survey acquisition cost data for the purpose of setting Medicaid reimbursement rates. The Centers for Medicare and Medicaid Services (CMS) surveys and publishes retail pharmacy acquisition cost information in the form of National Average Drug Acquisition Cost files to provide state Medicaid agencies with a basis of comparison for their own reimbursement and pricing methodologies and rates.
Participation in the Medicaid Drug Rebate programProgram requires us to pay a rebate for each unit of drug reimbursed by Medicaid. The amount of the "basic" portion of the rebate for each product is set by law as the larger of: (i) 23.1% of quarterly AMP, or (ii) the difference between quarterly AMP and the quarterly best price (Best Price), which, in general, represents the lowest price available from usthe manufacturer to any commercial or non-governmental customer (Best Price).entity in the U.S. in any pricing structure, calculated to include all applicable sales and associated rebates, discounts and other price concessions. AMP must be reported on a monthly and quarterly basis, and Best Price is reported on a quarterly basis, only.to CMS, the federal agency that administers the Medicaid Drug Rebate Program. In addition, the rebate also includes the "additional" portion, which adjusts the overall rebate amount upward as an "inflation penalty" when the drug's latest quarter's AMP exceeds the drug's AMP from the first full quarter of sales after launch, adjusted for increases in the Consumer Price Index-Urban. The upward adjustment in the rebate amount per unit is equal to the excess amount of the current AMP over the inflation-adjusted AMP from the first full quarter of sales. The rebate amount is recomputed each quarter based on our report to CMS of current quarterly AMP and Best Price for ourthe relevant drug. The terms of our participation in the program would impose a requirement forMedicaid Drug Rebate Program require us to report revisions to AMP or Best Price within a period not to exceed 12 quarters from the quarter in which the data was originally due.due, and CMS may request or require restatements for earlier periods as well. Any such revisions could have the impact of increasing or decreasing our rebate liability for prior quarters, depending on the direction of the revision. The Affordable Care Act made significant changes to the Medicaid Drug Rebate Program, and CMS issued a final regulation, which became effective on April 1, 2016, to implement the changes to the Medicaid Drug Rebate program under the Affordable Care Act. On December 21, 2020, CMS issued a final regulation that modified existing Medicaid Drug Rebate Program regulations to permit reporting multiple Best Price figures with regard to value‑based purchasing arrangements (beginning in 2022); provide definitions for “line extension,” “new formulation,” and related terms with the practical effect of expanding the scope of drugs considered to be line extensions (beginning in 2022); and revise AMP and Best Price exclusions of manufacturer-sponsored patient benefit programs, specifically regarding inapplicability of such exclusions in the context of pharmacy benefit manager “accumulator” programs (beginning in 2023).It is currently unclear if the Biden administration will delay the effectiveness or take other actions with respect to this regulation.
Federal law requires that any manufacturer that participates in the Medicaid Drug Rebate programProgram also participate in the 340B programProgram in order for federal funds to be available for the manufacturer's drugs under Medicaid and Medicare Part B. The 340B program,Program, which is administered by the Health Resource and Services Administration
(HRSA) requires participating manufacturers to agree to charge statutorily defined covered entities no more than the 340B "ceiling price" for the manufacturer's covered outpatient drugs. These 340B covered entities include a variety of community health clinics and other entities that receive health services grants from the Public Health Service, as well as hospitals that serve a disproportionate share of low-income patients. The 340B ceiling price is calculated using a statutory formula, which is based on the AMP and rebate amount for the covered outpatient drug as calculated under the Medicaid Drug Rebate program.Program. Any changes to the definition of AMP and the Medicaid rebate amount under the Affordable Care Act or otherfederal legislation could affect our 340B ceiling price calculations and negatively impact our results of operations. HRSA issued a final regulation regarding the calculation of the 340B ceiling price and the imposition of civil monetary penalties on manufacturers that knowingly and intentionally overcharge covered entities, which became effective on January 1, 2019. It is currently unclear how HRSA will apply its enforcement authority under the new regulation. HRSA also is implementinghas implemented a ceiling price reporting requirement related to the 340B program during the first quarter of 2019Program under which we will beare required to report
340B ceiling prices to HRSA on a quarterly basis.basis, and HRSA then publishes that information to covered entities. Moreover, under a final regulation effective January 13, 2021, HRSA newly established an administrative dispute resolution, or ADR, process for claims by covered entities that a manufacturer has engaged in overcharging, and by manufacturers that a covered entity violated the prohibitions against diversion or duplicate discounts. Such claims are to be resolved through an ADR panel of government officials rendering a decision that could be appealed only in federal court. An ADR proceeding could subject us to onerous procedural requirements and could result in additional liability. In addition, legislation may be introduced that, if passed, would further expand the 340B programProgram to additional covered entities or would require participating manufacturers to agree to provide 340B discounted pricing on drugs used in an inpatient setting.
Federal law also requires that a company that participates in the Medicaid Drug Rebate Program report ASP information each quarter to CMS for certain categories of drugs that are paid under the Medicare Part B program. Manufacturers calculate the average sales price based on a statutorily defined formula as well as regulations and interpretations of the statute by CMS. CMS uses these submissions to determine payment rates for drugs under Medicare Part B.
In the U.S. Medicare program, outpatient prescription drugs may be covered under Medicare Part D. Medicare Part D is a voluntary prescription drug benefit, through which Medicare beneficiaries may enroll in prescription drug plans offered by private entities for coverage of outpatient prescription drugs. Part D plans include both stand-alone prescription drug benefit plans and prescription drug coverage as a supplement to Medicare Advantage plans provided for under Medicare Part C.
Coverage and reimbursement for covered outpatient drugs under Part D are not standardized. Part D prescription drug plan sponsors are not required to pay for all covered Part D drugs, and each drug plan can develop its own drug formulary that identifies which drugs it will cover and at what tier or level. Any formulary used by a Part D prescription drug plan must be developed and reviewed by a pharmacy and therapeutic committee. Although Part D prescription drug formularies must include drugs within each therapeutic category and class of covered Part D drugs, they have some flexibility to establish those categories and classes and are not required to cover all of the drugs in each category or class. Medicare Part D prescription drug plans may use formularies to limit the number of drugs that will be covered in any therapeutic class and/or impose differential cost sharing or other utilization management techniques.
The availability of coverage under Medicare Part D may increase demand for our products and any product candidates for which we receive marketing approval. However, in order for the products that we market to be included on the formularies of Part D prescription drug plans, we likely will have to offer pricing that is lower than the prices we might otherwise obtain. Changes to Medicare Part D that give plans more freedom to limit coverage or manage utilization, and other cost reduction initiatives in the program could decrease the coverage and price that we receive for any approved products and could harm our business.
In order to be eligible to have our products or any future products paid for with federal funds under the Medicaid and Medicare Part B programs, as applicable, and purchased by certain federal agencies and grantees, we also participate in the U.S. Department of Veterans Affairs (VA) Federal Supply Schedule (FSS) pricing program. Under this program, we are obligated to make our "innovator" drugs available for procurement on an FSS contract and charge a price to four federal agencies — the VA, U.S. Department of Defense (DoD) Public Health Service and U.S. Coast Guard — that is no higher than the statutory Federal Ceiling Price (FCP). The FCP is based on the non-federal average manufacturer price (Non-FAMP), which we calculate and report to the VA on a quarterly and annual basis. We also participate in the Tricare Retail Pharmacy program, under which we pay quarterly rebates on utilization of innovator products that are dispensed through the Tricare Retail Pharmacy network to Tricare beneficiaries. The rebates are calculated as the difference between the annual Non-FAMP and FCP.
Pricing and rebate calculations vary across products and programs, are complex, and are often subject to interpretation by manufacturers,us, governmental or regulatory agencies, and the courts. Significant civil monetary penalties can be applied if a manufacturer iswe are found to have knowingly submitted any false AMP, best price, or Non-FAMP information to the government or failsfail to submit the required price data on a timely basis. Such conduct also could be grounds for CMS to terminate the manufacturer's Medicaid drug rebate agreement, in which case federal payments may not be available under
Medicaid or Medicare Part B for the manufacturer'sour covered outpatient drugs. Civil monetary penalties could also be applied if we are found to have charged 340B covered entities more than the statutorily mandated ceiling price. In addition, claims submitted to federally-funded healthcare programs, such as Medicare and Medicaid, for drugs priced based on incorrect pricing data provided by a manufacturer can implicate the False Claims Act.
The containment of healthcare costs has become a priority of federal, state and foreign governments, and the prices of drugs have been a focus in this effort. The U.S. government, state legislatures, and foreign governments have shown significant interest in implementing cost-containment programs to limit the growth of government-paid healthcare costs, including price controls, restrictions on reimbursement, and requirements for substitution of generic products for branded prescription drugs. For example, there have been several recent U.S. Congressional inquiries and proposed federal and state legislation designed to, among other things, bring more transparency to
drug pricing, review the relationship between pricing and manufacturer patient programs, reduce the cost of drugs (including then-President Trump's executive order issued in November 2020 that, if it is found enforceable, is intended to tie drug prices in Medicare to lower prices abroad), and reform government program reimbursement methodologies for drug products.
Beginning April 1, 2013, Medicare payments for all items and services, including drugs, were reduced by 2% per fiscal year under the sequestration (i.e., automatic spending reductions) required by the Budget Control Act of 2011, as amended by the American Taxpayer Relief Act of 2012. Subsequent legislation extended theSuch 2% reduction on average, to 2027. Ifhas been extended through fiscal year 2030 (with the exception of a temporary suspension from May 1, 2020 through March 31, 2021) unless Congress does not take actiontakes additional action. As long as these cuts remain in the future to modify these sequestrations, Medicare Part D planseffect, they could seek to reduce their negotiated pricesadversely impact payment for drugs.any of our products that are reimbursed under Medicare.. Other legislative or regulatory cost containment legislation could have a similar effect.
Further, the Affordable Care Act may reduce the profitability of drug products. It expanded manufacturers' rebate liability under the Medicaid program from fee-for-service Medicaid utilization to include the utilization of Medicaid managed care organizations as well, and increased the minimum Medicaid rebate due for most innovator drugs, and capped the total rebate amount at 100% of AMP.drugs. The Affordable Care Act and subsequent legislation also changed the definition of AMP. On February 1, 2016, CMS issued final regulations to implement the changes to the Medicaid drug rebate programDrug Rebate Program under the Affordable Care Act. These regulations became effective on April 1, 2016.
The Affordable Care Act requires pharmaceutical manufacturers of branded prescription drugs to pay a branded prescription drug fee to the federal government. Each such manufacturer pays a prorated share of the branded prescription drug fee of $2.8 billion in 2019,fee year 2020 and subsequent fee years, based on the dollar value of its branded prescription drug sales to certain federal programs identified in the law. The Affordable Care Act also expanded the Public Health Service's 340B programProgram to include additional types of covered entities. Substantial new provisions affecting compliance have also been enacted, which may affect our business practices with healthcare practitioners. It appears likely that the Affordable Care Act will continue the pressure on pharmaceutical pricing, especially under the Medicare and Medicaid programs, and may also increase our regulatory burdens and operating costs.
Additional legislative changes, regulatory changes and judicial challenges related to the Affordable Care Act remain possible, as discussed above under the heading "U.S. Healthcare Reform." In addition, there likely will continue to be proposals by legislators at both the federal and state levels, regulators, and third-party payors to contain healthcare costs. Thus, even if we obtain favorable coverage and reimbursement status for our products and any product candidates for which we receive regulatory approval, less favorable coverage policies and reimbursement rates may be implemented in the future.
Additional information regarding these programs is discussed under the risk factor "If we are able to successfully commercialize XHANCE and if we participate in but fail to comply with our reporting and payment obligations under the Medicaid drug rebate program, or other governmental pricing programs, we could be subject to additional reimbursement requirements, penalties, sanctions and fines which could have a material adverse effect on our business, financial condition, results of operations and growth prospects" in the "Risk Factors" section of this Annual Report on Form 10-K.
Healthcare Fraud and Abuse Laws
In addition to FDA restrictions on marketing of pharmaceutical products, our business is subject to healthcare fraud and abuse regulation and enforcement by both the federal government and the states in which we conduct our business. These laws include, but are not limited to, the following:
•The federal Anti-kickbackAnti-Kickback Statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration, directly or indirectly, in cash or in kind, to induce or in return for
purchasing, leasing, ordering or arranging for or recommending the purchase, lease or order of any healthcare item or service reimbursable, in whole or in part, under Medicare, Medicaid or other federally financed healthcare programs. This statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on one hand and prescribers, purchasers, and formulary managers on the other. A violation of the Anti-Kickback Statute may be established without proving actual knowledge of the statute or specific intent to violate it. 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 federal civil False Claims Act. Although there are a number of statutory exceptions and regulatory safe harbors protecting certain common activities from prosecution, the exceptions and safe harbors are drawn narrowly and practices that involve remuneration to those who prescribe, purchase, or recommend pharmaceuticals, including certain discounts, or engaging such individuals as consultants, speakers or advisors, may be subject to scrutiny if they do not fit squarely within the exception or safe harbor. In November 2020, the U.S. Department of Health and Human Services finalized a previously abandoned proposal to amend the discount safe harbor regulation of the Anti-Kickback Statute in a purported effort to create incentives to manufacturers to lower their list prices, and to lower federal program beneficiary out-of-pocket costs.The rule, which is currently slated to take full effect January 1, 2023, revises the Anti-Kickback Statute discount safe harbor to exclude manufacturer rebates to Medicare Part D plans, either directly or through pharmacy benefit managers (PBMs), creates a new safe harbor for point-of-sale price reductions that are set in advance and are available to the beneficiary at the point-of-sale, and creates a new safe harbor for service fees paid by manufacturers to PBMs for services rendered to the manufacturer.It is too early to know whether the Biden Administration will further delay, rewrite, or allow the rule to go into effect, and what effect the rule might may have on negotiations for coverage for products with Medicare Part D plans or commercial insurers.Our practices may not in all cases meet all of the criteria for safe harbor protection from anti-kickback liability. Moreover, there are no safe harbors for many common practices, such as educational and
research grants, charitable donations, product support and patient assistance programs. Arrangements that implicate the Anti-Kickback Statute and do not fit within an exception or safe harbor are reviewed on a case-by-case basis to determine whether, based on the facts and circumstances, they violate the statute. In December 2020, the federal government published a regulation that creates new federal Anti-Kickback Statute safe harbors for (among other things) certain value-based arrangements and patient engagement tools, and modifies and clarifies the scope of existing safe harbors for warranties and personal service agreements. Even though it is finalized, the impact of the proposed regulation on our operations is not yet clear.
•The federal civil False Claims Act prohibits any person from, among other things, knowingly presenting, or causing to be presented, a false or fraudulent claim for payment of government funds, or knowingly making, using, or causing to be made or used, a false record or statement material to an obligation to pay money to the government or knowingly concealing or knowingly and improperly avoiding, decreasing, or concealing an obligation to pay money to the federal government. Actions under the False Claims Act may be brought by private individuals known as qui tam relators in the name of the government.government, and who may share in any monetary recovery. In recent years, several pharmaceutical and other healthcare companies have faced enforcement actions under the False Claims Act for, among other things, providing free product to customers with the expectation that the customers would bill federal programs for the product, and other interactions with prescribers and other customers including interactions that may have affected customers' billing or coding practices on claims submitted to the federal government. Other companies have faced enforcement actions for causing false claims to be submitted because of the company's marketing the product for unapproved, and thus non-reimbursable, uses. Federal enforcement agencies also have shown increased interest in pharmaceutical companies' product and patient assistance programs, including reimbursement and co-pay support services, and a number of investigations into these programs have resulted in significant civil and criminal settlements.
•The Health Insurance Portability and Accountability Act of 1996 as amended by the Health Information Technology for Economic and Clinical Health Act, which we refer to collectively as HIPAA,its implementing regulations (collectively, HIPAA), prohibits, among other things, knowingly and willfully executing a scheme to defraud any healthcare benefit program, including private third-party payors. HIPAA also prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement or representation, or making or using any false writing or document knowing the same to contain any materially false, fictitious or fraudulent statement or entry in connection with the delivery of or payment for healthcare benefits, items or services. HIPAA and its implementing regulations also establish uniform standards for certain covered entities, which are healthcare providers, health plans and healthcare clearinghouses, as well as their business associates, governing the conduct of specified electronic
healthcare transactions and protecting the security and privacy of protected health information. HIPAA has four tiers of civil monetary penalties and grants state attorneys enforcement authority. The Department of Justice also may impose criminal penalties. Additionally, certain states have adopted comparable privacy and security laws and regulations, some of which may be more stringent than HIPAA, and numerous federal and state laws, including state data breach notification laws, state health information privacy laws, and federal and state consumer protection laws, including, for example, Section 5 of the Federal Trade Commission Act of 1914, as amended, and the California Consumer Privacy Act (CCPA), govern the collection, use, and disclosure and protection of certain health-related and other personal information.
•We may obtain health information from third parties that are subject to privacy and security requirements under HIPAA and we could potentially be subject to criminal penalties if we, our affiliates, or our agents knowingly obtain or disclose individually identifiable health information maintained by a HIPAA-covered entity in a manner that is not authorized or permitted by HIPAA.
•The majority of states also have statutes or regulations similar to the federal anti-kickback and false claims laws, which apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payor. Several states now require pharmaceutical companies to report expenses relating to the marketing and promotion of pharmaceutical products in those states and to report gifts and payments to individual health care providers in those states. Some of these states also prohibit certain marketing-related activities including the provision of gifts, meals, or other items to certain health care providers. Other states have laws requiring pharmaceutical sales representatives to be registered or licensed, and still others impose limits on co-pay assistance that pharmaceutical companies can offer to patients. In addition, several states require pharmaceutical companies to implement compliance programs or marketing codes.
•The Physician Payments Sunshine Act, implemented as the Open Payments program, and its implementing regulations, requires 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 CMS information related to direct or indirect payments and other transfers of value to physicians and teaching hospitals, as well as ownership and investment interests held in the company by physicians and their immediate family members. Beginning in 2022, applicable manufacturers also will be required to report information regarding payments and transfers of value provided (starting in 2021) to physician assistants, nurse practitioners, clinical nurse specialists, certified nurse anesthetists and certified nurse-midwives.
Compliance with such laws and regulations will requirerequires substantial resources. Because of the breadth of these various fraud and abuse laws, it is possible that some of our business activities could be subject to challenge under one or more of such laws. Such a challenge could have material adverse effects on our business, financial condition and results of operations. In the event governmental authorities conclude that our business practices do not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations, they may impose sanctions under these laws, which are potentially significant and may include civil monetary penalties, damages, exclusion of an entity or individual from participation in government health care programs, criminal fines and imprisonment, additional reporting requirements if we become subject to a corporate
integrity agreement or other settlement to resolve allegations of violations of these laws, as well as the potential curtailment or restructuring of our operations. Even if we are not determined to have violated these laws, government investigations into these issues typically require the expenditure of significant resources and generate negative publicity.
Healthcare Privacy Laws
We may be subject to laws and regulations covering data privacy and the protection of health-related and other personal information. The legislative and regulatory landscape for privacy and data protection continues to evolve, and there has been an increasing focus on privacy and data protection issues which may affect our business. Numerous federal and state laws and regulations, including state security breach notification laws, state health information privacy laws and federal and state consumer protection laws, govern the collection, use, disclosure, and protection of personal information. Failure to comply with such laws and regulations could result in government enforcement actions and create liability for us (including the imposition of significant penalties), private litigation and/or adverse publicity that could negatively affect our business. In addition, healthcare providers who prescribe our products and research institutions we collaborate with are subject to privacy and security requirements under HIPAA.
Foreign Corrupt Practices Act
In addition, the U.S. Foreign Corrupt Practices Act of 1997 prohibits corporations and individualstheir intermediaries from engaging in certain activities to obtain or retain business or to influence a person working in an official capacity. It is illegal to pay, offer to pay or authorize the payment of anything of value to any official of another country, government staff member, political party or political candidate in an attempt to obtain or retain business or to otherwise influence a person working in that capacity.
EmployeesHuman Capital
As of March 1, 2019,February 28, 2021, we had a total of 102204 full-time employees and three part-time employees. The majorityAll of our employees are located in the U.S., with the exception of three employees located in United Kingdom and two employees located in Norway. 61% of our US employees are field-based, in customer-facing roles. Among our employees, 59% are female and 41% are male. We have no collective bargaining agreements withand none of our employees and none are represented by labor unions.
Culture is a critical element in the management of our organization. Our talented employees, known as colleagues, are focused on driving our business with the Optinose values as the foundation for all our efforts. Our goal is that each colleague feels a deep connection to what they do, loves coming to work and is aligned to our One Mission – to improve lives. Our values of Authenticity, Fearless Conversations, Friendship, Openness, Perseverance and Possibility Thinking guide our actions and decisions.
Culture begins with our hiring process and is supported through our colleague performance and development processes and the entire colleague life cycle. We support our colleagues with a comprehensive offering of competitive pay and benefits. Since the COVID-19 pandemic began, we created robust protocols to ensure the safety of our colleagues and continue to adapt over time to the changing environment. We consider our current relations with our employees to be good.
Properties
Our principal office is located in Yardley, Pennsylvania, where we lease approximately 30,000 square feet of office space pursuant to a lease that expires in May 2021.2024. We also lease facilities in Ewing, New Jersey, and Oslo, Norway and Swindon, England.Norway. We believe our facilities are adequate to meet our current needs, although we may seek to negotiate new leases or evaluate additional or alternate space for our operations. We believe appropriate alternative space will be readily available on commercially reasonable terms.
Legal Proceedings
We are not currently a party to any material pending legal proceedings.
Corporate Information
We were incorporated under the laws of the State of Delaware in May 2010. Our predecessor entity OptiNose AS was formed under the laws of Norway in September 2000. In 2010, OptiNose AS became our subsidiary as part of an internal reorganization. Our corporate office is located at 1020 Stony Hill Road, Suite 300, Yardley, PA 19067. Our telephone number is (267) 364-3500. We maintain an Internet website at www.optinose.com. The information contained on our website is not incorporated by reference into this Form 10-K.
We make available free of charge under the “Investors—SEC Filings” section of our website all of our filings with the SEC, including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and amendments to such documents, each of which is provided on our website as soon as reasonably practicable after we electronically file or furnish, as applicable, the information with the SEC.
ITEM 1A. RISK FACTORS
Risk Factors
Investing in our common stock involves a high degree of risk. Before deciding to invest in our common stock, you should consider carefully the risks and uncertainties described below, together with general economic and business risks and all of the other information contained in this Annual Report on Form 10-K, including our consolidated financial statements and the
related notes and the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations." If any of the following risks actually occur, our business, financial condition, results of operations and prospects could be harmed. In that event, the price of our common stock could decline and you could lose all or part of your investment. This Annual Report on Form 10-K also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of specific factors, including the risks described below. See "Note Regarding Forward-Looking Statements."
Risks Related to Our Financial Position and Capital Resources
We have incurred significant losses since our inception and anticipate that we will incur continued losses in the future.
We are a specialty pharmaceutical company with a limited operating history. To date, we have focused primarily on developing XHANCE and Onzetra Xsail, as well as other product candidates using our proprietary exhalation delivery system (EDS) technology.EDS technology, including OPN-019. Since inception, we have incurred significant net losses and expect to continue to incur net losses for the foreseeable future. To date, we have generated revenue from sales of XHANCE since its launch in 2018, andas well as from our license agreement (the AVP-825 License Agreement) with Avanir Pharmaceuticals, Inc. (Avanir), pursuant to which we granted them the exclusive right to further develop and commercialize AVP-825 for the acute treatment of migraines in adults.licensing revenues. We incurred net losses of $106.7$99.8 million and $48.9$110.1 million for the years ended December 31, 20182020 and 2017,2019, respectively. As of December 31, 2018,2020, we had an accumulated deficit of $317.9$527.8 million.
We expect to incur losses for the foreseeable future as we:
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▪ | continue to commercialize XHANCE and further scale up external manufacturing and distribution capabilities to commercialize XHANCE or any other product candidate for which we may obtain regulatory approval; |
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▪ | continue to focus our regulatory compliance efforts on requirements applicable to marketed drugs; |
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▪ | continue clinical development activities for XHANCE, including the U.S. Food and Drug Administration (FDA) mandated pediatric studies, and a Phase 3b clinical trial in pursuit of a follow-on indication for the treatment of chronic sinusitis; |
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▪ | seek to discover and develop, in-license or acquire additional products, product candidates and technology; |
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▪ | maintain, expand and protect our intellectual property portfolio; |
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▪ | hire additional commercial, clinical, manufacturing and scientific personnel; |
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▪ | add operational, financial and management information systems and personnel, including personnel to support commercialization efforts; and |
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▪ | incur additional legal, accounting and other expenses in operating as a publicly traded commercial-stage company. |
▪continue to commercialize XHANCE and further scale up external manufacturing and distribution capabilities to commercialize XHANCE or any other product candidate for which we may obtain regulatory approval;
▪continue to focus our regulatory compliance efforts on requirements applicable to marketed drugs;
▪continue clinical development activities for XHANCE, including the two ongoing FDA Phase 3b clinical trials in pursuit of a follow-on indication for the treatment of chronic sinusitis and mandated post-marketing pediatric study;
▪continue pre-clinical and clinical development activities with respect to our other product candidates, including OPN-019;
▪seek to discover and develop, in-license or acquire additional products, product candidates and technology;
▪maintain, expand and protect our intellectual property portfolio;
▪hire additional personnel to continue to support company growth; and
▪incur additional legal, accounting and other expenses in operating as a publicly traded commercial-stage company.
Because of the numerous risks and uncertainties associated with drug development and commercialization, we are unable to accurately predict the timing or amount of expenses or when, or if, we will be able to achieve profitability. If we are required by regulatory authorities to perform studies in addition to those expected, or if there are any delays in the initiation and completion of our clinical trials or the development of any of our product candidates, our expenses could increase.
We may never achieve or maintain profitability.
Our ability to become and remain profitable will depend on our ability to generate revenue. Our ability to generate revenue depends upon our ability to successfully commercialize XHANCE and any of our other product candidates or any other product candidates, if approved, that we may in-license or acquire in the future, as well as from our ability to successfully out-license any of our products or technology. Our ability to generate revenue from our current or future products and product candidates will depend on a number of factors, including:
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▪ | our ability to successfully commercialize XHANCE for the treatment of nasal polyps; |
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▪ | our ability to successfully complete required clinical trials and submit a supplemental new drug application to the FDA and obtain regulatory approval for XHANCE for the treatment of chronic sinusitis; |
▪our ability to successfully commercialize XHANCE for the treatment of nasal polyps;
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▪ | our ability to complete and submit applications to, and obtain regulatory approval from, foreign regulatory authorities, if we choose to commercialize XHANCE outside the U.S.; |
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▪ | the size of the markets in the territories for which we gain regulatory approval; |
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▪ | the performance of our contract sales organization, and once onboarded our internal sales team, in marketing and promoting XHANCE; |
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▪ | our ability to maintain and further develop a commercial organization capable of sales, marketing and distribution for XHANCE and any of our other product candidates for which we may obtain marketing approval; |
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▪ | our ability to maintain commercially reasonable agreements with wholesalers, distributors and other third parties in our supply chain; |
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▪ | our success in establishing a commercially viable price for our products; |
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▪ | our success in defending against potential generic competition and other developments in our market generally; |
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▪ | our ability to manufacture commercial quantities of our products at acceptable cost levels; |
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▪ | our ability to obtain coverage and adequate reimbursement from third parties, including government payors; |
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▪ | our ability to commercialize and/or find a partner to commercialize AVP-825; and |
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▪ | our ability to successfully complete development activities, including the necessary clinical trials, with respect to our other product candidates. |
▪our ability to successfully complete required clinical trials and submit a supplemental NDA to the FDA and obtain regulatory approval for XHANCE for the treatment of chronic sinusitis;
▪our ability to complete and submit applications to, and obtain regulatory approval from, foreign regulatory authorities, if we choose to commercialize XHANCE outside the U.S.;
▪the size of the markets in the territories for which we gain regulatory approval;
▪the performance of our sales team, in marketing and promoting XHANCE;
▪our ability to maintain and further develop a commercial organization capable of sales, marketing and distribution for XHANCE and any of our other product candidates for which we may obtain marketing approval;
▪our ability to maintain commercially reasonable agreements with wholesalers, distributors and other third parties in our supply chain;
▪our success in establishing a commercially viable price for our products;
▪our success in defending against potential generic competition and other developments in our market generally;
▪our ability to have commercial quantities of our products manufactured at acceptable cost levels;
▪our ability to obtain coverage and adequate reimbursement from third parties, including government payors; and
▪our ability to successfully complete development activities, including the necessary clinical trials, with respect to our other product candidates.
XHANCE, as well as any of our other product candidates if approved for commercial sale, may not gain market acceptance or achieve commercial success. If our addressable market is not as significant as we estimate or the treatment population is narrowed by competition, physician choice or clinical practice guidelines, we may not generate significant revenue from sales of XHANCE. In addition, we would anticipate incurring significant costs associated with commercializing any approved product. We may not achieve profitability soon after generating product sales, if ever.profitability. If we are unable to generate enough product revenues to cover our operating expenses and prior losses,service our debt, we will not become profitable and may be unable to continue operations without continued funding.
Even if we achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would depress the value of our company and could impair our ability to raise capital, expand our business, maintain our development efforts, obtain drug approvals, diversify our offerings or continue our operations. A decline in the value of our company could also cause you to lose all or part of your investment.
We will likely require additional capital to fund our operations and, if we fail to obtain necessary financing, we may be unable to continue the commercialization of XHANCE and to continue the development of our other product candidates.candidates, including XHANCE for the treatment of chronic sinusitis and OPN-019.
Our operations have consumed substantial amounts of cash. To date, we have financed our operations primarily through the sale and issuance of common and preferred stock, debt, licensing revenues, 2018 XHANCE revenue and research grants. We expect to continue to spend substantial amounts to commercialize XHANCE and to advance the clinical development of XHANCE for the treatment of chronic sinusitis and our other product candidates.candidates, including OPN-019. As of December 31, 2018,2020, we had cash and cash equivalents of $201.0$144.2 million. Although it is difficult to predict our future liquidity requirements, we believe that existing cash and cash equivalents at December 31, 2018 will be sufficientlikely require additional capital in the future secured through equity or debt financings, partnerships, collaborations, or other sources in order to meet our debt service obligations under our Notes,debt, and to carry out our planned development and commercial activities into the fourth quarter of 2020. Our estimate of the period of time through which our financial resources will be adequate to support our operations is based on assumptions that may prove to be wrong, and we could deplete our available capital resources sooner than we currently expect.activities.
Our future funding requirements, both near and long-term, will depend on many factors, including, but not limited to:
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▪ | the success of our commercialization of XHANCE for the treatment of nasal polyps including, among other things, patient and physician acceptance of XHANCE and our ability to obtain adequate insurance coverage and reimbursement for XHANCE; |
▪the success of our commercialization of XHANCE for the treatment of nasal polyps including, among other things, patient and physician acceptance of XHANCE and our ability to maintain adequate insurance coverage and reimbursement for XHANCE;
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▪ | the cost of commercialization activities for XHANCE, including product manufacturing, distribution, marketing and sales; |
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▪ | net product revenues received from sales of XHANCE; |
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▪ | the costs and timing of internalizing and expanding our sales force; |
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▪ | the level of co-pay assistance and other patient affordability programs offered for XHANCE; |
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▪ | our clinical development plans for XHANCE, including FDA-mandated pediatric studies and clinical trials for the supplemental indication for the treatment of chronic sinusitis; |
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▪ | the outcome, timing and cost of the regulatory approval process of XHANCE for chronic sinusitis by the FDA, including the potential for the FDA to require that we perform more studies and clinical trials than those that we currently expect; |
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▪ | the costs involved in preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights; |
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▪ | the cost of defending intellectual property disputes, including patent infringement actions brought by third parties against us; |
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▪ | fluctuations in the three-month LIBOR-based floating interest rate of our Notes; |
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▪ | the initiation, progress, timing, costs and results of clinical trials and other research and development related to additional product candidates; and |
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▪ | the extent to which we in-license, acquire or otherwise partner in development of other products, product candidates or technologies. |
▪the impact of COVID-19 on our sales of XHANCE and our clinical trials;
▪the cost of commercialization activities for XHANCE, including product manufacturing, distribution, marketing and sales;
▪net product revenues received from sales of XHANCE;
▪the cost and timing of any future expansion of our sales force;
▪the level of co-pay assistance and other patient affordability programs offered for XHANCE;
▪our clinical development plans for XHANCE, including clinical trials for the supplemental indication for the treatment of chronic sinusitis and FDA-mandated post-marketing pediatric study;
▪the outcome, timing and cost of the regulatory approval process of XHANCE for chronic sinusitis by the FDA, including the potential for the FDA to require that we perform more studies and clinical trials than those that we currently expect;
▪the costs involved in preparing, filing and prosecuting patent applications, and maintaining and enforcing our intellectual property rights;
▪the cost of defending intellectual property disputes, including patent infringement actions brought by third parties against us;
▪the initiation, progress, timing, costs and results of clinical trials and other research and development related to additional product candidates, including OPN-019; and
▪the extent to which we in-license, acquire or otherwise partner in the development of other products, product candidates or technologies.
We cannot be certain that additional funding will be available when needed on acceptable terms, or at all. If we are unable to raise additional capital in sufficient amounts, when required or on acceptable terms, we also could be required to:
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▪ | seek strategic collaborations to assist in the commercialization of XHANCE in the U.S. and other markets; |
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▪ | significantly delay, scale back or discontinue the development of XHANCE for the treatment of chronic sinusitis; |
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▪ | relinquish or license on unfavorable terms our rights to our EDS devices and technologies or other product candidates that we otherwise would seek to develop or commercialize ourselves; |
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▪ | delay, limit, reduce or terminate the drug development of our current or future product candidates, or seek collaborators for one or more of our current or future product candidates at an earlier stage than otherwise would be desirable or on terms that are less favorable than might otherwise be available; or |
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▪ | significantly curtail our operations. |
▪seek strategic collaborations to assist in the commercialization of XHANCE in the U.S. and other markets at an earlier stage than otherwise would be desirable or on terms that are less favorable than might otherwise be available;
▪significantly delay, scale back or discontinue the development of XHANCE for the treatment of chronic sinusitis;
▪relinquish or license on unfavorable terms our rights to our EDS devices and technologies or other product candidates that we otherwise would seek to develop or commercialize ourselves;
▪delay, limit, reduce or terminate the drug development of our current or future product candidates, or seek collaborators for one or more of our current or future product candidates at an earlier stage than otherwise would be desirable or on terms that are less favorable than might otherwise be available; or
▪significantly curtail our operations.
Although we may have the ability to obtain an additional $25.0$20.0 million through the issuance of additional senior secured notes pursuant to the Note Purchase Agreement,terms of our existing debt financing, the availability of this $25.0$20.0 million is subject to achieving at least $26.0 million of XHANCE net product revenues and royalties in the quarter ending June 30, 2021 and certain other conditions that we may not be able to meet.
Our failure to comply with the covenants or other terms of the Note Purchase Agreement, including as a result of events beyond our control, could result in a default under the Note Purchase Agreement that could materially and adversely affect the ongoing viability of our business.
On December 29, 2017,September 12, 2019 (the Closing Date), we entered into athe Note Purchase Agreement with Athyrium Opportunities III Acquisitionfunds managed by Pharmakon Advisors, LP, as collateral agent (the Collateral Agent) and the purchasers party thereto (the Purchasers) that provides for the issuance of up to $100.0 million of senior secured notes (the Notes). $75.0$150.0 million of the Pharmakon Senior Secured Notes, of which $80.0 million were issued on the Closing Date (the Initial Notes), $30.0 million were issued on February 13, 2020 (the First Delayed Draw Notes) and $20.0 were issued on December 29, 2017, of which $50.01, 2020 (the Third Delayed Draw Notes). An additional $20.0 million were issued by OptiNose AS and $25.0 million were issued by OptiNose US, Inc.was available to the Company (the Issuers.) The remaining $25.0Second Delayed Draw Notes), but the Company did not meet the requirements to issue those additional notes. On August 13, 2020, we entered into an amendment to the Note Purchase Agreement whereby an additional $20.0 million of the Pharmakon Senior Secured Notes (the
Additional Delayed Draw Notes, and together with the Initial Notes, First Delayed Draw Notes and Third Delayed Draw Notes, the Notes) may be issued by OptiNose US, Inc. and soldin 2021, subject to the Purchasers between April 1, 2019 and August 14, 2019, subject to us and our consolidated subsidiaries achieving trailing four quarter net revenues (as calculated pursuant to the termsachievement of the Note Purchase Agreement) of $15.0at least $26.0 million a pro forma ratio of total debt to trailing four quarter net revenues not exceeding 6.50 to 1.00 and other specified conditions.
The unpaid principal amount under the Notes is due and payable on June 29, 2023 (the Maturity Date). The proceeds of the Notes were used to provide ongoing working capital to support the launch and commercialization of XHANCE as well as for general corporate purposes.net sales and royalties in the quarter ending June 30, 2021 and certain other conditions. The Pharmakon Senior Secured Notes bear interest at a fixed per annum rate of three-month LIBOR rate (subject10.75% and are scheduled to a 1.0% floor) plus 9.0%mature on September 12, 2024 (the Maturity Date). The interest rate was 11.8125% at December 31, 2018. The IssuersWe are required to make quarterly interest-onlyinterest payments until the Maturity Date. In addition, the Issuers paid an upfront fee of 1% of the aggregate commitment amount of the Notes on December 29, 2017. We are also required to pay an exit fee of 2% of anymake principal payments, (whether mandatory, voluntary orwhich are payable in eight equal quarterly installments beginning on December 15, 2022 and continuing until the Maturity Date; provided that we may elect to postpone any such principal payment until the Maturity Date if, as of the applicable payment date, certain trailing four-quarter consolidated XHANCE net sales and royalties thresholds have been achieved. The Notes are guaranteed by OptiNose, Inc. and our subsidiaries and are secured by a pledge of substantially all of their assets.
The Note Purchase Agreement, as amended, contains various covenants that limit our ability to engage in specified types of transactions without our lenders’ prior consent, as well as financial covenants that require us to maintain at maturity) made throughoutleast $30.0 million of cash and cash equivalents in certain deposit accounts and require us to achieve certain minimum trailing twelve-month consolidated XHANCE net sales and royalties, tested on a quarterly basis and increasing from $15.0 million for the twelve month period ending December 31, 2019 to $121.25 million for the twelve-month period ending December 31, 2023. For 2021, we are required to achieve consolidated XHANCE net sales and royalties of $48.0 million, $58.0 million, $66.5 million and $80.0 million for the trailing twelve-month periods ending March 31, June 30, September 30 and December 31, 2021, respectively, and $90.0 million, $98.75 million, $102.5 million and $106.25 million for the trailing twelve-month periods ending March 31, June 30, September 30 and December 31, 2022, respectively. The Note Purchase Agreement also includes minimum trailing twelve-month consolidated XHANCE net sales and royalties applicable during the term of the Note Purchase Agreement.Notes for calendar year 2023.
In addition, each Note
Each holder of the Notes may elect to accelerate the repayment of all unpaid principal and accrued interest under such holder’s Note upon consummation of a specified change of control transaction or occurrence of certain events of default (as specified in the Note Purchase Agreement), including, among other things:
• our default in a payment obligation under the Notes;
• our breach of the restrictive covenants or other terms of the Notes;
• our breach of reporting obligations;
• our failure to properly maintain the collateral;
• any circumstance that could reasonably be expected to have a material adverse effect (as defined in the Note Purchase Agreement) on the Issuer;
• certain regulatory and/or commercial actions that causes an ongoing delay in commercialization of XHANCE; and
• certain specified insolvency and bankruptcy-related events.
Subject to any applicable cure period set forth in the Notes, all amounts outstanding with respect to the Notes (principal and accrued interest), as well as any applicable prepayment premiums or interest “make-whole” payments, would become due and payable immediately upon an event of default.default at a default interest rate of 13.75%. Our assets or cash flow may not be sufficient to fully repay our obligations under the Notes if the obligations thereunder are accelerated upon any events of default. The duration and magnitude of the negative impact from the COVID-19 pandemic on XHANCE net revenues could also affect our ability to meet the net revenue threshold to draw additional capital under our Pharmakon Note Purchase Agreement and to remain in compliance with our revenue covenants. Further, if we are unable to repay, refinance or restructure our obligations under the Notes, the holders of such Notes could proceed to protect and enforce their rights under the Notes by exercising such remedies (including foreclosure on the assets securing our obligations under the Notes and the Note Purchase Agreement) as are available to the holders thereunder and in respect thereof under applicable law, either by suit in equity or by action at law, or both, whether for specific performance of any covenant or other agreement contained in the Notes or in aid of the exercise of any power granted in the Notes. The foregoing would materially and adversely affect the ongoing viability of our business.
Our Note Purchase Agreement contains restrictions that limit our flexibility in operating our business.
The Note Purchase Agreement contains various covenants that limit our ability to engage in specified types of transactions without our lenders’ prior consent. These covenants limit our ability to, among other things:
• sell, transfer, lease or dispose of our assets;
• create, incur or assume additional indebtedness;
• encumber or permit liens on certain of our assets;
• make restricted payments, including paying dividends on, repurchasing or making distributions with respect to our common stock;
• make specified investments (including loans and advances);
• consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;
• enter into certain transactions with our affiliates;
• grant certain license rights related to our products, technology and other intellectual property rights; and
• permit our cash and cash equivalents held in certain deposit accounts to be less than $10,000,000$30.0 million at any time.
The covenants in our Note Purchase Agreement and related security agreements may limit our ability to take certain actions that may be in our long-term best interests. In the event that we breach one or more covenants, our lenders may choose to declare an event of default and require that we immediately repay all amounts outstanding under the Notes, plus penalties and interest, terminate their commitments to extend further creditpurchase additional Notes and foreclose on the collateral granted to them to secure such indebtedness.the Notes. Such repayment could have a material adverse effect on our business, operating results and financial condition.
Provisions of the Notes for certain potential payments to the holders of such Notes that could impede a sale of the Company.
Subject to certain exceptions, the Issuerswe are required to make mandatory prepayments of the Notes, with the proceeds of assetsasset sales, extraordinary receipts and prohibited debt issuances, and upon the occurrence of a change of control.control (as defined in the Note Purchase Agreement). In addition, the Issuerswe may make voluntary prepayments of the Notes, in whole or in part. All mandatory and voluntary prepayments of the Notes are subject to the payment of prepayment premiums as follows: (i) if prepayment occurs prior to the secondthird anniversary of the applicable date of issuance,Closing Date, an amount equal to the amount by which (a) the present value2% of 102% of the principal prepaid plus all interest that would have accrued on such principal through such second anniversary exceeds (b) the amount of principal prepaid, (ii) if prepayment occurs on or after the secondthird anniversary of the applicable date of issuanceClosing Date but prior to the thirdfourth anniversary of such issuance,the Closing Date, an amount equal to 2%1% of the principal prepaid, and (iii) if prepayment occurs on or after the thirdfourth anniversary of the applicable dateClosing Date, no prepayment premium is due. We are also required to pay a "make-whole" amount in respect of issuance butany principal payments (whether mandatory or voluntary) made prior to the fourth30-month anniversary of suchthe issuance of the applicable Note, in an amount equal to 1%the interest that would have accrued through the 30-month anniversary in respect of thesuch Note but for such principal prepaid. No prepayment premium is due on any principal prepaid after the fourth anniversary of the applicable date of issuance of any Notes.repayment. These provisions may make it more costly for a potential acquirer to engage in a business combination transaction with us. Provisions that have the effect of discouraging, delaying or preventing a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock and could also affect the price that some investors are willing to pay for our common stock.
Raising additional capital may cause dilution to our existing stockholders, restrict our operations or require us to relinquish rights to our technologies or product candidates.
We do not have any committed external source of funds other than the additional $25.0$20.0 million that may become available under the Note Purchase Agreement between April 1, 2019 and August 14, 2019,in 2021, subject to usthe achievement of minimum XHANCE net sales and our consolidated subsidiaries achieving trailing four quarter net revenues (as calculated pursuant to the terms of the Note Purchase Agreement) of $15.0 million, a pro forma ratio of total debt to trailing four quarter net revenues not exceeding 6.50 to 1.00royalties and certain other specified conditions. Until such time, if ever, as we can generate substantial revenue, we may seek additional capital through a combination of private and public equity offerings, debt financings, collaborations, strategic alliances and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms may include liquidation or other preferences that adversely affect your rights as a stockholder. Debt financings may be coupled with an equity component, such as warrants to purchase shares, which could also result in dilution of our existing stockholders' ownership. The incurrence of additional indebtedness would result in increased fixed payment obligations and could also result in certain restrictive covenants, such as limitations on our ability to incur additional debt, limitations on our ability to acquire or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business and may result in liens being placed on our assets and intellectual property. If we were to default on such indebtedness, we could lose such assets and intellectual property.
If we raise additional funds through collaborations, or strategic alliance, grants, marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, product candidates or future revenue streams or grant licenses on terms that are not favorable to us.us or at an earlier stage than would otherwise be desirable.
Our ability to use our net operating loss carry forwards and other tax attributes may be limited.
As of December 31, 2018,2020, we had U.S. federal net operating loss (NOL) carry forwards of approximately $86.6$241.4 million available to offset future U.S. taxable income and U.S. federal research and development (R&D) tax credits of $2.4 million. While some of our federal NOL carry forwards will carry forward indefinitely, some of our U.S. NOL and credit carry forwards will expire if not utilized with the first expiration occurring in 2030. We also havehad state NOL carry forwards of $57.0$172.1 million as of December 31, 2018.2020. These state NOL carry forwards can only offset income in the same state in which they were generated and thus there is a possibility that they may not be utilized. The carry forward period varies among the states, with the first expiration in 2028, and some may expire unutilized.2028. In addition, our Norwegian and UK subsidiaries havehad total foreign NOL carry forwards of $50.5$60.9 million as of December 31, 2018.2020. These foreign NOL carry forwards do not expire but can only be used to offset profits generated in Norway or the United Kingdom, respectively, and may be limited in use based on the laws of those countries.
Our U.S. NOL and tax credit carry forwards could expire unused and be unavailable to offset future income tax liabilities because of their limited duration or because of theother restrictions under U.S. tax law. Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the Code), if a corporation undergoes an “ownership change”, generally defined as a greater than 50% change, by value, in equity ownership during a three-year period, the corporation’s ability to offset pre-change tax attributes, such as
NOLs and R&D tax credits, against post-change income or tax may be limited. We have not performed an analysis under Section 382 of the Code and cannot predict or otherwise determine whether utilization of our federal tax attribute carry forwards may be limited. As a result, if we have taxable income in the future, our ability to use existing U.S. NOL and R&D tax credit carry forwards to reduce U.S. taxable income or tax liability may be subject to limitation resulting in increased future tax liabilities. Similar rules at the state level may also limit our ability to use state NOLs. Also, there may be periods when the use of NOLs is suspended or otherwise limited at the state level, which could accelerate or permanently increase state taxes owed. Furthermore, the losses could expire before we generate sufficient income to utilize them.
We may have ownership changes in the future due to additional changes in our stock ownership which could be outside of our control. If an ownership change occurs and our ability to use our historical net operating loss and tax credit carry forwards is limited, it could adversely impact our future operating results by increasing our tax obligations.
Risks Related to COVID-19
The termination of the AVP-825 License Agreementcoronavirus (COVID-19) pandemic has and may generate additional expenses for us.
On December 10, 2018, we received written notice from Avanir of its election to terminate the AVP-825 License Agreement. As a result, the AVP-825 License Agreement is expected to terminate on March 10, 2019 (the Termination Date). We do not expect to receive any additional proceeds from the AVP-825 License Agreement.
Upon termination of the AVP-825 License Agreement, we may elect to continue to commercialize Onzetra Xsail ourselves or through a new licensee. However, we may not be able to find a new licensee willing to enter into a license agreement on commercially reasonable terms, if at all. Further, we may incur additional expenses in connection with the process of identifying potential new licensees and in connection with the termination of the AVP-825 License Agreement.
Foreign exchange risks and controls mayadversely affect our financial position and results of operations.
Through the operation of our subsidiaries based in the United Kingdom and Norway, we are exposed to foreign currency fluctuations and exchange rate risks. In addition to the operations of our foreign subsidiaries, we also contract with vendors that are located outside the U.S., and in some cases make payment of invoices denominated in foreign currencies. We are subject to fluctuations in foreign currency rates in connection with these arrangements and we do not currently hedge our foreign currency exchange rate risk. In addition, because we maintain our consolidated financial statements in U.S. dollars, our financial results are vulnerable to fluctuations in the exchange rate between the U.S. dollar and foreign currencies, such as the British pound sterling, the euro, and the Norwegian krone. In preparing our consolidated financial statements, we must convert all non-U.S. dollar results to U.S. dollars, which impacts ourbusiness, results of operations is reflectedand financial condition.
In March 2020, the World Health Organization declared the outbreak of a novel coronavirus, or COVID-19, as a component
pandemic (the “COVID-19 pandemic”), which continues to spread throughout the U.S. and worldwide. On March 13, 2020, the then-President of the United States announced a national emergency relating to the COVID-19 pandemic.
Government authorities in the U.S. have recommended or imposed various social distancing, quarantine, and isolation measures on large portions of the population, and similar measures have also been taken in many other countries around the world. These measures have changed, and will continue to change, based on the severity and uncertainties of the COVID-19 pandemic.
In March 2020, we modified our stockholder's equity (deficit)business practices and transitioned to a full-time, virtual work environment in which all employees were encouraged to work from their place of residence if their job functions allowed, and all work-related travel was temporarily discontinued. A significant portion of the physicians' offices in which our territory managers detail XHANCE either were closed, had reduced patient flow or temporarily stopped sales representatives’ visits, which has hindered our ability to detail XHANCE to physicians' offices. Late in the first quarter of 2020, we began to observe an adverse impact of the COVID-19 pandemic on XHANCE prescription growth and net revenues, and subsequently withdrew our previous XHANCE revenue guidance for 2020. This adverse impact was most pronounced during the “shelter-in-place” mitigation efforts that were prevalent from late-March through May 2020. Where permitted by governmental requirements and the policies of physician offices, our territory managers began to return to in-person detailing of physicians in May and June 2020, however, many restrictions remain and some physicians' offices are not seeing sales representatives. If our territory managers continue to have a limited ability to meet with physicians and if patients’ visits to doctors continue to be limited, XHANCE prescription growth and net revenues will continue to be adversely impacted. In addition, changes in insurance coverage or reimbursement levels by governmental authorities, private health insurers and other third-party payors, or in the type of such coverage held by patients, due to the impacts of the COVID-19 pandemic, including the related increase in unemployment in the U.S., may negatively impact XHANCE prescription growth and net revenues.
The duration and magnitude of the negative impact from the COVID-19 pandemic on XHANCE net revenues could also affect our ability to meet the net revenue threshold to draw the remaining $20.0 million of additional capital under our Pharmakon Note Purchase Agreement and to remain in compliance with our revenue covenants. Furthermore, capital markets in the U.S. and around the world have also been negatively impacted by COVID-19, which may harm our business, including our ability to obtain future financing.
Our ability to enroll patients and retain principal investigators and site staff for our ongoing clinical trials have been, and could continue to be, impaired due to the COVID-19 outbreak in their geographic areas, the prioritization of medical resources toward the COVID-19 pandemic, or as a result of quarantines and other restrictions that interrupt healthcare services. For example, previous guidance related to the expected timing of results from our ongoing chronic sinusitis trials indicated that top-line results from both trials would be available in the second half of 2021. Pauses or delays in patient enrollment due to factors related to COVID-19 have had, and may be credited or chargedcontinue to operationshave, varying effects in different geographies and reflected in other income (expense), net. The impact of changes in exchange rates has not been significant historically. However, changes in exchange rates could cause significant changesover time have led to a change in our financial positionprojected timeline for initial data availability and results of operationsmay lead to additional changes in the future. We now expect top-line from at least one of our ongoing chronic sinusitis trials by the end of 2021 and from the other trial in the first half of 2022. For those subjects currently participating in these studies, procedures to facilitate ongoing treatment and capture of data during periods of in-person care restrictions have been put in place. Furthermore, patients, investigators, or site staff have been and may continue to be unwilling or unable to comply with clinical trial protocols due to COVID-19 illness, concerns about the pandemic, or quarantines or other restrictions that impede their movement. Any interruption in the supply of the study drug might also delay our ability to complete our ongoing clinical trials within our expected timelines. Significant delays in the completion of our ongoing clinical trials are costly and could adversely affect our business and financial condition.
COVID-19 may also have an adverse impact on our contract manufacturers, suppliers, PPN partners, wholesalers, distributors and third party logistic provider as a result of employees or other key personnel becoming infected, preventive and precautionary measures that governments or such third parties are taking, such as social distancing, quarantines, and other restrictions, and shortages of supplies necessary for the manufacture of XHANCE. Any of these circumstances could adversely impact the ability of third parties on which we rely to manufacture and distribute adequate volumes of XHANCE. For example, in April 2020, our contract manufacturer for the formulation and assembly of finished XHANCE drug product implemented a reduced work schedule in response to the pandemic which resulted in temporary delays relating to the assembly of XHANCE finished goods.
The extent to which the coronavirus impacts our business and the third parties on whom we rely, such as our contract manufacturers, suppliers, PPN partners, wholesalers, distributors, third party logistics, contract research organizations, investigators for our clinical trials and other vendors, will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the outbreak and any resurgence, new information that may emerge concerning the severity of the coronavirus, the actions to contain the
coronavirus or treat its impact, and the speed with which and the extent to which normal economic and operating conditions resume, among others.
Risks Related to Commercialization of XHANCE
We have a limited history of commercializing drugs, which may make it difficult for you to evaluate the success of our business to date and to assess our future viability.
Although our predecessor and subsidiary, OptiNose AS, commenced operations in 2000, our operations to date have beenuntil the launch of XHANCE in March 2018 were largely focused on raising capital and developing AVP-825Onzetra Xsail and XHANCE, including undertaking preclinical studies and conducting clinical trials, as well as commercializing XHANCE through the last nine months of 2018.trials. While we conducted the pre-approval stages of clinical development for AVP-825,Onzetra Xsail, Avanir Pharmaceuticals, Inc. was responsible for completing the clinical development of, obtaining regulatory approval for, and initiating the initial commercial launch of that product under our former license agreement with them. Further, while we have been commercializing XHANCE for the last nine months ofsince March 2018, we have limited history regarding sales, marketing, distribution and other activities necessary for successful product commercialization. Consequently, any predictions about our future success or viability may not be as accurate as they could be if we had a longer history of successfully developing and commercializing drugs.
If we are unable to successfully commercialize XHANCE, our business, financial condition and results of operations may be materially adversely affected and the price of our common stock may decline.
Our ability to successfully commercialize XHANCE depends on many factors, including:
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▪ | our ability to manufacture commercial quantities of XHANCE at a reasonable cost and with sufficient speed to meet commercial demand; |
▪our ability to have commercial quantities of XHANCE manufactured at a reasonable cost and with sufficient speed to meet commercial demand;
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▪ | our ability to manage our third-party sales organization, and once onboarded our internal sales team, to market, promote and sell XHANCE; |
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▪ | our success in educating physicians, patients and caregivers about the benefits, administration and use of XHANCE; |
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▪ | the availability, perceived advantages, relative cost, relative safety and relative efficacy of competing products; |
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▪ | the availability of coverage and adequate reimbursement for XHANCE; |
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▪ | our ability to commercialize XHANCE at a profitable average net revenue per prescription; |
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▪ | our ability to contract with wholesalers distributors and/or preferred pharmacy network partners (PPNPs) on acceptable terms; |
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▪ | our ability to obtain regulatory approval for XHANCE for a follow-on indication for the treatment of chronic sinusitis; |
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▪ | the effectiveness of our marketing campaigns; |
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▪ | our ability to attract and retain qualified pharmaceutical industry personnel; |
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▪ | our effective use of promotional resources; |
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▪ | a continued acceptable safety profile for XHANCE; |
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▪ | our ability to obtain and maintain appropriate state licenses in the states in which we sell or intend to sell XHANCE; and |
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▪ | our ability to successfully defend any challenges to our intellectual property relating to XHANCE. |
▪the ability of our sales team to effectively market, promote and sell XHANCE;
▪our success in educating physicians, patients and caregivers about the benefits, administration and use of XHANCE;
▪patient and physician acceptable of XHANCE;
▪the availability, perceived advantages, relative cost, relative safety and relative efficacy of competing products;
▪the availability of coverage and adequate reimbursement for XHANCE;
▪our ability to commercialize XHANCE at a profitable average net revenue per prescription;
▪our ability to obtain and maintain contracts with wholesalers, distributors and/or PPN partners on acceptable terms;
▪results from additional clinical trials and our ability to obtain regulatory approval for XHANCE for a follow-on indication for the treatment of chronic sinusitis;
▪the effectiveness of our marketing campaigns;
▪our ability to attract and retain qualified pharmaceutical industry personnel;
▪a continued acceptable safety profile for XHANCE;
▪our ability to obtain and maintain required state licenses to sell XHANCE; and
▪our ability to successfully defend any challenges to our intellectual property relating to XHANCE.
It is difficult for us to predict future performance. As we gain additional commercial experience, a number of factors over which we have limited control may contribute to fluctuations in our financial results. DemandWe expect that first quarter prescription demand and average net revenue per prescription for our products mayXHANCE will be adversely impacted adversely by the annual resetting of patient healthcare insurance plan deductibles and changes in individual patients' healthcare insurance coverage, both of which may cause patientsoften occur in January. Additionally, demand has historically been, and we expect will continue to delay fulfilling an XHANCE prescription. Demand may also be, impacted by the seasonal variation in patient visits with their doctor.doctor and INS market seasonality resulting in reduced XHANCE prescription demand in the third quarter.
Many of these matters are beyond our control and are subject to other risks described elsewhere in this "Risk Factors" section. Accordingly, we cannot assure you that we will be able to successfully commercialize or generate enough revenue from XHANCE to achieve profitability. If we cannot do so, or are significantly delayed in doing so, our business, financial condition and results of operations may be materially adversely affected and the price of our common stock may decline.
The commercial success of XHANCE will depend upon its acceptance by multiple stakeholders, including physicians, patients and healthcare payors.
Physicians may not prescribe XHANCE, in which case we would not generate the revenues we anticipate. The degree of market acceptance of XHANCE will depend on a number of factors, including:
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▪ | demonstration of clinical safety and efficacy; |
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▪ | relative convenience and ease of administration; |
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▪ | pricing and cost-effectiveness; |
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▪ | availability of alternative treatments and perceived advantages over such alternative treatments; |
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▪ | the clinical indications for which XHANCE is approved; |
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▪ | the prevalence and severity of any AEs; |
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▪ | limitations or warnings contained in the FDA-approved label for XHANCE; |
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▪ | the effectiveness of our or any future collaborators' sales and marketing strategies; |
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▪ | consolidation among healthcare providers, which increases the impact of the loss of any relationship; |
▪demonstration of clinical safety and efficacy;
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▪ | our ability to obtain and maintain sufficient third-party coverage and adequate reimbursement; and |
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▪ | the willingness of patients to pay out-of-pocket in the absence of third-party coverage. |
▪relative convenience and ease of administration;
▪pricing and cost-effectiveness;
▪availability of alternative treatments and perceived advantages over such alternative treatments;
▪the clinical indications for which XHANCE is approved;
▪the prevalence and severity of any AEs;
▪limitations or warnings contained in the FDA-approved label for XHANCE;
▪the effectiveness of our or any future collaborators' sales and marketing strategies;
▪consolidation among healthcare providers, which increases the impact of the loss of any relationship;
▪our ability to obtain and maintain sufficient third-party coverage and adequate reimbursement;
▪adequacy and accessibility of our patient assistance programs; and
▪the willingness of patients to pay out-of-pocket in the absence of third-party coverage.
If XHANCE does not achieve an adequate level of acceptance by physicians, patients and healthcare payors, we may not generate sufficient revenue in order to become or remain profitable.
If third-party payors do not reimburse patients for XHANCE or if reimbursement levels are set too low for us to sell XHANCE at a profit, our ability to successfully commercialize XHANCE and our results of operations will be harmed.
Our ability to commercialize XHANCE successfully depends in part on the extent to which coverage and adequate reimbursement for XHANCE will be available in a timely manner and remains available from third-party payors, including governmental healthcare programs such as Medicare and Medicaid, commercial health insurers and managed care organizations. Government authorities and other third-party payors, such as private health insurers and health maintenance organizations, determine which medications they will cover and establish reimbursement levels. Reimbursement decisions by particular third-party payors depend upon a number of factors, including each third-party payor's determination that use of a product is:
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▪ | a covered benefit under its health plan; |
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▪ | appropriate and medically necessary for the specific condition or disease; |
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▪ | neither experimental nor investigational. |
▪a covered benefit under its health plan;
▪appropriate and medically necessary for the specific condition or disease;
▪cost effective; and
▪neither experimental nor investigational.
Obtaining coverage and reimbursement approval for XHANCE from government authorities or other third-party payors is a time consuming and costly process that could require us to provide supporting scientific, clinical and cost-effectiveness data, including expensive pharmacoeconomic studies beyond the data required to obtain marketing approval, for the use of XHANCE to each government authority or other third-party payor. We may not be able to provide data sufficient to gain or maintain acceptance with respect to coverage and reimbursement from government authorities or other third-party payors.
Third-party payors may deny reimbursement for covered products if they determine that a medical product was not used in accordance with cost-effective diagnosis methods, as determined by the third-party payor, or was used for an unapproved indication. Third-party payors also may refuse to reimburse for procedures and devices deemed to be experimental. Third-party payors may also limit coverage to specific products on an approved list, or formulary, which might not include all of the FDA-approved products for a particular indication.
Third-party payors are increasingly attempting to contain healthcare costs by limiting both coverage and the level of reimbursement for medical products and services. The process for determining whether a payor will provide coverage for a product may be separate from the process for setting the price or reimbursement rate that the payor will pay for the product once coverage is approved. Levels of reimbursement may also decrease in the future, and future legislation, regulation or reimbursement policies of third-party payors may adversely affect the demand for and reimbursement available for XHANCE, which in turn, could negatively impact pricing. Further, payors, including healthcare insurers, pharmacy benefit managers and group purchasing organizations, increasingly seek ways to reduce their costs. Many payors continue to adopt benefit plan changes that shift a greater portion of prescription costs to patients. Such measures include more limited benefit plan designs, higher patient co-pay or co-insurance obligations and limitations on patients’ use of commercial manufacturer co-pay payment assistance programs (including through co-pay accumulator adjustment or maximization programs). Payors also increasingly seek price discounts or rebates in connection with the placement of our products on their formularies or those they manage. Payors may also control costs by imposing restrictions on access to or usage of our products, such as by requiring prior authorizations or "step-edits," and may choose to exclude certain indications for which our products are approved or even choose to exclude coverage entirely. For example, some insurers may establishhave established a step-edit system that requires a patient to first use a lower price alternative product prior to becoming eligible for reimbursement of a higher pricepriced product. Some providers may not complete the burdensome administrative process required to demonstrate or document that the patients for whom XHANCE has been prescribed meet the payors’ utilization management criteria (i.e., prior authorizations or step-edits) and, as a result, patients will not gain access to XHANCE treatment. Further, other patients may obtain coverage for XHANCE but abandon their prescriptions rather than pay their co-pay payment which would result in a significant shortfall in achieving our revenue expectations and negatively impact our business, prospects, results of operations and financial condition.
Significant consolidation in the health insurance industry has resulted in a few large insurers and pharmacy benefit managers exerting greater pressure in pricing and usage negotiations with drug manufacturers, significantly increasing discounts and rebates required of manufacturers and limiting patient access and usage. Further consolidation among insurers, pharmacy benefit managers and other payors, including through integrated delivery systems, would increase the negotiating leverage such entities have over us and other drug manufacturers. Ultimately, further discounts, rebates, coverage or plan changes, restrictions or exclusions as described above could have a material adverse effect on sales of our affected products.
If we are unable to differentiate XHANCE from current and future products or existing methods of treatments, our ability to successfully commercialize XHANCE would be adversely affected.
We are currently commercializing XHANCE for the treatment of nasal polyps and intend to seek FDA approval for a follow-on indication of XHANCE for the treatment of chronic sinusitis. Currently, Nasonex,Nasonex™, marketed by Merck, is the only other branded drug therapy approved by the FDA for the treatment of nasal polyps. A generic version of Nasonex,Nasonex™, mometasone furoate monohydrate, was approved by the FDA for, among other indications, the treatment of nasal polyps and launched in 2016. In addition, Beconase AQ,AQ™, which is an INS marketed by GlaxoSmithKline, is indicated for the prophylaxis of nasal polyps after surgical resection, while SINUVATMSINUVA™ is a commercially available corticosteroid-eluting implant indicated for the treatment of nasal polyps in adult patients who have had ethmoid sinus surgery that can be placed in the ethmoid sinus under endoscopic visualization for up to 90 days. We are not aware of any drug product approved for the treatment of chronic sinusitis. In addition to competition from NasonexNasonex™ and Beconase AQ,AQ™, we will also need to differentiate XHANCE from other products and treatments identified in current clinical practice guidelines for the treatment of chronic rhinosinusitis with and without nasal polyps. Such products and treatments include the use of nasal rinses, decongestants, over-the-counter and prescription INS products, oral steroids, antibiotics, and sinus surgery and other procedures, including functional endoscopic sinus surgery, balloon sinus dilation and steroid-releasing sinus implants. In addition, several biologic monoclonal antibodies are in clinical development or have been developed for the treatment of nasal polyps, including omalizumab, reslizumab, mepolizumabbenralizumab, and dupilumab. For dupilumab,mepolizumab. In June 2019, the submissionFDA approved DUPIXENT™ (dupilumab) as an add-on maintenance treatment (to an intranasal steroid) in adult patients with inadequately controlled chronic rhinosinusitis with nasal polyposis. In November 2020, the FDA approved XOLAIR™ add-on maintenance treatment of an Supplemental Biologics License Application (sBLA) was recently publicly announced.nasal polyps in adult patients with inadequate response to nasal corticosteroids. In addition, there are new small molecules, including fevipiprant, being developed for the treatment of nasal polyps, that are also believed to inhibit specific pathways of inflammation present in nasal polyps. If we are unable to achieve significant differentiation for
XHANCE against these other products and treatments, including on the basis of efficacy, safety and tolerability profile, reliability, convenience of administration, price and reimbursement, the opportunity for XHANCE to be commercialized successfully would be adversely affected.
If the market opportunities for XHANCE are smaller than we believe, our revenue may be adversely affected, and our business may suffer.
Our initial targetWe believe there is a market opportunity for XHANCE consistsconsisting of ENT physicians, allergists and high-decile INS-prescribing primary care physicians that we believe treat an estimated 3.5 million U.S. patients with chronic rhinosinusitis, an estimated 1.2 million of whom have chronic rhinosinusitis with nasal polyps. If we are able to obtain a follow-on indication of XHANCE for the treatment of chronic sinusitis, we intend to broaden our reach and target primary care physicians that we believe treat an additional estimated 6.25 million patients with chronic rhinosinusitis, an estimated one-third of whom have chronic rhinosinusitis with nasal polyps.
Our projections of both the number of people who suffer from chronic rhinosinusitis with and without nasal polyps, as well as the subset of people with these diseases who have the potential to benefit from the use of XHANCE, are based on our beliefs and estimates. These estimates have been derived from a variety of sources, including scientific literature, surveys we commissioned, prescription data or other market research and may prove to be incorrect. Further, new studies may change the estimated incidence or prevalence of chronic rhinosinusitis or nasal polyps. The number of patients may turn out to be lower than expected. Additionally, the potentially addressable patient population for XHANCE may be limited or may not be amenable to treatment with XHANCE, and new patients may become increasingly difficult to identify or gain access to, which would adversely affect our results of operations and our business.
Clinical practice guidelines and recommendations published by various organizations could have significant influence on the use of XHANCE.
Government agencies may promulgate clinical practice guidelines directly applicable to XHANCE. In addition, professional societies, practice management groups, private health and science foundations and organizations involved in various diseases from time to time may also publish guidelines or recommendations to the healthcare and patient communities. Recommendations of government agencies or these other groups or organizations may relate to such matters as usage, dosage, route of administration and use of concomitant therapies.
Recommendations or guidelines suggesting the reduced use of XHANCE or the use of competitive or alternative products as the standard of care to be followed by patients and healthcare providers could result in decreased use of XHANCE.
If we are unable to maintain agreements with third parties to market and sell XHANCE, or we are unable to effectively onboard our third party sales force to employees, our business may be harmed.
We currently have limited sales, marketing or distribution capabilities. We have contracted to use an outsourced contract sales organization (CSO) to promote XHANCE to our defined specialty audience of ENT and allergy specialists and high-decile INS-prescribing primary care physicians. While we plan to transition to an internal sales force model in April 2019, our CSO may not dedicate sufficient resources to the commercialization of XHANCE prior to such transition or may otherwise fail in its commercialization due to factors beyond our control. Additionally, our CSO may fail to comply with applicable legal or regulatory requirements, or may enter into agreements with other parties that have products and services that could compete with XHANCE. Additionally, we may not effectively or efficiently manage such transition and our sales force may fail to comply with applicable legal or regulatory requirements. This could subject us to significant civil, criminal and administrative penalties, damages, fines, imprisonment, exclusion from government funded healthcare programs, such as Medicare and Medicaid, additional oversight and reporting requirements if we become subject to a corporate integrity agreement to resolve allegations of non-compliance with these laws and the curtailment or restructuring of our operations.
We may also seek to enter into a strategic collaboration with a third party to commercialize XHANCE. We face significant competition in seeking appropriate strategic collaborators, and these strategic collaborations can be intricate and time-consuming to negotiate and document. We may not be able to negotiate strategic collaborations on acceptable terms, or at all. We are unable to predict when, if ever, we will enter into any strategic collaborations because of the numerous risks and uncertainties associated with establishing strategic partnerships.
A significant portion of our sales are to a limited number of PPN partners and pharmaceutical wholesalers and PPNPs.wholesalers. Changes in terms required by these wholesalers, disruptions in these relationships or a default could harm our results of operations and financial condition.
Approximately 42%83% of our XHANCE net revenues during the fiscal year ended December 31, 20182020 were to the threePPN partners. The five largest pharmaceutical wholesalers. Additionally,PPNs make up approximately 57%44% of our net revenues. Approximately 16% of our XHANCE net revenues during the fiscal year ended December 31, 20182020 were to PPNPs, the majority of which relate to a particular PPNP, Foundation Care LLC.three largest pharmaceutical wholesalers. If any of these wholesalersPPN partners or PPNPswholesalers ceases to purchase our product for any reason, then unless and until the remaining wholesalersPPN partners or PPNPswholesalers increase their purchases of XHANCE or alternative distribution channels are established:
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▪ | our commercial operations could be significantly disrupted; |
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▪ | the availability of XHANCE to patients could be disrupted; and |
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▪ | we may not achieve the sales of XHANCE that we expect, which could decrease our revenues. |
▪our commercial operations could be significantly disrupted;
▪the availability of XHANCE to patients could be disrupted; and
▪we may not achieve the sales of XHANCE that we expect, which would decrease our revenues.
We do not require collateral from our wholesalers or PPNPsPPN partners but rather maintain credit limits and, as a result, we have an exposure to credit risk in our accounts receivable. A default by a large wholesalerPPN partner or PPNPwholesaler could harm our results of operations and financial condition. In the fourth quarter of 2020, we established a bad debt reserve for one customer with a past due balance. Our inability to collect this past due balance or any other balances that may become past due as a result of our extension of credit to customers may harm our results of operations.
In addition to pharmaceutical wholesalers, we
We rely on PPNPsPPN partners for distribution of XHANCE in the U.S., and the failure of those PPNPsPPN partners to distribute XHANCE effectively would adversely affect sales of XHANCE.
Our reliance on PPNPsPPN partners for the distribution of XHANCE in the U.S. involves certain risks, including, but not limited to, risks that these PPNPsPPN partners will:
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▪ | not provide us accurate or timely information regarding their inventories, the number of patients who are using our products or complaints about our products; |
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▪ | reduce or discontinue their efforts to sell or support or otherwise not effectively sell or support our products; |
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▪ | not devote the resources necessary to sell our products in the volumes and within the time frames that we expect; |
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▪ | engage in unlawful or inappropriate business practices that result in legal or regulatory enforcement activity which could result in liability to our Company or damage our goodwill with patients; or |
▪not provide us accurate or timely information regarding their inventories, the number of patients who are using our products or complaints about our products;
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▪ | be unable to satisfy financial obligations to us or others. |
▪reduce or discontinue their efforts to sell or support or otherwise not effectively sell or support our products, including, without limitation, the discontinuation of their refill programs for XHANCE and other patient support services;
▪not devote the resources necessary to sell our products in the volumes and within the time frames that we expect;
▪engage in unlawful or inappropriate business practices that result in legal or regulatory enforcement activity which could result in liability to our Company or damage our goodwill with patients; or
▪be unable to satisfy financial obligations to us or others.
In the event that any of the PPNPsPPN partners with whom we work do not fulfill their contractual obligations to us or refuse to or fail to adequately serve patients, or the agreements are terminated without adequate notice, shipments of XHANCE, and associated revenues, would be adversely affected.
If we cannot successfully implement ourand maintain effective patient affordability programs or improve formulary access for XHANCE in the face of increasing pressure to reduce the price of medications, the adoption of XHANCE by physicians and patients may decline.
While weWe offer patient affordability programs through traditional retail pharmacies part of our commercial strategy to increase adoption and access to XHANCE is to offer physicians the opportunity to have patients fill prescriptions through PPNPs that can apply appropriate patient affordability programsPPN partners to help reduce eligible patients’ out-of-pocket costs for prescriptions filled. BecauseXHANCE prescriptions. The utilization of thisour patient affordability programs will depend on physician and patient awareness and acceptance of the programs. Additionally, certain co-pay assistance benefits are only available through PPN partners. As a result, eligible patients’ out-of-pocket cost for XHANCE, when dispensed through PPNPs,PPN partners, may be lower than such costs when XHANCE is dispensed from traditional retail pharmacies. However, to the extent physicians doare not direct prescriptions to the participating PPNPs, the adoption of XHANCE by physicians and patients may decline.
Our ability to increase utilization of our patient affordability programs will depend on physician and patient awareness and comfort with the programs, and we have limited ability to influence whether physicians use our patient affordability programswilling to prescribe XHANCEthrough PPN partners or whether patients will agreeare not willing to receive XHANCE through PPNPs.PPN partners, access to and utilization of XHANCE may decline. In addition, theour patient affordability programs are not available to federal health care programsprogram (such as Medicare and Medicaid) beneficiaries.
We have also contracted with certain Pharmacy Benefit Managers (PBMs)PBMs and other payors to secure formulary status and reimbursement for XHANCE, which generally require us to pay administrative fees and rebates to the PBMs and other payors for qualifying prescriptions. While we have business relationshipsagreements with three of the largest PBMs, as well as other PBMs we believe these agreements will secureand payors, in order to facilitate formulary status for XHANCE, but we cannot guarantee that we will be able to agree to terms with other PBMs and other payors, or that such terms will be commercially reasonable to us. Additionally, our contracts with PBMs and payors are of limited duration and PBMs and payors with whom we contract may seek to renegotiate more favorable terms prior to the expiration of such contracts or in connection with renewals. Despite our agreements with PBMs, the extent of formulary status and reimbursement will ultimately depend to a large extent upon individual healthcare plan formulary decisions. If healthcare plans that contract with PBMs with which we have agreements do not adopt formulary changes recommended by the PBMs with respect to XHANCE, we may not realize the expected access and reimbursement benefits from these agreements. Consequently, the success of our PBM contracting strategy will depend not only on our ability to expand formulary adoption among healthcare plans, but also upon the relative mix of healthcare plans that have PBM-chosen formularies versus custom formularies. If we are unable to realize the expected benefits of our contractual arrangements with the PBMs the adoption of XHANCE by physicians and patients may decline. If we are unable to increase adoption of PPNPsPPN partners for filling prescriptions of XHANCE by physicians or to secure formulary status and reimbursement through arrangements with PBMs and other payors, particularly with healthcare plans that use custom formularies, our ability to achieve net sales growth for XHANCE would be impaired.
The negative publicity regarding specialty pharmacies or patient support service providers may result in physicians being less willing to send prescriptions to PPN partners or participate in our patient affordability programs, which would limit our ability to increase patient access and adoptionutilization of XHANCE.
There has been negative publicity and inquiries from Congress and enforcement authorities regarding the use of specialty pharmacies and patient support services providers and drug pricing. PPNPsWe contract with whom we contractPPN partners (who may be considered specialty pharmacies. Ourpharmacies) and patient support services providers that provide certain services in connection with our patient affordability programs. These programs are in place to assist in ensuring that when a physician determines XHANCE offers a potential clinical benefit to their patients and they prescribe it for an eligible patient, financial assistance may be available to reduce the patient’s out-of-pocket costs. We do not own or possess any option to purchase an ownership stake in any pharmacy that distributes XHANCE or in any patient support services provider, and our relationship with each pharmacy and patient support services provider is non-exclusive and arm’s length. All of our sales are processed through pharmacies independent of us. Despite this, the negative publicity and interest from Congress and enforcement authorities regarding specialty pharmacies or patient support services providers may result in physicians being less willing to send prescriptions to PPN partners or participate in our patient affordability programs and thereby limit our ability to increase patient access and adoptionutilization of XHANCE.
We may be unable to form and maintain relationships with pharmacies that participate in our PPN and patient affordability programs, which could adversely affect the commercialization of XHANCE and our operating results.
We may also encounter difficulty in forming and maintaining relationships with pharmacies that participate in our PPN and patient affordability programs. We currently depend on a limited number of PPNPsPPN partners to fulfill patient prescriptions. If
these PPNPsPPN partners are unable to process and fulfill the volume of patient prescriptions directed to them, our ability to maintain or increase prescriptions for XHANCE will be impaired. The commercialization of XHANCE and our operating results could be affected should any of the PPNPsPPN partners choose not to continue to fulfill XHANCE prescriptions or by any adverse market events at any of the PPNPs.PPN partners. For example, pharmacies that dispense XHANCE could lose contracts that they currently maintain with managed care organizations (MCOs), including PBMs. Pharmacies often enter into agreements with MCOs. They may be required to abide by certain terms and conditions to maintain access to MCO networks, including terms and conditions that could limit their ability to participate in patient affordability programs like ours. Failure to comply with the terms of their agreements with MCOs could result in a variety of penalties, including termination of their agreement, which could negatively impact the ability of those pharmacies to dispense XHANCE and collect reimbursement from MCOs for such medicines.
Our patient affordability programs are subject to certain federal and state laws, the violation of which could have an adverse impact on our business and subject us to significant penalties.
Our patient affordability programs may implicate certain federal and state laws related to, among other things, unlawful schemes to defraud, fraud and abuse, excessive fees for services, tortious interference with patient contracts and statutory or common law fraud. We have a comprehensive compliance program in place to address adherence with various laws and regulations relating to the selling, marketing and manufacturing of XHANCE. Despite our compliance efforts, to the extent the patient affordability programs are found to be inconsistent with applicable laws or the pharmacies that participate in our patient affordability programs do not comply with applicable laws or our business rules, we may be required to restructure or discontinue such programs, terminate our relationship with certain pharmacies, or be subject to other significant penalties.
If the cost of maintaining our patient affordability programs increases relative to our sales revenue, we could be forceforced to reduce or eliminate our financial assistance programs, which could have an adverse effect on our financial results.
If the cost of maintaining our patient affordability programs increases relative to our sales revenues, we could be forced to reduce the amount of patient financial assistance that we offer or otherwise scale back or eliminate such programs, which could in turn have a negative impact on physicians’ willingness to prescribe and patients’ willingness to fill prescriptions of XHANCE. While we believe that our arrangements with PBMs will result in broader inclusion of certain of our therapiesXHANCE on healthcare plan formularies, and lower our cost of providing patient affordability programs, these arrangements generally require us to pay administrative and rebate payments to the PBMs and/or other payors and their effectiveness will ultimately depend to a large extent upon individual healthcare plan formulary decisions that are beyond the control of the PBMs. If our arrangements with PBMs and other payors do not result in increased prescriptions and reductions in our costs to provide our patient affordability programs that are sufficient to
offset the administrative fees and rebate payments to the PBMs and/or other payors, our financial results may continue to be harmed.
XHANCE may become associated with undesirable adverse reactions or have other properties that could result in significant negative consequences following regulatory approval.
If we or others identify adverse events (AEs)AEs associated with XHANCE, a number of potentially significant negative consequences could result, including:
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▪ | we may be forced to suspend marketing of XHANCE; |
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▪ | the FDA may withdraw its approval of XHANCE or impose restrictions on its distribution; |
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▪ | the FDA may require additional warnings or contradictions in the label that could diminish the usage or otherwise limit the commercial success of XHANCE; |
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▪ | we may be required to conduct additional post-marketing studies; |
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▪ | we could be sued and held liable for harm caused to patients; and |
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▪ | our reputation may suffer. |
▪we may be forced to suspend marketing of XHANCE;
▪the FDA may withdraw its approval of XHANCE or impose restrictions on its distribution;
▪the FDA may require additional warnings or contradictions in the label that could diminish the usage or otherwise limit the commercial success of XHANCE;
▪we may be required to conduct additional post-marketing studies;
▪we could be sued and held liable for harm caused to patients; and
▪our reputation may suffer.
Any of these events could prevent us from achieving or maintaining market acceptance of XHANCE.
If the FDA or other applicable regulatory authorities approve generic or similar products that compete with XHANCE, or if the FDA or other applicable regulatory authorities change or create new pathways that may expedite approval of such products, it could decrease our expected sales of XHANCE.
Once an NDA, including a Section 505(b)(2) application, is approved, the product covered thereby becomes a "listed drug" which can, in turn, be cited by potential competitors in support of approval of an abbreviated NDA (ANDA).ANDA or 505(b)(2) NDA. The FD&C Act, FDA regulations and other applicable regulations and policies provide incentives to manufacturers to create modified, non-infringing versions of a drug to facilitate the approval of an ANDA for generic substitutes. Manufacturers may be able to bring a generic product to market in a much more cost-efficient pathway than we currently anticipate. If the costs involved in bringing such a product to market are significantly less than our costs with respect to the development of XHANCE, companies that produce generic equivalents to XHANCE may be able to offer their products at lower prices. Further, if the timeline for bringing such a product to market is expedited, companies that produce generic equivalents to XHANCE may compete with XHANCE faster than we currently anticipate. For example, the FDA has communicated a priority to build on initiatives to accelerate generic entry of complex generics, which include locally acting nasal drug products.products and the FDA recently updated the list of product specific guidances for complex generic drug products that the FDA plans to issue in 2021 to include XHANCE, which may provide clarity for competitors to develop generic products that competes with XHANCE. If the FDA provides foraccepts alternatives to comparative clinical endpoint bioequivalence studies for generic versions of locally-acting orally inhaled and nasal drug products, companies that produceXHANCE, we may face generic equivalents to XHANCE may compete with XHANCEcompetition faster than we currently anticipate and a significant percentage of any future sales of XHANCE could be lost to such generic products. In 2019, the FDA published a draft product-specific guidance for 0.05mg/spray fluticasone propionate nasal spray that states that a comparative clinical endpoint bioequivalence study is recommended for a fluticasone propionate nasal spray product because of an inability to adequately characterize drug particle size distribution (PSD) in aerosols and sprays using commonly used analytical methods. However, the draft guidance also provides that if a product's PSD can be accurately measured using a validated analytical method such as morphology-directed Raman spectroscopy or any other advanced methodology, the product's sponsor could submit comparative PSD data as part of their drug characterization within their ANDA application as a potential alternative to a bioequivalence study. Moreover, in addition to generic competition, we could face competition from other companies seeking approval of products that are similar to ours using the Section 505(b)(2) pathway. Such applicants may be able to rely on XHANCE or other approved drug products or published literature to develop drug products that are similar to ours. Furthermore, we have received a request for units of XHANCE from a generic manufacturer and are in the process of providing such units in compliance with the CREATES Act. The introduction of a drug product similar to our products or product candidates could expose us to increased competition, leading to a decrease in sales of XHANCE. Competition that we may face from generic or similar versions of XHANCE could materially and adversely impact our future revenue, profitability, and cash flows.
Even though we have obtained regulatory approval for XHANCE, we will still face extensive FDA regulatory requirements and may face future regulatory difficulties.
Even though we have obtained regulatory approval in the U.S. for XHANCE, the FDA and state regulatory authorities may still impose significant restrictions on the indicated uses or marketing of XHANCE, or impose
ongoing requirements for potentially costly post-approval studies or post-marketing surveillance. For example, as part of its approval of XHANCE for the treatment of nasal polyps in adults, the FDA requiredis requiring that we conduct a randomized, double-blind, placebo controlled clinical studytrial in children and adolescents 12 to 17 years of age with nasal polyposis to assess the safety, efficacy, and pharmacokinetics of XHANCE in this population. The FDA originally indicated the study was to be conducted in children and adolescents 6 to 17 years of age. On October 30, 2017, the FDA notified us that in response to our request it had modified the required age range to 12 to 17 years of age. We submitted our final protocol to the FDA with respect to the pediatric study by January 2018 as required, and we have since contracted with various clinical trial sites and begun patient enrollment.enrollment in this trial. We are required to complete the studytrial by January 2022 and to submit a final report with respect to the studytrial by July 2022. Because2022, however, due to enrollment rates, we will need to submit a request to the Optinose EDS for XHANCE was designed for use in adult patients,FDA to extend these deadlines. If the FDA declines our request, we may discover that the dimensionsbe in violation of this EDS make it unsuitablerequirement relating to the FDA's approval of our NDA for use in pediatric patient populations. As such, this pediatric study may also require us to undergo a costly and time-consuming development process to design and manufacture as appropriate a modified EDS to conduct these studies.XHANCE.
We are also subject to ongoing FDA requirements governing the labeling, packaging, storage, distribution, safety surveillance, advertising, promotion, record-keeping and reporting of safety and other post-marketing information. The holder of an approved NDA is obligated to monitor and report AEs and any failure of a product to meet the specifications in the NDA. The holder of an approved NDA must also submit new or supplemental applications and obtain FDA approval for certain changes to the approved product, product labeling or manufacturing process. Advertising and promotional materials must comply with FDA regulations and may be subject to other potentially applicable federal and state laws. The applicable regulations in countries outside the U.S. grant similar powers to the competent authorities and impose similar obligations on companies.
In addition, manufacturers of drug products and their facilities are subject to payment of substantial user fees and continual review and periodic inspections by the FDA and other regulatory authorities for compliance with current Good Manufacturing Practice (cGMP)cGMP regulations and adherence to commitments made in the NDA. Since XHANCE is a combination product, we will also need to comply with some of the FDA's manufacturing regulations for devices. In addition to cGMP, the FDA requires that our drug-device combination product comply with the Quality System Regulation (QSR), which sets forth the FDA's manufacturing quality standards for medical devices, and other applicable government regulations and corresponding foreign standards. If we, or a regulatory authority,
discover previously unknown problems with XHANCE, such as AEs, of unanticipated severity or frequency, or problems with a facility where the product is manufactured, a regulatory authority may impose restrictions relative to XHANCE or the manufacturing facility, including requiring recall or withdrawal of the product from the market, suspension of manufacturing, or other FDA action or other action by foreign regulatory authorities.
If we fail to comply with applicable regulatory requirements following approval of XHANCE, a regulatory authority may:
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▪ | issue a warning letter asserting that we are in violation of the law; |
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▪ | seek an injunction or impose civil or criminal penalties or monetary fines; |
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▪ | suspend, modify or withdraw regulatory approval; |
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▪ | suspend any ongoing clinical trials; |
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▪ | refuse to approve a pending NDA or a pending application for marketing authorization or supplements to an NDA or to an application for marketing authorization submitted by us; |
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▪ | seize our product candidate; and/or |
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▪ | refuse to allow us to enter into supply contracts, including government contracts. |
▪issue a warning letter asserting that we or our manufacturing partners are in violation of the law;
▪seek an injunction or impose civil or criminal penalties or monetary fines;
▪suspend, modify or withdraw regulatory approval;
▪suspend any ongoing clinical trials;
▪refuse to approve a pending NDA or a pending application for marketing authorization or supplements to an NDA or to an application for marketing authorization submitted by us;
▪seize our product or product candidate; and/or
▪refuse to allow us to enter into supply contracts, including government contracts.
Our relationships with physicians, patients, payors and payorspharmacies in the U.S. are subject to applicable anti-kickback, fraud and abuse laws and regulations. Our failure to comply with these laws could expose us to criminal, civil and administrative sanctions, reputational harm, and could harm our results of operations and financial conditions.
Our current and future operations with respect to the commercialization and further development of XHANCE, including the commercialization of XHANCE by our co-promotion partner, as well as potential future development programs, are subject to various U.S. federal and state healthcare laws and regulations. These laws impact, among other things, our proposed sales, marketing, support and education programs and constrain our business and financial arrangements and relationships with third-party payors, healthcare professionals, pharmacies and others who may prescribe, recommend, purchase or provide XHANCE, and other parties through which we market, sell and distribute XHANCE. Finally, our current and future operations are subject to additional healthcare-related statutory and regulatory requirements and enforcement by foreign regulatory authorities in jurisdictions in which we conduct our business. The laws are described in greater detail in the previous section under "Business — Government Regulation — Healthcare Fraud and Abuse Laws," and include, but are not limited to:
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▪ | the federal Anti-Kickback Statute, prohibits persons or entities from, among other things, knowingly and willfully soliciting, offering, receiving or paying any remuneration, directly or indirectly, overtly or covertly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchase, lease, order, or arranging for or recommending the purchase, lease or order of, any good or service, for which payment may be made, in whole or in part, under federal healthcare programs such as Medicare and Medicaid. A person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation. |
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▪ | the federal civil False Claims Act (which can be enforced through "qui tam," or whistleblower actions, by private citizens on behalf of the federal government) prohibits any person from, among other things, knowingly presenting, or causing to be presented false or fraudulent claims for payment of government funds or knowingly making, using or causing to be made or used, a false record or statement material to an obligation to pay money to the government or knowingly and improperly avoiding, decreasing or concealing an obligation to pay money to the U.S. federal government. |
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▪ | the federal federal Health Insurance Portability and Accountability Act of 1996 (HIPAA) imposes criminal and civil liability for, among other things, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program, or 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 by a healthcare benefit program, which includes both government and privately funded benefits programs; similar to the U.S. federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation. |
▪the federal Anti-Kickback Statute, prohibits persons or entities from, among other things, knowingly and willfully soliciting, offering, receiving or paying any remuneration, directly or indirectly, overtly or covertly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchase, lease, order, or arranging for or recommending the purchase, lease or order of, any good or service, for which payment may be made, in whole or in part, under federal healthcare programs such as Medicare and Medicaid. A person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation.
▪the federal civil False Claims Act (which can be enforced through "qui tam," or whistleblower actions, by private citizens on behalf of the federal government) prohibits any person from, among other things, knowingly presenting, or causing to be presented false or fraudulent claims for payment of government funds or knowingly making, using or causing to be made or used, a false record or statement material to an obligation to pay money to the government or knowingly and improperly avoiding, decreasing or concealing an obligation to pay money to the U.S. federal government.
▪the federal Health Insurance Portability and Accountability Act of 1996 (HIPAA) imposes criminal and civil liability for, among other things, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program, or 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 by a healthcare benefit program, which includes both government and privately funded benefits programs; similar to the U.S. federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation.
•numerous federal and state laws and regulations that address privacy and data security, including state data breach notification laws, state health information privacy laws, and federal and state consumer protection laws (e.g., Section 5 of the Federal Trade Commission Act (FTC Act)), govern the collection, use, disclosure and protection of health-related and other personal information, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating relevant compliance efforts.
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▪ | a majority of states whom have adopted laws and regulations analogous to federal laws, including state anti-kickback and false claims laws, that may apply to our business practices, including but not limited to, research, distribution, sales and marketing arrangements and claims involving healthcare items or services reimbursed by any third-party payor, including private insurers. Other states have adopted laws that, among other things, require pharmaceutical companies to comply with the pharmaceutical industry's voluntary compliance guidelines and the relevant compliance guidance promulgated by the U.S. federal government, or otherwise restrict payments that may be made to healthcare providers and other potential referral sources; and state laws and regulations that require drug manufacturers to file reports relating to pricing and marketing information, which requires tracking gifts and other remuneration and items of value provided to healthcare professionals and entities. In addition, some states have laws requiring pharmaceutical sales representatives to be registered or licensed, and still others impose limits on co-pay assistance that pharmaceutical companies can offer to patients. |
▪a majority of states whom have adopted laws and regulations analogous to federal laws, including state anti-kickback and false claims laws, that may apply to our business practices, including but not limited to, research, distribution, sales and marketing arrangements and claims involving healthcare items or services reimbursed by any third-party payor, including private insurers. Other states have adopted laws that, among other things, require pharmaceutical companies to comply with the pharmaceutical industry's voluntary compliance guidelines and the relevant compliance guidance promulgated by the U.S. federal government, or otherwise restrict payments that may be made to healthcare providers and other potential referral sources; and state laws and regulations that require drug manufacturers to file reports relating to pricing and marketing information, which requires tracking gifts and other remuneration and items of value provided to healthcare professionals and entities. In addition, some states have laws requiring pharmaceutical sales representatives to be registered or licensed, and still others impose limits on co-pay assistance that pharmaceutical companies can offer to patients.
•the Physician Payments Sunshine Act, implemented as the Open Payments program, and its implementing regulations, requires 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 CMS information related to direct or indirect payments and other transfers of value to physicians and teaching hospitals, as well as ownership and investment interests held in the company by physicians and their immediate family members. Beginning in 2022, applicable manufacturers also will be required to report information regarding payments and transfers of value provided to physician assistants, nurse practitioners, clinical nurse specialists, certified nurse anesthetists and certified nurse-midwives.
The shifting commercial compliance environment and the need to build and maintain robust and expandable systems to comply with different compliance or reporting requirements in multiple jurisdictions increase the possibility that a healthcare or pharmaceutical company may fail to comply fully with one or more of these requirements. Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations may involve substantial costs. It is possible that governmental authorities will conclude that our business practices, including those of our co-promotion partner, do not comply with applicable fraud and abuse or other healthcare laws and regulations or guidance. If our operations or those of our co-promotion partner with respect to their promotion of XHANCE 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 from government funded healthcare programs, such as Medicare and Medicaid, additional oversight and reporting requirements if we become subject to a corporate integrity agreement or other settlement agreement to resolve allegations of non-compliance with these laws and the curtailment or restructuring of our operations. If any of the physicians or other providers or entities with whom we expect to do business is found not to be in compliance with applicable laws, they may be subject to the same criminal, civil or administrative sanctions, including exclusions from government funded healthcare programs. Even if we are not determined to have violated these laws, government investigations into these issues typically require the expenditure of significant resources and generate negative publicity, which could harm our financial condition and divert resources and the attention of our management from operating our business.
The occurrence of any event or penalty described above may inhibit our ability to commercialize and further develop XHANCE and generate revenues which would have a material adverse effect on our business, financial condition and results of operations.
If we are able to successfully commercialize XHANCE and if fail to comply with our reporting and payment obligations under the Medicaid Drug Rebate Program, or other governmental pricing programs, we could be subject to additional reimbursement requirements, penalties, sanctions and fines which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
We participate in the Medicaid Drug Rebate Program, and other governmental pricing programs, and therefore we are obligated to pay certain specified rebates and report pricing information with respect to XHANCE. Pricing and rebate calculations vary across product and programs, are complex and are often subject to interpretation by us, governmental orand regulatory agencies and the courts. We cannot assure you that our submissions will not be found by the Centers for Medicare & Medicaid Services (CMS)CMS to be incomplete or incorrect. Governmental agencies may also make changes in
program interpretations, requirements or conditions of participation, some of which may have implications for amounts previously estimated or paid. The Medicaid rebate amount is computed each quarter based on our submission to CMS of our current average manufacturer price (AMP) and best priceBest Price for the quarter. If we become aware that our reporting for a prior quarter was incorrect, or has changed as a result of recalculation of the pricing data, we are obligated to resubmit the corrected data for a period not to exceed twelve quarters from the quarter in which the data originally were due, and CMS may request or require restatements for earlier periods as well. Such restatements and recalculations increase our costs for complying with the laws and regulations governing the Medicaid Drug Rebate Program. Any corrections to our rebate calculations could result in an overage or underage in our rebate liability for past quarters, depending on the nature of the correction. Price recalculations also may affect the ceiling price at which we are required to offer our products to certain covered entities, such as safety-net providers, under the Public Health Service's 340B drug pricing program (the 340B program)Program and under other similar government pricing programs. These programs are described in greater detail in the previous section under "Business — Government Regulation — Coverage and Reimbursement."
Our failure to comply with our reporting and payment obligations under the Medicaid Drug Rebate Program and other governmental programs could negatively impact our financial results. The issuance of federal regulations and coverage expansion by various governmental agencies relating to the Medicaid Drug Rebate Program has increased and will continue to increase our costs and the complexity of compliance, has been and will continue to be time-consuming to implement, and could have a material adverse effect on our results of operations, particularly if CMS challenges the approach we take in our implementation of federal regulation.
We will also beare liable for errors associated with our submission of pricing data. In addition to retroactive rebates and the potential for 340B programProgram refunds, if we are found to have knowingly submitted false AMP or best priceBest Price information to the government, we may be liable for significant civil monetary penalties. Such failure also could be grounds for CMS to terminate our Medicaid drug rebate agreement, pursuant to which we participate in the Medicaid program.Drug Rebate Program. In the event that CMS terminates our rebate agreement, federal payments may not be available under Medicaid or Medicare Part B for XHANCE.
The Health Resource and Services Administration (HRSA)HRSA issued a final regulation regarding the calculation of the 340B ceiling price and the imposition of civil monetary penalties on manufacturers that knowingly and intentionally overcharge covered entities, which became effective on January 1, 2019. It is currently unclear how HRSA will apply its enforcement authority under the new regulation. HRSA also is implementinghas implemented a ceiling price reporting requirement related to the 340B program during the first quarter of 2019Program under which we will beare required to report 340B ceiling prices to HRSA on a quarterly basis.basis, and HRSA then publishes that information to covered entities. Moreover, under a final regulation effective January 13, 2021, HRSA newly established an administrative dispute resolution, or ADR, process for claims by covered entities that a manufacturer has engaged in overcharging, and by manufacturers that a covered entity violated the prohibitions against diversion
or duplicate discounts. Such claims are to be resolved through an ADR panel of government officials rendering a decision that could be appealed only in federal court. An ADR proceeding could subject us to onerous procedural requirements and could result in additional liability. In addition, legislation may be introduced that, if passed, would further expand the 340B programProgram to additional covered entities or would require participating manufacturers to agree to provide 340B discounted pricing on drugs used in an inpatient setting.
Federal law also requires that a company that participates in the Medicaid Drug Rebate Program report ASP information each quarter to CMS for certain categories of drugs that are paid under the Medicare Part B program. Manufacturers calculate the average sales price based on a statutorily defined formula as well as regulations and interpretations of the statute by CMS. CMS uses these submissions to determine payment rates for drugs under Medicare Part B.
Federal law requires that a company must participate in the U.S. Department of Veterans Affairs (VA) Federal Supply Schedule (FSS) pricing program to be eligible to have its products paid for with federal funds. As part of this program, we are obligated to make XHANCE available for procurement on an FSS contract under which we must comply with standard government terms and conditions and charge a price that is no higher than the statutory Federal Ceiling Price (FCP) to four federal agencies (VA, U.S. Department of Defense (DOD) Public Health Service, and U.S. Coast Guard). The FCP is based on the Non-Federal Average Manufacturer Price (Non-FAMP), which we calculate and report to the VA on a quarterly and annual basis. If we overcharge the government in connection with our FSS contract or Section 703 Agreement, whether due to a misstated FCP or otherwise, we are required to refund the difference to the government. Failure to make necessary disclosures and/or to identify contract overcharges can result in allegations against us under the U.S. civil False Claims Act and other laws and regulations. Unexpected refunds to the government, and responding to a government investigation or enforcement action, would be expensive and time-consuming, and could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
Regulatory approval for any approved product is limited by the FDA to those specific indications and conditions for which clinical safety and efficacy have been demonstrated.
Our promotional materials, statements and training methods must comply with applicable laws and regulations, including FDA's prohibition of the promotion of unapproved, or off-label, use. Physicians may use our products off-label, as the FDA does not restrict or regulate a physician's independent choice of treatment within the practice of medicine. As healthcare professionals frequently prescribe corticosteroids for the treatment of chronic nasal inflammatory diseases, such as chronic rhinosinusitis, doctors often prescribe XHANCE for the treatment of chronic rhinosinusitis and other chronic nasal inflammatory diseases, even though the FDA has granted approval of XHANCE only for the treatment of nasal polyps and we promote the use of XHANCE only for the treatment of nasal polyps. If the FDA determines that our promotional materials, statements or activities constitute promotion of an off-
labeloff-label use, we could be required to modify our promotional materials, statements or training methods or subject us to regulatory or enforcement actions, such as the issuance of an untitled letter, a warning letter, injunction, seizure, civil fine, disgorgement of money, operating restrictions or criminal penalties. We may also be subject to actions by other governmental entities or private parties, such as the U.S. civil False Claims Act, civil whistleblower or "qui tam" actions. It is also possible that other federal, state or foreign enforcement authorities might take action if they consider our promotional materials or activities to constitute promotion of an off-label use, which could result in significant fines or penalties under other statutory authorities. In that event, our reputation could be damaged and market adoption of XHANCE could be impaired.
Even though we have obtained FDA approval for XHANCE in the U.S., we may never obtain approval for or successfully commercialize itXHANCE outside of the U.S., which would limit our ability to realize its full market potential.
In order to market XHANCE outside of the U.S., we must obtain marketing authorizations and comply with numerous and varying regulatory requirements of other countries regarding quality, safety and efficacy. Clinical trials conducted in one country may not be accepted by foreign regulatory authorities, and regulatory approval in one country does not mean that regulatory approval will be obtained in any other country. Approval processes vary among countries and can involve additional product testing and validation and additional administrative review periods. Seeking foreign regulatory approval could result in difficulties and costs for us and require additional non-clinical studies or clinical trials, which could be costly and time consuming. Regulatory requirements can vary widely from country to country and could delay or prevent the introduction of XHANCE in those countries. While our management team has experience in obtaining foreign regulatory approvals at other companies, we do not have any product candidates approved for sale in any foreign jurisdiction, and we, as a company, do not have experience in obtaining regulatory approval in international markets. If we fail to comply with regulatory requirements in international markets or to obtain and maintain required approvals, or if regulatory approval in international markets is delayed, our target market for XHANCE will be reduced and we would not be able to realize the full market potential of XHANCE. Furthermore, in addition to the costs to commercialize XHANCE in international markets, the pricing of XHANCE outside of the U.S. at levels acceptable to patients, prescribing physicians or a foreign
government payor may be a challenge. If we are unable to achieve, or do not believe we will be able to achieve, acceptable pricing, we may not be able to profitably commercialize XHANCE in international markets.
The Affordable Care Act and any changes in healthcare law may increase the difficulty and cost for us to commercialize XHANCE and affect the prices we may obtain.
The U.S. and many foreign jurisdictions have enacted or proposed legislative and regulatory changes affecting the healthcare system that could restrict or regulate post-approval activities and affect our ability to profitably sell XHANCE. The U.S. government, state legislatures and foreign governments also have shown significant interest in implementing cost-containment programs to limit the growth of government-paid healthcare costs, including price controls, restrictions on reimbursement and requirements for substitution of generic products for branded prescription drugs.
The Patient Protection and Affordable Care Act as amended by the Health Care and Education Affordability Reconciliation Act (collectively the Affordable Care Act) was intended to broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add transparency requirements for the healthcare and health insurance industries, impose new taxes and fees on the health industry and impose additional health policy reforms. These intended reforms are described in greater detail in the previous section under "Business — Government Regulation — U.S. Healthcare Reform."
Among the provisions of the Affordable Care Act that have been implemented since enactment and are of importance to the commercialization of XHANCE are the following:
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▪ | an annual, nondeductible fee on any entity that manufactures or imports specified branded prescription drugs or biologic agents; |
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▪ | an increase in the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate Program; |
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▪ | ▪an annual, nondeductible fee on any entity that manufactures or imports specified branded prescription drugs or biologic agents; ▪an increase in the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate Program; ▪expansion of healthcare fraud and abuse laws, including the U.S. civil False Claims Act and the Anti-Kickback Statute, new government investigative powers, and enhanced penalties for noncompliance; |
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▪ | a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50% point-of-sale discounts off negotiated prices of applicable brand drugs to eligible beneficiaries during their coverage gap period, as a condition for a manufacturer's outpatient drugs to be covered under Medicare Part D; |
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▪ | extension of manufacturers' Medicaid rebate liability to covered drugs dispensed to individuals who are enrolled in Medicaid managed care organizations; |
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▪ | price reporting requirements for drugs that are inhaled, infused, instilled, implanted, or injected; |
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▪ | expansion of eligibility criteria for Medicaid programs; |
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▪ | expansion of the entity types eligible for discounts under the Public Health Service's 340B drug pricing program; |
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▪ | a requirement to annually report certain information regarding drug samples that manufacturers and distributors provide to physicians; and |
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▪ | a Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such research. |
Some of healthcare fraud and abuse laws, including the U.S. civil False Claims Act and the Anti-Kickback Statute, new government investigative powers, and enhanced penalties for noncompliance;
▪a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 70% (as of January 1, 2019) point-of-sale discounts off negotiated prices of applicable brand drugs to eligible beneficiaries during their coverage gap period, as a condition for a manufacturer's outpatient drugs to be covered under Medicare Part D;
▪extension of manufacturers' Medicaid rebate liability to covered drugs dispensed to individuals who are enrolled in Medicaid managed care organizations;
▪price reporting requirements for drugs that are inhaled, infused, instilled, implanted, or injected;
▪expansion of eligibility criteria for Medicaid programs;
▪expansion of the entity types eligible for discounts under the Public Health Service Act's 340B drug pricing program;
▪a requirement to annually report certain information regarding drug samples that manufacturers and distributors provide to physicians; and
▪a Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such research.
Certain provisions of the Affordable Care Act have yet to be fully implemented, and certain provisions have been subject to judicial and Congressional challenges. In addition, there have beenchallenges, as well as efforts by the Trump Administration to repeal or replace certain aspects of the Affordable Care Actthem or alter their interpretation and to alter the implementation of the Affordable Care Act and related laws.implementation. For example, on December 22, 2017, the U.S. government signed into law comprehensive tax legislation, referred to as the Tax Cuts and Jobs Act, (the Tax Act), which includes a provision repealing, effective January 1, 2019, the tax-based shared responsibility payment imposed by the Affordable Care Act 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 November 10, 2020, the Supreme Court heard oral argument over the constitutionality of the individual mandate. A ruling is expected by mid-2021 and could produce any of a number of results, including invalidation of the Affordable Care Act in its entirety if there is a finding of inseverability. It is unclear how the ultimate decision in this case, or other efforts to repeal, replace or otherwise modify, or invalidate the Affordable Care Act or its implementing regulations, or portions thereof, will affect the Affordable Care Act or our business.
Further, the Bipartisan Budget Act of 2018, among other things, amended the Medicare statute to reduce the coverage gap in most Medicare drugs plans, commonly known as the “donut hole,” by raising the required manufacturer point-of-sale discount from 50% to 70% off the negotiated price effective as of January 1, 2019. Additional legislative changes, regulatory changes, and judicial challenges related to the Affordable Care Act remain possible. It is unclear how the Affordable Care Act and its implementation, as well as efforts to repeal or replace, or invalidate, the Affordable Care Act, or portions thereof, will affect our business, financial condition and results of operations. We expect that the Affordable Care Act, as currently enacted or as it may be amended in the future, and other healthcare reform measures that may be adopted in the future, could have a material adverse effect on our industry generally and on our ability to maintain or increase sales of XHANCE or to successfully commercialize it.
We also expect that the Affordable Care Act, as well as other healthcare reform measures that have and may be adopted in the future, may result in more rigorous coverage criteria and in additional downward pressure on the price that we receive for XHANCE and could seriously harm our future revenues. Any reduction in reimbursement from Medicare, Medicaid, or other government programs may result in a similar reduction in payments from private payors. The implementation of cost containment measures or other healthcare reforms may prevent us from being able to generate revenues, attain profitability or successfully commercialize XHANCE.
Product liability lawsuits against us could cause us to incur substantial liabilities and to limit commercialization of XHANCE and any other product candidates that we may develop.
We currently face an inherent risk of product liability exposure related to the testing of our product candidates in human clinical trials and from our commercialization of XHANCE, and this risk will increase significantly as we further commercialize XHANCE and other product candidates that we may develop. We may face product liability claims, regardless of FDA approval for commercial manufacturing and sale as product liability claims may be brought against us by patients who have used XHANCE in any of our clinical trials, future patients, healthcare providers or others using, administering or selling XHANCE and any of our products,product candidates, if and when approved. On occasion, large judgments have been awarded in class action lawsuits based on drugs that had unanticipated adverse effects. If we cannot successfully defend ourselves against claims that our product candidates or products caused injuries, we could incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:
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▪ | decreased demand for XHANCE; |
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▪ | injury to our reputation and significant negative media attention; |
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▪ | termination of clinical trial sites or entire trial programs that we conduct in the future relating to XHANCE or our other product candidates; |
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▪ | withdrawal of clinical trial participants from any future clinical trial relating to XHANCE or our other product candidates; |
▪decreased demand for XHANCE;
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▪ | significant costs to defend the related litigation; |
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▪ | substantial monetary awards to patients; |
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▪ | diversion of management and scientific resources from our business operations; and |
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▪ | an increase in product liability insurance premiums or an inability to maintain product liability insurance coverage. |
▪injury to our reputation and significant negative media attention;
▪termination of clinical trial sites or entire trial programs that we conduct now or in the future relating to XHANCE or our other product candidates;
▪withdrawal of clinical trial participants from any current or future clinical trial relating to XHANCE or our other product candidates;
▪significant costs to defend the related litigation;
▪substantial monetary awards to patients;
▪loss of revenue;
▪diversion of management and scientific resources from our business operations; and
▪an increase in product liability insurance premiums or an inability to maintain product liability insurance coverage.
We currently carry product liability insurance with coverage up to $10.0 million in the aggregate, with a per incident limit of $10.0 million, which may not be adequate to cover all liabilities that we may incur. Further, we may not be able to maintain insurance coverage at a reasonable cost or in an amount adequate to satisfy any liability that may arise. Our inability to maintain sufficient product liability insurance at an acceptable cost could adversely affect our XHANCE product revenues, result in additional liabilities, inhibit the development of XHANCE for additional indications or inhibit the development of our other product candidates. A successful product liability claim or series of claims brought against us could cause our stock price to decline and, if judgments exceed our insurance coverage, could adversely affect our financial condition, results of operations and business.
Additionally, any agreements we may enter into in the future with collaborators in connection with the development or commercialization of XHANCE, AVP-825, our exhalation device technology or any of our other product candidates may entitle us to indemnification against product liability losses, but such indemnification may not be available or
adequate should any claim arise. In addition, several of our agreements require us to indemnify third parties and these indemnifications obligations may exceed the coverage under our product liability insurance policy. For example, under the terms
We are subject to intense competition and, if we are unable to compete effectively, our product candidates, if approved, may not reach their commercial potential.
The development and commercialization of new drugs is highly competitive and subject to rapid and significant technological change as research provides a deeper understanding of the license agreementpathology of diseases and new technologies and treatments are developed. We face competition with respect to XHANCE from prescription and over-the-counter INS, monoclonal antibodies, oral steroids and other medical management products, and will face competition with respect to any other product candidates that we entered into with Inexiamay seek to develop or commercialize in the future, from many different sources, including large pharmaceutical, biotechnology, specialty pharmaceutical and, to a lesser degree, medical device companies.
The key competitive factors that we expect to enter intoimpact the commercial success of XHANCE and any other product candidates we may develop are likely to be their efficacy, safety and tolerability profile, reliability, convenience of administration, price and reimbursement. Nasonex™, marketed by Merck, is currently the only other branded INS drug therapy approved by the FDA for the treatment of nasal polyps, which is our current indication for XHANCE. A generic version of Nasonex™, mometasone furoate monohydrate, was approved by the FDA for, among other indications, the treatment of nasal polyps and launched in 2016. In addition, Beconase AQ™, which is an INS marketed by GlaxoSmithKline, is indicated for the prophylaxis of nasal polyps after surgical resection, SINUVA™ is a commercially available corticosteroid-eluting implant indicated for the treatment of nasal polyps in adult patients who have had ethmoid sinus surgery that can be placed in the ethmoid sinus under endoscopic visualization for up to 90 days, DUPIXENT™, which is a monoclonal antibody marketed by Sanofi and Regeneron, is indicated as an add-on maintenance treatment (to an intranasal steroid) in adult patients with inadequately controlled chronic rhinosinusitis with nasal polyposis, and XOLAIR™, which is a monoclonal antibody marketed by Genentech USA, Inc. and Novartis Pharmaceuticals Corporation, is indicated as an add-on maintenance treatment of nasal polyps in adult patients with inadequate response to nasal corticosteroids. We are not aware of any drug therapy approved by the FDA or foreign regulatory agencies for the treatment of chronic sinusitis.
Even though they have not been approved for the treatment of such indications, published clinical supply agreementpractice guidelines do recommend the use of INS products for the treatment of chronic rhinosinusitis with Inexia wherebyand without nasal polyps in an effort to maximize medical therapy prior to surgical intervention. Currently approved branded INS products include Rhinocort™, marketed by AstraZeneca, Nasacort AQ™, marketed by sanofi-aventis, Beconase AQ™, Flonase™ (which contains the same active pharmaceutical ingredient as XHANCE), and Veramyst™, each marketed by GlaxoSmithKline, Qnasl™, marketed by Teva Pharmaceuticals, and Omnaris™ and Zetonna™, each marketed by Sunovion Pharmaceuticals.
Due to the limitations of current treatments, several companies are investigating or have investigated the treatment of nasal polyps with monoclonal antibodies. To date, four monoclonal antibodies have been studied in nasal polyps: omalizumab, benralizumab, mepolizumab and dupilumab. In June 2019, FDA approved DUPIXENT™ (dupilumab) as an add-on maintenance treatment (to an intranasal steroid) in adult patients with inadequately controlled chronic rhinosinusitis with nasal polyposis. In November 2020, the FDA approved XOLAIR™ add-on maintenance treatment of nasal polyps in adult patients with inadequate response to nasal corticosteroids. In addition, there are new small molecules, including fevipiprant, being developed for the treatment of nasal polyps, that are also believed to inhibit specific pathways of inflammation present in nasal polyps. Most of these INS and monoclonal antibody companies, as well as other potential competitors, have substantially greater financial, technical and human resources than we will provide certain exhalation devicesdo and significantly greater experience in the discovery and development of product candidates, obtaining FDA and other regulatory approvals of products and the commercialization of those products.
Mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources being concentrated among a small number of our competitors. Accordingly, our competitors may be more successful than we may be in obtaining FDA approval of drugs and achieving widespread market acceptance. Our competitors' drugs, or drugs they may develop in the future, may be more effective, or more effectively marketed and sold, than any drug we may commercialize and may render XHANCE or any of our other product candidates we may develop obsolete or non-competitive before we can recover the expenses of developing and commercializing XHANCE or any of our other product candidates. Our competitors may also obtain FDA or other regulatory approval of products more rapidly than expected or may obtain better or preferred market access by offering large rebates to Inexia, whichpayors or by other means. We may expose usnot have accurately or completely predicted the development of new and improved or low-cost surgical interventions, alternative medical therapies or other market-disrupting events. If we are unable to indemnification obligations that may exceedmanufacture, distribute, stimulate demand reaching the coverage under our product liability insurance policypredicted market share, overcome barriers to
access or otherwise expose useffectively commercialize the product, all of which factors may be influenced by current or future competition, then our opportunity to third partygenerate revenue from the sale of XHANCE or any of our other product liability losses.candidates, if approved, will be compromised.
Risks Related to Clinical Development and Regulatory Approval of XHANCE for the Treatment of Chronic Sinusitis and Our Other Product Candidates
The design and execution of clinical trials to support FDA-approval of XHANCE for the treatment of chronic sinusitis is subject to substantial risk and uncertainty.
We have initiated a clinical program to support a follow-on indication of XHANCE for the treatment of chronic sinusitis. SimilarWe anticipate submitting a prior approval efficacy supplement to support the approval of the new indication under our NDA for XHANCE for the treatment of nasal polyps, we believe we may also be able to use the Sectioncurrently approved 505(b)(2) pathway for potential U.S. approval for XHANCE for the treatment of chronic sinusitis.NDA. Because there is no FDA-approved product for the treatment of chronic sinusitis, we believe there is substantial risk and uncertainty in planning and conducting adequate clinical trials to meet FDA requirements to support approval for this indication. If the clinical program required by the FDA is more costly or time-consuming than anticipated, we may decide to cease tothe pursuit of this follow-on indication. Additionally, clinical trials for this indication may not demonstrate sufficient efficacy or safety to support FDA approval for a follow-on indication for XHANCE. If we do not obtain a follow-on indication for the treatment of chronic sinusitis, our promotion of XHANCE will be limited to nasal polyps, which would limit our potential sales of XHANCE.
The clinical and regulatory approval processes of the FDA are lengthy, time consuming and inherently unpredictable, and if we are ultimately unable to obtain regulatory approval for our product candidates, our business may be substantially harmed.
The time required to obtain approval by the FDA is unpredictable but typically takes many years following the commencement of clinical trials and depends upon numerous factors, including the substantial discretion of the regulatory agency.FDA. In addition, approval policies, regulations, or the type and amount of clinical data necessary to gain approval may change during the course of a product candidate's clinical development.
Our product candidates could fail to receive regulatory approval for many reasons, including the following:
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▪ | the FDA may not accept our NDA filing; |
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▪ | the FDA may disagree with the design, scope or implementation of our clinical trials; |
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▪ | we may be unable to demonstrate to the satisfaction of the FDA that a product candidate is safe and effective for its proposed indication; |
▪the FDA may not accept our NDA filing or prior approval efficacy supplement;
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▪ | we may be unable to demonstrate that a product candidate's clinical and other benefits outweigh its safety risks; |
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▪ | the FDA may disagree with our interpretation of data from preclinical studies or clinical trials; |
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▪ | the data collected from clinical trials of our product candidates may not be sufficient to support the submission of an NDA; |
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▪ | the FDA may fail to approve the manufacturing processes or facilities of third-party manufacturers with which we contract for clinical and commercial supplies; and |
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▪ | the approval policies or regulations of the FDA may change in a manner rendering our clinical data insufficient for approval. |
▪the FDA may disagree with the design, scope or implementation of our clinical trials;
▪we may be unable to demonstrate to the satisfaction of the FDA that a product candidate is safe and effective for its proposed indication;
▪we may be unable to demonstrate that a product candidate's clinical and other benefits outweigh its safety risks;
▪the FDA may disagree with our interpretation of data from preclinical studies or clinical trials;
▪the data collected from clinical trials of our product candidates may not be sufficient to support the approval of an NDA;
▪the FDA may fail to approve the manufacturing processes or facilities of third-party manufacturers with which we contract for clinical and commercial supplies; and
▪the approval policies or regulations of the FDA may change in a manner rendering our clinical data insufficient for approval.
The failure to obtain regulatory approval for a particular product candidate, could substantially harm our business.
Clinical development is a lengthy and expensive process with an uncertain outcome, and results of earlier studies and trials may not be predictive of future trial results. Clinical failure can occur at any stage of clinical development.
Clinical trials are expensive, can take many years to complete and have highly uncertain outcomes. Failure can occur at any time during the clinical trial process as a result of inadequate performance of a drug, inadequate adherence by patients or investigators to clinical trial protocols, investigators failure to comply with applicable laws, or other factors. Drug candidates in later stages of clinical trials may fail to show the desired safety and efficacy traits despite having progressed through earlier clinical trials. A number of companies in the pharmaceutical industry have suffered significant setbacks in advanced clinical trials as a result of a lack of efficacy or adverse safety profiles, despite promising results in earlier trials. Our clinical trials for the follow-on indication of XHANCE for the treatment of chronic sinusitis or our other product candidates may not be successful or may be more expensive or time-consuming than we currently expect. If clinical trials for this or any other product candidate fail to demonstrate safety or efficacy to the satisfaction of the FDA, the FDA may not approve the follow-on indication of XHANCE or any other product candidate and we would not be able to commercialize it, which could substantially harm our business.
Delays in clinical trials are common and have many causes, and any delay could result in increased costs to us and jeopardize or delay our ability to obtain regulatory approval and commence product sales.sales, or our ability to maintain regulatory approval.
We have experienced and may experience further delays in clinical trials of our product candidates or for our FDA-mandated post-marketing pediatric study for XHANCE, or the time required to complete clinical trials for our product candidates of FDA-mandated post-marketing pediatric study for XHANCE may be longer than anticipated. Our ongoing and future clinical trials may not begin on time, have an effective design, enroll a sufficient number of patients, timely enroll patients, or be completed on schedule, if at all. Our clinical trials can be delayed or terminated for a variety of reasons, including, but not limited to:
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▪ | inability to raise funding necessary to initiate or continue a clinical trial; |
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▪ | delays in obtaining regulatory approval to commence a clinical trial; |
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▪ | delays in reaching agreement with the FDA or foreign regulatory authorities on final trial design or the scope of the development program; |
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▪ | imposition of a clinical hold following an inspection of our clinical trial operations or trial sites by the FDA or foreign regulatory authorities; |
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▪ | delays in reaching agreement on acceptable terms with prospective contract research organizations, or CROs, and clinical trial sites; |
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▪ | delays in obtaining required institutional review board (IRB) approval; |
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▪ | delays in recruiting suitable patients to participate in a clinical trial; |
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▪ | delays as a result of interim analyses, if any, of clinical trials that indicate futility of the trial or necessitate an increase in the number of patients enrolled in trial; |
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▪ | patients' delays or failure to complete participation in a clinical trial or return for post-treatment follow-up; |
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▪ | clinical sites dropping out of a clinical trial; |
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▪ | time required to add new clinical sites; or |
▪inability to raise funding necessary to initiate or continue a clinical trial;
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▪ | delays by our contract manufacturing organizations (CMOs) to produce and deliver a sufficient supply of clinical trial materials. |
▪delays in obtaining regulatory approval to commence a clinical trial;
▪delays in reaching agreement with the FDA or foreign regulatory authorities on final trial design or the scope of the development program;
▪imposition of a clinical hold following an inspection of our clinical trial operations or trial sites by the FDA or foreign regulatory authorities;
▪delays in reaching agreement on acceptable terms with prospective contract research organizations (CROs), and clinical trial sites;
▪delays in obtaining required IRB approval;
▪inability to attract clinical investigators for trials;
▪delays in recruiting suitable patients to participate in a clinical trial;
▪delays as a result of interim analyses, if any, of clinical trials that indicate futility of the trial or necessitate an increase in the number of patients enrolled in trial;
▪patients' delays or failure to complete participation in a clinical trial or return for post-treatment follow-up;
▪adverse side effects;
▪clinical sites dropping out of a clinical trial;
▪time required to add new clinical sites;
▪any shelter-in-place orders from local, state or federal governments or clinical trial site policies resulting from the COVID-19 pandemic that determine essential and non-essential functions and staff, which may impact the ability of site staff to conduct assessments, or result in delays to the conduct of the assessments, as part of our clinical trial protocols, or the ability to enter assessment results into clinical trial databases in a timely manner;
▪delays by our CMOs to produce and deliver a sufficient supply of clinical trial materials; or
▪governmental or regulatory delays, or changes in approval policies or regulations.
For example, previous guidance related to the expected timing of results from our ongoing chronic sinusitis trials indicated that top-line results from both trials would be available in the second half of 2021. Pauses in patient enrollment due to factors related to the COVID-19 pandemic have had, and may continue to have, varying effects in different geographies and over time have led to a change in our projected timeline for initial data availability and may lead to additional changes in the future. We now expect top-line results from at least one of our ongoing chronic sinusitis trials by the end of 2021 and from the other trial in the first half of 2022. For those subjects currently participating in these studies, procedures to facilitate ongoing treatment and capture of data during periods of in-person care restrictions have been put in place.
If clinical trials for our product candidates or for our FDA-mandated post-marketing pediatric study for XHANCE are delayed for any of the above reasons or other reasons, our development costs may increase, our approval process could be delayed or negatively impacted and our ability to commercialize our product or product candidates could be materially harmed.
We will need to identify proprietary names for our product candidates that are acceptable to FDA, and any delay associated with doing so may adversely impact our business.
Any proprietary name we propose to use with our product candidates in the U.S. must be reviewed and accepted by the FDA, regardless of whether we have registered it, or applied to register it, as a trademark. The FDA reviews any proposed product name, including an evaluation of potential for confusion with other product names. The FDA may also object to a product name if it believes the name inappropriately implies medical claims or contributes to an overstatement of efficacy. If the FDA objects to any proposed proprietary product name, we may be required to expend significant additional resources in an effort to identify a suitable proprietary product name that would qualify under applicable laws, not infringe the existing rights of third parties and be acceptable to the FDA.
Our product candidates, if approved, may require REMS, which may significantly increase our costs.
Our product candidates, if approved, may require REMS. The REMS may include requirements for special labeling or medication guides for patients, special communication plans to healthcare professionals and restrictions on distribution and use. We cannot predict the specific scope or magnitude of REMS that may be required as part of the FDA's approval of our other product candidates. Depending on the extent of the REMS requirements, our costs to commercialize our product candidates may increase significantly and distribution restrictions could limit sales. Similar requirements may arise in countries outside of the U.S.
Changes in regulatory requirements and guidance may occur and we may need to amend clinical trial protocols submitted to applicable regulatory authorities to reflect these changes. Amendments may require us to resubmit clinical trial protocols to IRBs or ethics committees for re-examination, which may impact the costs, timing or successful completion of a clinical trial.
The FDA's and other regulatory authorities' policies may change, and additional government regulations may be enacted that could prevent, limit or delay regulatory approval of our other product candidates. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the U.S. or abroad. If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may lose any marketing approval that we may have obtained.
If we are required to conduct additional clinical trials or other studies with respect to our product candidates beyond those that we currently contemplate, or if we are unable to successfully complete our clinical trials or other studies, we may be delayed in obtaining regulatory approval of any of our product candidates, we may not be able to obtain regulatory approval at all or we may obtain approval of indications that are not as broad as intended. Our product development costs will also increase if we experience delays in testing or approvals, and we may not have sufficient funding to complete the testing and approval process for our product candidates. Significant clinical trial delays could allow our competitors to bring products to market before we do and impair our ability to commercialize our products if and when approved. If any of this occurs, our business would be harmed.
Risks Related to Our Reliance on Third Parties
If we encounter difficulties in maintaining commercial manufacturing and supply agreements with our third-party manufacturers and suppliers of XHANCE, our ability to commercialize XHANCE would be impaired.
We do not own any manufacturing facilities. We currently have no plans to build our own clinical or commercial scale manufacturing facility. We lack the resources to manufacture and test, on a commercial scale, the technical performance of XHANCE and our other product candidates. We currently rely, and expect to continue to rely, on a limited number of experienced personnel and CMOs and suppliers who assist in the production, assembly, test, supply, storage and distribution of XHANCE and its components in ourfor commercial and clinical trials and FDA registration,supplies, and we control only some of the aspects of their activities. We may not be able to maintain terms that are favorable to us. We may not be able to enter into commercial manufacturing and supply agreements with any necessary third parties, should such additional agreements become necessary. If we are unable to enter into such agreements or
maintain existing agreements, each on commercially reasonable terms, our ability to commercialize XHANCE would be impaired, and our business, financial condition and results of operations would be materially adversely affected.
If we encounter issues with our contract manufacturers or suppliers, we may need to qualify alternative manufacturers or suppliers, which could impair our ability to sufficiently and timely manufacture and supply XHANCE.
We currently depend on contract manufacturers and suppliers for XHANCE and its components. Although we could obtain each of these components from other third-party suppliers, we would need to qualify and obtain FDA approval for another contract manufacturer or supplier as an alternative source for each such component, which could be costly and cause significant delays. Each ofFor example, we estimate that it would take at least one year to identify and qualify an alternate contract manufacturer for XHANCE. Additionally, our current commercial manufacturing and supply agreements generally include limitations on our ability to utilize alternative manufacturers or suppliers for these components above certain specified thresholds during the terms of the agreements, or may include purchase minimums, which impairs our ability to fully implement any future manufacturing strategies to prevent supply shortages or quality issues.
In addition, some of our suppliers, including our active pharmaceutical ingredient (API) supplier and our contract manufacturers, conduct their manufacturing operations for us at a single facility. Unless and until we qualify additional facilities, we may face limitations in our ability to respond to manufacturing and supply issues. For example, if regulatory, manufacturing or other problems require one of these manufacturers or suppliers to discontinue production at their respective facility, or if the equipment used for the production of XHANCE in these facilities is significantly damaged or destroyed by fire, flood, earthquake, power loss or similar events, the ability of such manufacturer or supplier to provide components or API needed for XHANCE, or to manufacture XHANCE may be significantly impaired. In the event that these parties suffer a temporary or protracted loss of its facility or equipment, we would still be required to obtain FDA approval to qualify a new manufacturer or supplier, as applicable, as an alternate manufacturer or source for the respective component before any components manufactured by such manufacturer or by such supplier could be sold or used.
Any production shortfall that impairs the supply of XHANCE or any of theseits components could have a material adverse effect on our business, financial condition and results of operations and adversely affect our ability to satisfy demand for XHANCE, which could adversely affect our product sales and operating results materially.
COVID-19 may also have an adverse impact on our contract manufacturers or suppliers as a result of employees or other key personnel becoming infected, preventive and precautionary measures that governments or such third parties are taking, such as social distancing, quarantines, and other restrictions, and shortages of supplies necessary for the manufacture of XHANCE. Any of these circumstances could adversely impact the ability of third parties on which we rely to manufacture and distribute adequate volumes of XHANCE.
If third-party manufacturers, wholesalers, distributors and distributorsPPN partners fail to devote sufficient time and resources to XHANCE or their performance is substandard, our product supply may be negatively impacted.
Our reliance on a limited number of manufacturers, wholesalers, distributors and distributorsPPN partners exposes us to the following risks, any of which could limit commercial supply of our products, result in higher costs, or deprive us of potential product revenues:
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▪ | our CMOs, or other third parties we rely on, may encounter difficulties in achieving the volume of production needed to satisfy commercial demand, may experience technical issues that impact quality or compliance with applicable and strictly enforced regulations governing the manufacture of pharmaceutical products, and may experience shortages of qualified personnel to adequately staff production operations; |
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▪ | our wholesalers and distributors could become unable to sell and deliver XHANCE for regulatory, compliance and other reasons; |
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▪ | our CMOs, wholesalers and distributors could default on their agreements with us to meet our requirements for commercial supply of XHANCE; |
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▪ | our CMOs, wholesalers and distributors may not perform as agreed or may not remain in business for the time required to successfully produce, store, sell and distribute our products and we may incur additional cost; and |
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▪ | if our CMOs, wholesalers and distributors were to terminate our arrangements or fail to meet their contractual obligations, we may be forced to delay or cease sales and ongoing development of XHANCE, or find alternatives that may be more expensive than originally anticipated. |
▪our CMOs, or other third parties we rely on, may encounter difficulties in achieving the volume of production needed to satisfy commercial demand, may experience technical issues that impact quality or compliance with applicable and strictly enforced regulations governing the manufacture of pharmaceutical products, and may experience shortages of qualified personnel to adequately staff production operations;
▪our wholesalers, distributors and PPN partners could become unable to sell and deliver XHANCE for regulatory, compliance and other reasons;
▪our CMOs, wholesalers, distributors and PPN partners could default on their agreements with us to meet our requirements for commercial supply of XHANCE;
▪our CMOs, wholesalers, distributors and PPN partners may not perform as agreed or may not remain in business for the time required to successfully produce, store, sell and distribute our products and we may incur additional cost; and
▪if our CMOs, wholesalers, distributors and PPN partners were to terminate our arrangements or fail to meet their contractual obligations, we may be forced to delay or cease sales and ongoing development of XHANCE, or find alternatives that may be more expensive than originally anticipated.
Our reliance on third parties reduces our control over our product candidate development and commercialization activities but does not relieve us of our responsibility to ensure compliance with all required legal, regulatory and scientific standards. For example, the FDA and other regulatory authorities require that our product candidates and any products that we may eventually commercialize be manufactured according to cGMP and similar foreign standards. Any failure by our third-party manufacturers to comply with cGMP or failure to scale up manufacturing processes, including any failure to deliver sufficient quantities of product candidates in a timely manner, could lead
to a delay in, or failure to obtain, regulatory approval of any of our product candidates or supply our commercial volume of XHANCE. In addition, such failure could be the basis for the FDA to issue a warning or untitled letter, withdraw approvals for product candidates previously granted to us, or take other regulatory or legal action, including recall or seizure, total or partial suspension of production, suspension of ongoing clinical trials, refusal to approve pending applications or supplemental applications, detention or product, refusal to permit the import or export of products, injunction, imposing civil penalties or pursuing criminal prosecution.
Manufacturing issues may arise that could increase product and regulatory approval costs or delay commercialization.
As we further scale upIssues may arise involving product manufacturing of XHANCE and conduct required stabilityor any of our products that may be under development, including but not limited to delays in receiving finished product or product components, analytical testing issues, may arise involving product-packaging problems and third-party equipment malfunctions. These issues may require refinement or resolution in order to continue with commercial marketingand not delay the commercialization of XHANCE.XHANCE or development of any of our products under development. In addition, quality issues may arise during scale-up and of commercial manufacturing processes.processes or the scale-up of any of our products that may be under development. Any issues in our product or delivery devices could result in increased scrutiny by regulatory authorities, delays in our regulatory approval process, increases in our operating expenses, shortages in our products available for sales or clinical trial use, decreases in sales to customers, or failure to obtain or maintain approval for our products.
We rely on third parties to conduct our clinical trials. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, or if they terminate their agreement with us, we may not be able to obtain regulatory approval for or commercialize our product candidates.
We have relied upon and plan to continue to rely upon CROs to monitor and manage data for our prospective preclinical and clinical programs. We rely on these parties for execution of our clinical trials, and we control only some of the aspects of their activities. Nevertheless, we are responsible for ensuring that each of our studies and clinical trials are conducted in accordance with the applicable protocol, legal, regulatory and scientific standards, and our reliance on the CROs does not relieve us of our regulatory responsibilities. We and our CROs are required to comply with federal regulations and current Good Clinical Practices (GCP),GCP, which are international standards meant to protect the rights and health of patients and to define the roles of clinical trial sponsors, advisors and monitors. GCPs are enforced by the FDA and foreign regulatory authorities in the form of International Conference on Harmonization (ICH) guidelines for all of our product candidates in clinical development. Regulatory authorities enforce these GCP through periodic inspections of trial sponsors, principal investigators and trial sites. If we or any of our CROs fail to comply with applicable GCP and other regulations, including as a result of any recent changes in such regulations, the clinical data generated in our clinical trials may be deemed unreliable and the FDA or foreign regulatory authorities may require us to perform additional clinical trials before approving our marketing applications. We cannot assure you that upon inspection by a given regulatory authority, such regulatory authority will determine that any of our clinical trials comply with GCP requirements. In addition, our clinical trials must be conducted with product produced under cGMP requirements. While we have agreements governing activities of our CROs, we have limited influence over their actual performance. Failure to comply with applicable regulations in the conduct of the clinical trials for our product candidates may require us to repeat preclinical studies and clinical trials, which would increase our operating expenses and delay the regulatory approval process.
Our CROs are not our employees, and except for remedies available to us under our agreements with such CROs, we cannot control whether or not they devote sufficient time and resources to our ongoing clinical and preclinical programs. If our CROs do not successfully carry out their contractual duties or obligations or meet expected deadlines, if they need to be replaced or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols, regulatory requirements or for other reasons or if we receive additional FDA notices that do require corrective action, our clinical trials may be extended, delayed or terminated and we may not be able to obtain regulatory approval for or successfully commercialize our product candidates. As a result, the commercial prospects for our product candidates would be harmed, our costs could increase substantially and our ability to generate revenue could be delayed.
Switching or adding additional CROs involves additional cost and requires management time and focus. Identifying, qualifying and managing performance of third-party service providers can be difficult, time-consuming and cause delays in our development programs. In addition, there is a natural transition period when a new CRO commences work and the new CRO may not provide the same type or level of services as the original provider. Though we carefully manage our relationships with our CROs, there can be no assurance that we will not encounter challenges or delays in the future or that these delays or challenges will not have a material adverse impact on our business, financial condition and prospects. If any of our relationships with our CROs terminate, we may not be able to enter into arrangements with alternative CROs or to do so on commercially reasonable terms. As a result, delays may occur, which can materially impact our ability to meet our desired clinical development timelines.
Because we have relied on third parties, our internal capacity to perform these functions is limited. Outsourcing these functions involves risks that third parties may not perform to our standards, may not produce results in a timely manner or may fail to perform at all. 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. We currently have a small number of employees, which limits the internal resources we have available to identify and monitor our third-party providers. To the extent we are unable to identify and successfully manage the performance of third-party service providers in the future, our ability to advance our product candidates through clinical trials will be compromised. Though we carefully manage our relationships with our CROs, there can be no assurance that we will not encounter similar challenges or delays in the future or that these delays or challenges will not have a material adverse impact on our business, financial condition and prospects.
Risks Related to Our Business Operations and Industry
Our future success depends on our ability to retain and have the full attention of our key executives and to attract, retain and motivate other qualified personnel.
We are highly dependent on the management, development, clinical, financial and business development expertise of our executive team and, in particular, the services of Peter K. Miller, our Chief Executive Officer, and Ramy A. Mahmoud, our President and Chief Operating Officer. Each of Mr. Miller and Dr. Mahmoud is employed by us at will and is permitted to terminate his employment with us at any time. We entered into employment agreements with Mr. Miller and Dr. Mahmoud in October 2017, but Mr. Miller and Dr. Mahmoud continue to be employed at will. We do not maintain "key person" insurance for any of our executives or other employees. The loss of the services of Mr. Miller or Dr. Mahmoud could impede the achievement of our development and commercialization objectives.
Recruiting and retaining qualified employees for our business, including scientific, technical and sales and marketing personnel, will also be critical to our success. Competition for skilled personnel in our industry is intense and the turnover rate can be high. We may not be able to attract and retain personnel on acceptable terms given the competition among numerous pharmaceutical companies for individuals with similar skill sets. In addition, failure to succeed in our commercialization efforts or in the performance of any future clinical studies may make it more challenging to recruit and retain qualified personnel. The inability to recruit or loss of the services of any executive or key employee could impede the progress of our research, development and commercialization objectives.
We expect to grow the size of our organization, and we may experience difficulties in managing this growth.
Implementation of our development and commercialization strategies may require additional managerial, operational, sales, marketing, financial and other resources. Our current management, personnel and systems may not be adequate to effectively manage the expansion of our operations, including but not limited to in connection with the onboarding of our contract sales organization to become our internal sales team, which may result in weaknesses in our infrastructure, give rise to operational mistakes, loss of business opportunities, employee turnover and reduced productivity. Future growth could require significant capital expenditures and may divert financial resources from other projects, such as the development of our existing or future product candidates. Future growth would impose significant added responsibilities on members of management, including:
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▪ | managing the commercialization of XHANCE and any other products for which we obtain marketing approval; |
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▪ | overseeing our preclinical studies and clinical trials effectively; |
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▪ | identifying, recruiting, maintaining, motivating and integrating additional employees, including any sales and marketing personnel engaged in connection with the commercialization of any approved product; |
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▪ | managing our internal development efforts effectively while complying with our contractual obligations to licensors, licensees, contractors and other third parties; and |
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▪ | improving our managerial, development, operational and financial systems and procedures. |
As our operations expand, we will need to manage additional relationships with various strategic collaborators, suppliers and other third parties. Our future financial performance and our ability to commercialize our product candidates and to compete effectively will depend, in part, on our ability to manage any future growth effectively. To that end, we must be able to manage our development efforts and clinical trials effectively and hire, train and integrate additional management, administrative and sales and marketing personnel. Failure to accomplish any of these activities could prevent us from successfully growing our company.
We are subject to intense competition and, if we are unable to compete effectively, our product candidates, if approved, may not reach their commercial potential.
The development and commercialization of new drugs is highly competitive and subject to rapid and significant technological change as research provides a deeper understanding of the pathology of diseases and new technologies and treatments are developed. We face competition with respect to XHANCE from prescription and over-the-counter INS, oral steroids and other medical management products, and will face competition with respect to any other product candidates that we may seek to develop or commercialize in the future, from many different sources, including large pharmaceutical, biotechnology, specialty pharmaceutical and, to a lesser degree, medical device companies.
The key competitive factors that we expect to impact the commercial success of XHANCE and any other product candidates we may develop are likely to be their efficacy, safety and tolerability profile, reliability, convenience of administration, price and reimbursement. Nasonex, marketed by Merck, is currently the only other branded drug therapy approved by the FDA for the treatment of nasal polyps, which is our initial indication for XHANCE. A generic version of Nasonex, mometasone furoate monohydrate, was approved by the FDA for, among other indications, the treatment of nasal polyps and launched in 2016. In addition, Beconase AQ, which is an INS marketed by GlaxoSmithKline, is indicated for the prophylaxis of nasal polyps after surgical resection, and SINUVATM is a commercially available corticosteroid-eluting implant indicated for the treatment of nasal polyps in adult patients who have had ethmoid sinus surgery that can be placed in the ethmoid sinus under endoscopic visualization for up to 90 days. We are not aware of any drug therapy approved by the FDA or foreign regulatory agencies for the treatment of chronic sinusitis.
Even though they have not been approved for the treatment of such indications, published clinical practice guidelines do recommend the use of INS products for the treatment of chronic rhinosinusitis and nasal polyps in an effort to maximize medical therapy prior to surgical intervention. Currently approved branded INS products include Rhinocort, marketed by AstraZeneca, Nasacort AQ, marketed by sanofi-aventis, Beconase AQ, Flonase (which contains the same active pharmaceutical ingredient as XHANCE), and Veramyst, each marketed by GlaxoSmithKline, Qnasl, marketed by Teva Pharmaceuticals, and Omnaris and Zetonna, each marketed by Sunovion Pharmaceuticals. Due to the limitations of current treatments, several companies are investigating the treatment of nasal polyps with biologic monoclonal antibodies. To date, four biologic monoclonal antibodies have been studied in nasal polyps: omalizumab, reslizumab, mepolizumab and dupilumab. For dupilumab, the submission of an Supplemental Biologics License Application (sBLA) was recently publicly announced. In addition, there are new small molecules, including fevipiprant, being developed for the treatment of nasal polyps, that are also believed to inhibit specific pathways of inflammation present in nasal polyps. Most of these INS and biologics companies, as well as other potential competitors, have substantially greater financial, technical and human resources than we do and significantly greater experience in the discovery and development of product candidates, obtaining FDA and other regulatory approvals of products and the commercialization of those products.
Mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources being concentrated among a small number of our competitors. Accordingly, our competitors may be more successful than we may be in obtaining FDA approval of drugs and achieving widespread market acceptance. Our competitors' drugs, or drugs they may develop in the future, may be more effective, or more effectively marketed and sold, than any drug we may commercialize and may render XHANCE or any of our other product candidates we may develop obsolete or non-competitive before we can recover the expenses of developing and commercializing XHANCE or any of our other product candidates. Our competitors may also obtain FDA or other regulatory approval of products more rapidly than expected or may obtain better or preferred market access by offering large rebates to payors or by other means. We may not have accurately or completely predicted the development of new and improved or low-cost surgical interventions, alternative medical therapies or other market-disrupting events. If we are unable to manufacture, distribute, stimulate demand reaching the predicted market share, overcome barriers to access or otherwise effectively commercialize the product, all of which factors may be influenced by current or future competition, then our opportunity to generate revenue from the sale of XHANCE or any of our other product candidates, if approved, will be compromised.
Our long-term growth depends on our ability to develop and commercialize additional ENT and allergy products.
It is important to our business that we continue to build a more complete product offering within the ENT and allergy markets. We are evaluating the use of our proprietary EDS technology to develop new product candidates for the ENT and allergy markets. Developing additional product candidates is expensive and time-consuming and could divert management's attention away from the commercialization of XHANCE. Even if we are successful in
developing additional product candidates, the success of any new product candidates or enhancement to any existing product candidates will depend on several factors, including our ability to:
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▪ | properly identify and anticipate ENT and allergy physician and patient needs; |
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▪ | develop, obtain necessary regulatory clearances or approvals, and introduce new product candidates or product enhancements in a timely manner; |
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▪ | demonstrate, if required, the safety and efficacy of new product candidates with data from preclinical studies and clinical trials; |
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▪ | avoid infringing upon the intellectual property rights of third parties; |
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▪ | comply with all regulations relating to the marketing of new product candidates, including any new or modified EDS technologies; and |
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▪ | provide adequate training to potential users of our product candidates. |
▪properly identify and anticipate ENT and allergy physician and patient needs;
▪develop, obtain necessary regulatory clearances or approvals, and introduce new product candidates or product enhancements in a timely manner;
▪demonstrate, if required, the safety and efficacy of new product candidates with data from preclinical studies and clinical trials;
▪avoid infringing upon the intellectual property rights of third parties;
▪comply with all regulations relating to the marketing of new product candidates, including any new or modified EDS technologies; and
▪provide adequate training to potential users of our product candidates.
If we are unsuccessful in developing and commercializing additional product candidates in other areas of the ENT and allergy markets, our ability to gain and maintain profitability may be impaired.
We may acquire other assets or businesses, or form collaborations or make investments in other companies or technologies, which could negatively impact our operating results, dilute our stockholders' ownership, increase our debt or cause us to incur significant expense.
As part of our business strategy, we may pursue acquisitions of assets, including preclinical, clinical or commercial-stage products or product candidates, businesses or strategic alliances and collaborations, to expand our existing technologies and operations. We may not identify or complete these transactions in a timely manner, on a cost-effective basis, or at all, and we may not realize the anticipated benefits of any such transaction. We may not be able to find suitable acquisition candidates, and if we make any acquisitions, we may not be able to complete technology transfers and integrate these acquisitions successfully into our existing business and we may incur additional debt or assume unknown or contingent liabilities as part of the transaction. Integration of an acquired company or assets may also disrupt ongoing operations, require the hiring of additional personnel and the implementation of additional internal systems and infrastructure, especially the acquisition of commercial assets, and require management resources that would otherwise focus on developing our existing business. We may not be able to find suitable strategic collaborators or identify other investment opportunities, and we may experience losses related to any such investments.
To finance any acquisitions or collaborations, we may choose to issue debt or shares of our common or preferred stock as consideration. Any such issuance of shares would dilute the ownership of our stockholders. If the price of our common stock is low or volatile, we may not be able to acquire other assets or companies or fund a transaction using our stock as consideration. Alternatively, it may be necessary for us to raise additional funds for acquisitions through public or private financings. Additional funds may not be available on terms that are favorable to us, or at all.
Our employees, collaborators, independent contractors, principal investigators, consultants, vendors and CROs may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements.
We are exposed to the risk that our employees, collaborators, independent contractors, principal investigators, consultants, vendors and CROs may engage in fraudulent or other illegal activity with respect to our business. Misconduct by these employees could include intentional, reckless and/or negligent conduct or unauthorized activity that violates:
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▪ | FDA regulations, including those laws requiring the reporting of true, complete and accurate information to the FDA; |
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▪ | manufacturing standards; |
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▪ | federal and state healthcare fraud and abuse laws and regulations; or |
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▪ | laws that require the true, complete and accurate reporting of financial information or data. |
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. Misconduct by these parties could also involve individually identifiable information, including, without limitation, the improper use of information obtained in the course of clinical trials, or illegal misappropriation of drug product, which could result in regulatory sanctions and serious harm to our reputation. Any incidents or any other conduct that leads to an employee receiving an FDA debarment could result in a loss of business from third parties and severe reputational harm.
We have a Code of Business Conduct and Ethics to govern and deter such behaviors, but it is not always possible to identify and deter employee misconduct, and the precautions we take to detect and prevent this activity 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 civil, criminal and administrative penalties, damages, monetary fines, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, contractual damages, reputational harm, diminished profits and future earnings, additional reporting requirements and oversight if we become subject to a corporate integrity agreement or similar agreement to resolve allegations of non-compliance with these laws, and curtailment of our operations.
If we fail to comply with data and privacy protection laws and regulations, we could be subject to government enforcement actions, which could include civil or criminal penalties, as well as private litigation and/or adverse publicity, any of which could negatively affect our operating results and business.
Our business is subject to complex and evolving U.S., state and international data and privacy protection laws. In the U.S., numerous federal and state laws and regulations, including state data breach notification laws, state health information privacy laws, and federal and state consumer protection laws (e.g., Section 5 of the Federal Trade Commission Act) govern the collection, use, disclosure, and protection of health-related and other personal information. For instance, HIPAA imposes certain obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individually identifiable health information and imposes notification obligations in the event of a breach of the privacy or security of individually identifiable health information on entities subject to HIPAA and their business associates that perform certain activities that involve the use or disclosure of protected health information on their behalf.
Additionally, the General Data Protection Regulation (GDPR), applicable in the European Union (EU) as of May 25, 2018, applies to all of our activities conducted from an establishment in the EU or related to products and services that we may offer to EU users. The GDPR created a range of new compliance obligations, which could cause us to change our business practices, and has significantly increased financial penalties for noncompliance (including possible fines of up to 4% of global annual turnover for the preceding financial year or €20 million (whichever is higher) for the most serious infringements).
Certain of these laws and regulations are described in greater detail in the previous section under "Business — Government Regulation — Healthcare Privacy Laws." Failure to comply with applicable data protection laws and regulations could result in government enforcement actions and create liability for us, which could include civil and/or criminal penalties, as well as private litigation and/or adverse publicity that could negatively affect our operating results and business.
Our business and operations would suffer in the event of computer system failures, cyberattacks or a deficiency in our cybersecurity or those of any business partners.
Despite the implementation of security measures, our internal computer systems and those of our contractors and consultants are vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures, cyberattacks or cyber-intrusions over the Internet, loss of funds or information from phishing or other fraudulent schemes, attachments to emails, persons inside our organization, or persons with access to systems inside our organization. The risk of a security breach or disruption, particularly through cyber-attacks or cyber intrusion, including by computer hackers, foreign governments, and cyber terrorists, has generally increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. Such an event could cause interruption of our operations or loss of Company funds and have a negative financial consequence on our business. For example, the loss of data from completed or ongoing clinical trials for our product candidates 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 were to
result in a loss of or damage to our data, or inappropriate disclosure of confidential, proprietary or personal information, we could incur material legal claims and liability and damage to our reputation and the development and commercialization of XHANCE and our product candidates could be delayed. Additionally, breach remediation costs may be significant
If we fail to successfully manage our global enterprise resource planning system, it could adversely affect our operations and operating results.
In 2018 we implemented a new global enterprise resource planning (ERP) system. This system replaces many of our existing operating and financial systems. Such an implementation was a major undertaking, both financially and from a management and personnel perspective. Any disruptions, delays or deficiencies in the maintenance of our ERP system could adversely affect our ability to process financial transactions, fulfill contractual obligations or otherwise operate our business.
We are subject to risks inherent in foreign operations.
We currently operate portions of our business through our foreign subsidiaries, including through our Norwegian subsidiary, OptiNose AS, which currently owns a substantial portion of our intellectual property and conducts development activities, andactivities. We also have our United Kingdom subsidiary, OptiNose UK Ltd., which performs research and development and regulatory activities for the Optinose EDS technology as well as other services.currently has no employees. We have committed, and intend to continue to commit, resources to our international operations. The operations we conduct in other countries, including clinical trials, and the operations conducted by third party suppliers and vendors with whom we do business, are subject to foreign laws. We are subject to a number of risks associated with our international business operations and activities that may increase liability, costs, and require significant management attention. These risks include:
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▪ | compliance with the laws of the U.S., the United Kingdom, Norway, and other countries that apply to our international operations, including import and export legislation; |
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▪ | compliance with foreign data protection laws and regulations in the United Kingdom, Norway and other countries that apply to our international operations; |
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▪ | the complexities and expenses of administering a business abroad; |
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▪ | complications in compliance with, and unexpected changes in, tariffs, trade barriers, price and exchange controls and other foreign regulatory requirements, including potential trade conflicts, changes to trade agreements/treaties, and the implementation of trade restrictions; |
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▪ | instability in economic or political conditions, including inflation, recession and actual or anticipated military conflicts, social upheaval or political uncertainty; |
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▪ | production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad; |
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▪ | uncertainties of laws and enforcement relating to the protection of intellectual property or secured technology; |
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▪ | litigation in foreign court systems; |
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▪ | changes in tax laws and regulations in the jurisdictions in which we operate; |
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▪ | compliance with tax, employment, immigration and labor laws, regulations and restrictions for employees living or traveling abroad; |
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▪ | difficulties staffing and managing foreign operations; and |
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▪ | workforce uncertainty in countries where labor unrest is more common than in the U.S.; |
▪compliance with the laws of the U.S., the United Kingdom, Norway, and other countries that apply to our international operations, including import and export legislation;
▪compliance with foreign data protection laws and regulations in the United Kingdom, Norway and other countries that apply to our international operations;
▪the complexities and expenses of administering a business abroad;
▪complications in compliance with, and unexpected changes in, tariffs, trade barriers, price and exchange controls and other foreign regulatory requirements, including potential trade conflicts, changes to trade agreements/treaties, and the implementation of trade restrictions;
▪instability in economic or political conditions, including inflation, recession and actual or anticipated military conflicts, social upheaval or political uncertainty;
▪production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad;
▪uncertainties of laws and enforcement relating to the protection of intellectual property or secured technology;
▪litigation in foreign court systems;
▪language barriers;
▪changes in tax laws and regulations in the jurisdictions in which we operate;
▪compliance with tax, employment, immigration and labor laws, regulations and restrictions for employees living or traveling abroad;
▪difficulties staffing and managing foreign operations; and
▪workforce uncertainty in countries where labor unrest is more common than in the U.S.
There can be no assurance that the policies and procedures we implement to address or mitigate these risks will be successful, that our personnel will comply with them or that we will not experience these factorsrisks in the future or that they will not have a material adverse effect on our business, results of operations and financial condition.
Our corporate structure and foreign operations may have adverse tax consequences and expose us to additional tax liabilities. In addition, tax returns we file are subject to examination by U.S. federal, state and foreign tax authorities.
We have operations in Norway and the UK and a substantial portion of our intellectual property, including certain rights to XHANCE, are owned by OptiNose AS, our Norwegian subsidiary. We file tax returns in various jurisdictions and those returns are subject to examination by the tax authorities. During an examination, a tax authority could challenge positions taken on a return. Such a challenge could result in the loss of tax attributes or in the payment of tax which could have an unfavorable impact on our financial condition.
We operate pursuant to written intercompany license, service and related agreements that establish prices for intellectual property and for services provided such as production, marketing, management, and technology development activities that are performed by one group company for another group company. The amounts paid under these intercompany agreements are commonly considered for tax purposes as transfer prices. If the affiliated companies are located in different countries, the tax laws and regulations of each country generally require that transfer prices be at arm’s length as if between unrelated companies. Our transfer pricing arrangements consider requirements of the jurisdictions in which we operate but are not binding on the tax authorities. If any tax authority is successful in challenging our transfer prices, there could be an increase in taxable income in that jurisdiction which could increase our tax liabilities. Further, if the tax authority in the other country does not agree with the adjustment, both countries could tax the same income, resulting in double taxation.
Any income earned by our foreign subsidiaries, including a portion of the sales of XHANCE in the U.S., may be subject to additional tax liabilities. If our foreign operations generate cash that we want to repatriate to the U.S. or if cash generated by our U.S. operations is not sufficient to fund our U.S. operations, we may face additional tax liabilities in returning or otherwise providing such cash to support our U.S. operations or other strategic opportunities in the U.S. If we are forced to repatriate any foreign-held cash, we could incur a significant tax charge, and our business, operating results or financial condition could be adversely impacted.
If foreign subsidiary income is subject to the Subpart F, investment in US property or global intangible low-taxed income provisions, or similar provisions of the U.S. Internal Revenue Code, collectively referred to in this paragraph as Subpart F, the income may be subject to U.S. corporate income tax even if there is no cash distribution of those earnings to the U.S. For example, Subpart F income includes certain "passive" income, certain income from intercompany transactions, foreign subsidiary income over a legislative threshold or income of a foreign subsidiary which makes an "investment in U.S. property", such as holding the stock in or making a loan to, a U.S. corporation. Any foreign subsidiary income subject to the Subpart F provisions would be included in determining U.S. taxable income and potentially subject to federal corporate income tax at rates up to 21%.
Comprehensive tax reform legislation could adversely affect our business and financial condition.
On December 22, 2017, the U.S. government signed into law comprehensive tax legislation, referred to as the Tax Cuts and Jobs Act (Tax Act). The Tax Act introduced significant changes to the U.S. corporate tax laws. The Tax Act changes include, but are not limited to:
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▪ | a reduction in the corporate tax rate from a top rate of 35% to a flat rate of 21%; |
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▪ | limits on the tax deductibility of interest expense; |
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▪ | limits on the utilization of net operating losses generated after 2017 to 80% of current year taxable income; |
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▪ | elimination of net operating loss carrybacks; |
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▪ | accelerated deduction for certain investments instead of depreciation deductions; |
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▪ | allowing indefinite carry forward of net operating loss carry forwards generated after 2017; |
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▪ | modifying or repealing certain business deductions and credits; and |
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▪ | limits on the deduction for certain compensation in excess of $1 million. |
While guidance has been provided on some of these new provisions, the overall impact of the Tax Act on our Company is uncertain and our business and financial condition could be adversely affected depending on how the new provisions are interpreted.
We may be exposed to liabilities under the U.S. Foreign Corrupt Practices Act and other U.S. and foreign anti-corruption anti-money laundering, export control, sanctions, and other trade laws and regulations, and any determination that we violated these laws could have a material adverse effect on our business.
We are subject to export control and import laws and regulations, including the U.S. Export Administration Regulations, U.S. Customs regulations, and various economic and trade sanctions regulations administered by the U.S. Treasury Department's Office of Foreign Assets Control. We are also subject to the U.S. Foreign Corrupt Practices Act of 1977, as amended (FCPA), the U.S. domestic bribery statute contained in 18 U.S.C. § 201, the U.S. Travel Act, the USA PATRIOT Act, the United Kingdom Bribery Act 2010, the Proceeds of Crime Act 2002, and possibly other anti-bribery and anti-money laundering laws in countries outside of the U.S. in which we conduct our activities. Anti-corruption laws are interpreted broadly and prohibit companies and their employees and third-party intermediaries from authorizing, promising, offering, providing, soliciting, or accepting, directly or indirectly, improper payments or benefits to or from any person whether in the public or private sector. As we commercialize XHANCE and any other product candidates that we may develop, we may engage with third-party manufacturers and collaborators who operate abroad and are required to obtain certain necessary permits, licenses and other regulatory approvals with respect to our business. Our activities abroad create the risk of unauthorized payments or offers of payments by employees, consultants, sales agents or distributors, even though they may not always be subject to our control. We have implemented policies to discourage these practices by our employees, consultants, sales agents and distributors. However, our employees, consultants, sales agents, or distributors of our company may engage in conduct for which we might be held responsible, even if we do not explicitly authorize such activities.
Noncompliance with anti-corruption, anti-money laundering, export control, sanctions, and other trade laws could subject us to whistleblower complaints, investigations, sanctions, settlements, prosecution, other enforcement actions, disgorgement of profits, significant fines, damages, other civil and criminal penalties or injunctions, suspension and/or debarment from contracting with certain persons, the loss of export privileges, reputational harm, adverse media coverage and other collateral consequences. If any subpoenas or investigations are launched, or governmental or other sanctions are imposed, or if we do not prevail in any possible civil or criminal litigation, our business, results of operations and financial condition could be materially harmed. Responding to any action will likely result in a materially significant diversion of management's attention and resources and significant defense and compliance costs and other professional fees. In addition, the U.S. government may seek to hold us liable for successor liability FCPA violations committed by companies in which we invest or that we acquire. As a general matter, enforcement actions and sanctions could harm our business, results of operations, and financial condition.
Risks Related to Our Intellectual Property
If we are unable to protect our intellectual property rights or if our intellectual property rights are inadequate to protect our technology, XHANCE or our other product candidates, our competitors could develop and commercialize technology similar to ours, and our competitive position could be harmed.
Our commercial success will depend in large part on our ability to obtain and maintain patent and other intellectual property protection in the U.S. and other countries with respect to our proprietary technology and products. We rely on trade secret, patent, copyright and trademark laws, and confidentiality and other agreements with employees and third parties, all of which offer only limited protection. Our strategy is to seek patent protection for XHANCE, our other product candidates and their compositions, their methods of use and processes for their manufacture, and any other aspects of inventions that are commercially important to the development of our business.
The patent prosecution process is expensive and time-consuming, and we and any future licensors and licensees may not be able to apply for or prosecute patents on certain aspects of our product candidates or delivery technologies at a reasonable cost, in a timely fashion, or at all. We may not have the right to control the preparation, filing and prosecution of patent applications, or to maintain the rights to patents licensed to third parties. Therefore, these patents and applications may not be prosecuted and enforced in a manner consistent with the best interests of our business. It is also possible that we, or any future licensors or licensees, will fail to identify patentable aspects of inventions made in the course of development and commercialization activities before it is too late to obtain patent protection on them. Therefore, our patents and applications may not be prosecuted and enforced in a manner consistent with the best interests of our business. It is possible that defects of form in the preparation or filing of our patents or patent applications may exist, or may arise in the future, such as with respect to proper priority claims, inventorship, claim scope or patent term adjustments. If any future licensors or licensees are not fully
cooperative or disagree with us as to the prosecution, maintenance, or enforcement of any patent rights, such patent rights could be compromised and we might not be able to prevent third parties from making, using, and selling competing products. If there are material defects in the form or preparation of our patents or patent applications, such patents or applications may be invalid or unenforceable. Moreover, our competitors may
independently develop equivalent knowledge, methods, and know-how. Any of these outcomes could impair our ability to prevent competition from third parties, which may have an adverse impact on our business, financial condition, and operating results.
The patent positions of pharmaceutical companies generally are highly uncertain, involve complex legal and factual questions and have in recent years been the subject of much litigation. As a result, the issuance, scope, validity, enforceability and commercial value of any patents that issue, are highly uncertain. The steps we have taken to protect our proprietary rights may not be adequate to preclude misappropriation of our proprietary information or infringement of our intellectual property rights, both inside and outside the U.S. Further, the examination process may require us to narrow the claims of pending patent applications, which may limit the scope of patent protection that may be obtained if these applications issue. The rights that may be granted under future issued patents may not provide us with the proprietary protection or competitive advantages we are seeking. If we are unable to obtain and maintain patent protection for our technology and products, or if the scope of the patent protection obtained is not sufficient, our competitors could develop and commercialize technology and products similar or superior to ours, and our ability to successfully commercialize our technology and products may be impaired.
As of February 28, 2019,1, 2021, we owned a total of 47over 50 U.S. patents and 27over 20 pending U.S. patent applications. TheseOur issued U.S. patents will expire between 20202021 and 2034. With respect to these patent rights, we2035. We do not know whether any of our patent applications will result in issued patents or, if any of our patent applications do issue, whether such patents will protect our technology and drugs, in whole or in part, or whether such patents will effectively prevent others from commercializing competitive technologies and products. There is no guarantee that any of our issued or granted patents will not later be found invalid or unenforceable. Furthermore, as our issued patents expire, the risk that competitors may be able to circumvent our remaining patents by developing similar or alternate technologies or products in a non-infringing manner is increased. Three of our 13 patents listed in the FDA's Orange Book for XHANCE are set to expire from 2021 to 2023. These patents cover certain aspects of our exhalation deliver system technology utilized by XHANCE.
The laws of foreign countries may not protect our rights to the same extent as the laws of the U.S. or vice versa. For example, European patent law restricts the patentability of methods of treatment of the human body more than U.S. law does. Publications of discoveries in the scientific literature often lag behind the actual discoveries, and patent applications in the U.S. and other jurisdictions are typically not published until 18 months after filing or in some cases not at all, until they are issued as a patent. Therefore, we cannot be certain that we were the first to make the inventions claimed in our pending patent applications, that we were the first to file for patent protection of such inventions, or that we have found all of the potentially relevant prior art relating to our patents and patent applications that could invalidate one or more of our patents or prevent one or more of our patent applications from issuing. Even if patents do successfully issue and even if such patents cover our product candidates, third parties may initiate oppositions, interferences, re-examinations, post-grant reviews, inter partes reviews, nullification or derivation actions in court or before patent offices or similar proceedings challenging the validity, enforceability, or scope of such patents, which may result in the patent claims being narrowed or invalidated. For example, in 2020 a third party filed an opposition in Europe to the issuance of one of our patents covering certain aspects of our flexible mouthpiece. Furthermore, even if they are unchallenged, our patents and patent applications may not adequately protect our intellectual property, provide exclusivity for our product candidates, or prevent others from designing around our claims. Any of these outcomes could impair our ability to prevent competition from third parties.
Furthermore, the issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability, and our owned and licensed patents may be challenged in the courts or patent offices in the U.S. and abroad. Such challenges may result in loss of exclusivity or freedom to operate or in patent claims being narrowed, invalidated or held unenforceable, in whole or in part, which could limit our ability to stop others from using or commercializing similar or identical technology and drugs, or limit the duration of the patent protection of our technology and drugs. Given the amount of time required for the development, testing and regulatory review of new drug 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 drugs similar or identical to ours.
We may become involved in lawsuits to protect or enforce our patents or the patents of our licensors, which could be expensive, time consuming and unsuccessful.
Competitors or other third parties may infringe our patents or the patents of any party from whom we may license patents from in the future. To counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time-consuming. In a patent litigation in the U.S., 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, for example, lack of novelty, obviousness or non-enablement. Grounds for an unenforceability assertion could be an allegation that someone connected with prosecution of the patent withheld relevant information from the U.S. Patent and Trademark Office (USPTO)USPTO or made a misleading statement, during prosecution. The outcome following legal assertions of invalidity and unenforceability during patent litigation is unpredictable. A court may decide that a patent of ours or of any of our future licensors is not valid or is
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. In addition, to the extent that we have to file patent litigation in a federal court against a U.S. patent holder, we would be required to initiate the proceeding in the state of incorporation or residency of such entity. With respect to the validity question, for example, we cannot be certain that no invalidating prior art exists. An adverse result in any litigation or defense proceedings could put one or more of our patents at risk of being invalidated, found unenforceable, or interpreted narrowly, and it could put our patent applications at risk of not issuing. Defense of these claims, regardless of their merit, would involve substantial litigation expense and would be a substantial diversion of employee resources from our business. If a defendant were to prevail on a legal assertion of invalidity or unenforceability, we would lose at least part, and perhaps all, of the patent protection on one or more of our products or certain aspects of the Optinoseour EDS technology. Such a loss of patent protection could compromise our ability to pursue our business strategy.
Interference proceedings brought by the USPTO may be necessary to determine the priority of inventions with respect to our patents and patent applications or those of our collaborators or licensors. An unfavorable outcome could require us to cease using the technology or to attempt to license rights to it from the prevailing party. Our business could be harmed if a prevailing party does not offer us a license on terms that are acceptable to us. Litigation or interference proceedings may fail and, even if successful, may result in substantial costs and distraction of our management and other employees. We may not be able to prevent, alone, with our licensees, or with any of our future licensors, misappropriation of our proprietary rights, particularly in countries where the laws may not protect those rights as fully as in the U.S. 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, there could be public announcements of the results of hearings, motions or other interim proceedings or developments. 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.
Moreover, we may be subject to a third-party pre-issuance submission of prior art to the USPTO or other foreign patent offices, or become involved in opposition, derivation, reexamination, inter partes review, post-grant 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, allow third parties to commercialize our technology or drugs and compete directly with us, without payment to us, or result in our inability to manufacture or commercialize drugs without infringing third-party patent rights. In addition, if the breadth or strength of protection provided by our patents and patent applications is threatened, it could dissuade companies from collaborating with us to license, develop, or commercialize current or future product candidates.
We may not be able to protect our intellectual property rights throughout the world.
Filing, prosecuting and defending patents on XHANCE, our other product candidates and the Optinoseour EDS technology throughout the world would be prohibitively expensive, and our intellectual property rights in some countries outside the U.S. may be less extensive than those in the U.S. In addition, the laws and practices of some foreign countries do not protect intellectual property rights, especially those relating to life sciences, to the same extent as federal and state laws in the U.S. For example, novel formulations of existing drugs and manufacturing processes may not be patentable in certain jurisdictions, and the requirements for patentability may differ in certain countries, particularly developing countries. Also, some foreign countries, including European Union countries, India, Japan and China, have compulsory licensing laws under which a patent owner may be compelled under certain circumstances to grant licenses to third parties. Consequently, we may have limited remedies if patents are infringed or if we are compelled to grant a license to a third party, and we may not be able to prevent third parties from practicing our inventions in all countries outside the U.S., or from selling or importing products made using our inventions into or within the U.S. or other jurisdictions. This could limit our potential revenue opportunities. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products, and may export otherwise infringing products to territories where we have patent protection, but where enforcement is not as strong as that in the U.S. These products may compete with our products in jurisdictions where we do not have any issued patents and our patent claims or other intellectual property rights may not be effective or sufficient to prevent them from competing with us in these jurisdictions. Furthermore, the prevalence of counterfeit medicines, which is
one that has been deliberately and fraudulently mislabeled as to its identity and source, is a significant and growing industry-wide issue that could impact our revenue and our reputation for which we may have limited or no recourse. Accordingly, our efforts to enforce intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from our intellectual property. We may not prevail in any lawsuits that we initiate in these foreign countries and the damages or other remedies awarded, if any, may not be commercially meaningful.
Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.
Periodic maintenance fees, renewal fees, annuity fees and various other governmental fees on patents and applications are required to be paid to the USPTO and various governmental patent agencies outside of the U.S. in several stages over the lifetime of the patents and applications. The USPTO and various non-U.S. governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process and after a patent has issued. There are situations in which non-compliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction.
Third parties may initiate legal proceedings alleging that we are infringing their intellectual property rights, the outcome of which could be uncertain and could harm our business.
Our commercial success depends upon our ability to develop, manufacture, market and sell XHANCE and our other product candidates and use our proprietary technologies without infringing the proprietary rights of third parties. While our product candidates are in preclinical studies and clinical trials, we believe that the use of our product candidates in these preclinical studies and clinical trials falls within the scope of the exemptions provided by 35 U.S.C. Section 271(e) in the U.S., which exempts from patent infringement liability activities reasonably related to the development and submission of information to the FDA. As XHANCE and Onzetra Xsail are commercialized and our other product candidates progress toward commercialization, the possibility of a patent infringement claim against us increases. For instance, ourif we use of the Section 505(b)(2) regulatory pathway for the follow-on indication of chronic sinusitis or any of our other product candidates it will require us to provide a Paragraph IV certification to the NDA and patent holders of the RLD pursuant to the Hatch-Waxman Act if the RLD is covered by Orange Book-listed patents. If the NDA or patent holder files a patent infringement lawsuit against us within 45 days of its receipt of notice of our certification, the FDA is prevented from approving our Section 505(b)(2) NDA until the earliest of 30 months, expiration of the patents, settlement of the lawsuit or a court decision in the infringement case that is favorable to us. Accordingly, we may invest significant time and expense in the development of our product candidates only to be subject to significant delay and expensive and time-consuming patent litigation before our product candidates may be commercialized. There can be no assurance that our product candidates do not infringe other parties' patents or other proprietary rights and competitors or other parties may assert that we infringe their proprietary rights in any event.
There is considerable intellectual property litigation in the biotechnology and pharmaceutical industries. We may become party to, or threatened with, future adversarial proceedings or litigation regarding intellectual property rights with respect to our product candidates, including interference or derivation proceedings before the USPTO. Numerous U.S. and foreign issued patents and pending patent applications owned by third parties exist in the fields in which we are developing our drug candidates. Third parties may assert infringement claims against us based on existing patents or patents that may be granted in the future.
If we are found to infringe a third party's intellectual property rights, we could be required to obtain a license from such third party to continue commercializing our product candidates. However, we may not be able to obtain any required license on commercially reasonable terms or at all. Even if a license can be obtained on acceptable terms, the rights may be non-exclusive, which could give our competitors access to the same technology or intellectual property rights licensed to us. If we fail to obtain a required license, we may be unable to effectively market product candidates based on our technology, which could limit our ability to generate revenue or achieve profitability and possibly prevent us from generating revenue sufficient to sustain our operations. Alternatively, we may need to redesign our infringing products, which may be impossible or require substantial time and monetary expenditure. Under certain circumstances, we could be forced, including by court order, to cease commercializing our product candidates. In addition, in any such proceeding or litigation, we could be found liable for substantial monetary damages, potentially including treble damages and attorneys' fees, if we are found to have willfully infringed. A finding of infringement could prevent us from commercializing our product candidates or force us to cease some of our business operations, which could harm our business. Any claims by third parties that we have misappropriated their confidential information or trade secrets could have a similar negative impact on our business.
The cost to us in defending or initiating any litigation or other proceeding relating to patent or other proprietary rights, even if resolved in our favor, could be substantial, and litigation would divert our management's attention. Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could compromise our commercialization efforts, delay our research and
development efforts and limit our ability to continue our operations. There could also be public announcements of the results of the hearing, motions, or other interim proceedings or developments. If securities analysts or investors perceive those results to be negative, it could cause the price of shares of our common stock to decline.
Our competitors may be able to circumvent our patents by developing similar or alternative technologies or products in a non-infringing manner.
Our competitors may seek to market generic versions of XHANCE or any of our approved productsother product for which we obtain approval by submitting ANDAs to the FDA or new products that use our approved products as the RLD, in each case where our competitors claim that our patents are invalid, unenforceable or not infringed. Alternatively, our competitors may seek approval to market their own products that are the same as, similar to or otherwise competitive with XHANCE and any future product candidates we may develop. In these circumstances, we may need to defend or assert our patents, by means including filing lawsuits alleging patent infringement requiring us to engage in complex, lengthy and costly litigation or other proceedings. In any of these types of proceedings, a court or government agency with jurisdiction may find our patents invalid, unenforceable or not infringed. We may also fail to identify patentable aspects of our research and development before it is too late to obtain patent protection. 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. Furthermore, as our issued patents expire, the risk that competitors may be able to circumvent our remaining patents by developing similar or alternate technologies or products in a non-infringing manner is increased. Three of our 13 remaining patents listed in the FDA's Orange Book for XHANCE are set to expire from 2021 to 2023. These patents cover certain aspects of our exhalation deliver system technology utilized by XHANCE.
Changes in either U.S. or foreign patent law or interpretation of such laws could diminish the value of patents in general, thereby impairing our ability to protect our products.
As is the case with other pharmaceutical companies, our success is heavily dependent on intellectual property, particularly patents. Obtaining and enforcing patents in the pharmaceutical industry involve both technological and legal complexity, and it therefore is costly, time-consuming and inherently uncertain. In addition, on September 16, 2011, the Leahy-Smith America Invents Act (the AIA) was signed into law. The AIA includes a number of significant changes to U.S. patent law, including provisions that affect the way patent applications will be prosecuted and may also affect patent litigation.
An important change introduced by the AIA is that, as of March 16, 2013, the U.S. transitioned to a "first-to-file" system for deciding which party should be granted a patent when two or more patent applications are filed by different parties claiming the same invention. A third party that files a patent application in the USPTO after that date, but before us, could therefore be awarded a patent covering an invention of ours even if we had made the invention before it was made by the third party. This will require us to be cognizant going forward of the time from invention to filing of a patent application.
Among some of the other changes introduced by the AIA are changes that limit where a patentee may file a patent infringement suit and providing opportunities for third parties to challenge any issued patent in the USPTO. This applies to all of our U.S. patents, even those issued before March 16, 2013. Because of a lower evidentiary standard necessary to invalidate a patent claim in USPTO proceedings compared to the evidentiary standard in U.S. federal court, a third party could potentially provide evidence in a USPTO proceeding sufficient for the USPTO to hold a claim invalid even though the same evidence would be insufficient to invalidate the claim if first presented in a district court action. Accordingly, a third party may attempt to use the USPTO procedures to invalidate our patent claims that would not have been invalidated if first challenged by the third party as a defendant in a district court action.
Depending on decisions by the U.S. Congress, the federal courts, the USPTO, or similar authorities in foreign jurisdictions, the laws and regulations governing patents could change in unpredictable ways that would weaken our ability to obtain new patents or to enforce our existing patents and patents that we might obtain in the future.
We may be subject to claims asserting that our employees, consultants, independent contractors and advisors have wrongfully used or disclosed confidential information and/or alleged trade secrets of their current or former employers or claims asserting ownership of what we regard as our own intellectual property.
Although we try to ensure that our employees, consultants, independent contractors and advisors do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that these individuals or we have inadvertently or otherwise used or disclosed confidential information and/or intellectual property, including trade secrets or other proprietary information, of the companies that any such individual currently or formerly worked for or provided services to. 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 our business.
In addition, while we require our employees and contractors who may be involved in the conception or development of intellectual property to execute agreements assigning such intellectual property to us, we may be unsuccessful in executing such an agreement with each party who, in fact, conceives or develops intellectual property that we regard as our own. The assignment of intellectual property rights may not be self-executing or the assignment agreements may be breached, and we may be forced to bring claims against third parties, or defend claims that they may bring against us, to determine the ownership of what we regard as our intellectual property.
Intellectual property rights do not prevent all potential threats to competitive advantages we may have.
The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have limitations, and intellectual property rights may not adequately protect our business or permit us to maintain our competitive advantage.
The following examples are illustrative:
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▪ | Others may be able to make drug and device components that are the same as or similar to XHANCE and our other product candidates but that are not covered by the claims of the patents that we own or have exclusively licensed; |
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▪ | We or any of our licensors or collaborators 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; |
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▪ | We or any of our licensors or collaborators might not have been the first to file patent applications covering certain of our inventions; |
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▪ | Others may independently develop similar or alternative technologies or duplicate any of our technologies without infringing our intellectual property rights; |
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▪ | The prosecution of our pending patent applications may not result in granted patents; |
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▪ | Granted patents that we own or have licensed may not cover our products or may be held not infringed, invalid or unenforceable, as a result of legal challenges by our competitors; |
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▪ | With respect to granted patents that we own or have licensed, especially patents that we either acquire or in-license, if certain information was withheld from or misrepresented to the patent examiner, such patents might be held to be unenforceable; |
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▪ | Patent protection on our product candidates may expire before we are able to develop and commercialize the product, or before we are able to recover our investment in the product; |
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▪ | Our competitors might conduct research and development activities in the U.S. and other countries that provide a safe harbor from patent infringement claims for such activities, as well as in countries in which we do not have patent rights, and may then use the information learned from such activities to develop competitive products for sale in markets where we intend to market our product candidates; |
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▪ | We may not develop additional proprietary technologies that are patentable; |
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▪ | The patents of others may have an adverse effect on our business; and |
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▪ | We may choose not to file a patent application for certain technologies, trade secrets or know-how, and a third party may subsequently file a patent covering such intellectual property. |
▪Others may be able to make drug and device components that are the same as or similar to XHANCE and our other product candidates but that are not covered by the claims of the patents that we own or have exclusively licensed;
▪We or any of our licensors or collaborators 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;
▪We or any of our licensors or collaborators might not have been the first to file patent applications covering certain of our inventions;
▪Others may independently develop similar or alternative technologies or duplicate any of our technologies without infringing our intellectual property rights;
▪The prosecution of our pending patent applications may not result in granted patents;
▪Granted patents that we own or have licensed may not cover our products or may be held not infringed, invalid or unenforceable, as a result of legal challenges by our competitors;
▪With respect to granted patents that we own or have licensed, especially patents that we either acquire or in-license, if certain information was withheld from or misrepresented to the patent examiner, such patents might be held to be unenforceable;
▪Patent protection on our product candidates may expire before we are able to develop and commercialize the product, or before we are able to recover our investment in the product;
▪Our competitors might conduct research and development activities in the U.S. and other countries that provide a safe harbor from patent infringement claims for such activities, as well as in countries in which we do not have patent rights, and may then use the information learned from such activities to develop competitive products for sale in markets where we intend to market our product candidates;
▪We may not develop additional proprietary technologies that are patentable;
▪The patents of others may have an adverse effect on our business; and
▪We may choose not to file a patent application for certain technologies, trade secrets or know-how, and a third party may subsequently file a patent covering such intellectual property.
Should any of these events occur, they could significantly harm our business, financial condition, results of operations and prospects.
If we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be harmed.
In addition to seeking patent protection for certain aspects of our product candidates and delivery technologies, we also consider trade secrets, including confidential and unpatented know-how, important to the maintenance of our competitive position. We protect trade secrets and confidential and unpatented know-how, in part, by customarily entering into non-disclosure and confidentiality agreements with parties who have access to such knowledge, such as our employees, outside scientific and commercial collaborators, CROs, CMOs, consultants, advisors and other third parties. We also enter into confidentiality and invention or patent assignment agreements with our employees and consultants that obligate them to maintain confidentiality and assign their inventions to us. Despite these efforts, any of these parties may breach the agreements and disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. In addition, our trade secrets may otherwise become known, including through a potential cybersecurity breach, or may be independently developed by competitors.
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 in the U.S. and certain foreign jurisdictions 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.
If our trademarks 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.
We expect to rely on trademarks as one means to distinguish any of our product candidates that are approved for marketing from the products of our competitors. OPTINOSE® and XHANCE® are registered trademarks of ours in the U.S. Our trademarks 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 or may be forced to stop using these names, which we need for name recognition by potential partners or customers in our markets of interest. If we are unable to establish name recognition based on our trademarks, we may not be able to compete effectively.
Risks Related to Ownership of Our Common Stock and Our Status as a Public Company
An active market for our common stock may not develop.
We completed our initial public offering in October 2017, but prior to that offering there was no market for our shares of common stock. Although our common stock is listed on Nasdaq, an active market for our common stock may not develop. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the fair market value of your shares. Further, an inactive market may also impair our ability to raise capital by selling shares of our common stock and may impair our ability to enter into strategic collaborations or acquire companies or products by using our shares of common stock as consideration.
The price of our common stock may be volatile and you may lose all or part of your investment.
The market price of our common stock is likely to be highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control. In addition to the factors discussed in this "Risk Factors" section and elsewhere in this Annual Report on Form 10-K, these factors include:
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▪ | our ability to successfully commercialize XHANCE; |
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▪ | any delay in our regulatory approval or filings for XHANCE for a follow-on indication for the treatment of chronic sinusitis or any other product candidate we may develop, and any adverse development or perceived adverse development with respect to the applicable regulatory authority's review of such filings, including without limitation the FDA's issuance of a "refusal to file" letter, a request for additional information, or a CRL; |
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▪ | the success of competitive products or technologies; |
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▪ | adverse regulatory actions with respect to our product candidates, including the failure to receive regulatory approval, or our competitors' products or product candidates; |
▪our ability to successfully commercialize XHANCE;
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▪ | actual or anticipated changes in our growth rate relative to our competitors; |
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▪ | announcements by us or our competitors of significant acquisitions or divestitures, strategic collaborations, joint ventures, collaborations or capital commitments; |
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▪ | the commencement, enrollment or results of planned clinical trials of our product candidates or any future clinical trials we may conduct, or any changes generally in the development status of our product candidates or those of our competitors; |
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▪ | regulatory or legal developments in the U.S. and other countries; |
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▪ | the outcome of any investigations or regulatory scrutiny of our operations or litigation that may be brought against us; |
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▪ | developments or disputes concerning patent applications, issued patents or other proprietary rights; |
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▪ | the recruitment or departure of key personnel; |
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▪ | the level of expenses related to any of our product candidates or clinical development programs; |
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▪ | actual or anticipated variations in our quarterly operating results; |
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▪ | the number and characteristics of our efforts to in-license or acquire additional product candidates or products; |
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▪ | introduction of new products or services by us or our competitors; |
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▪ | failure to meet the estimates and projections of the investment community or financial guidance that we may otherwise provide to the public; |
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▪ | actual or anticipated changes in estimates as to financial results, development timelines or recommendations by securities analysts; |
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▪ | actual or anticipated changes in estimates as to development timelines that we may provide to the public; |
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▪ | variations in our financial results or those of companies that are perceived to be similar to us; |
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▪ | fluctuations in the valuation of companies perceived by investors to be comparable to us; |
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▪ | share price and volume fluctuations attributable to inconsistent trading volume levels of our shares; |
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▪ | announcement or expectation of additional financing efforts; |
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▪ | sales of our common stock by us, our insiders or our other stockholders; |
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▪ | significant lawsuits, including patent or stockholder litigation; |
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▪ | changes in the structure of healthcare payment systems; |
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▪ | market conditions in the pharmaceutical and biotechnology sectors; |
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▪ | general political, economic, industry and market conditions; |
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▪ | investors' general perception of our company and our business; |
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▪ | publication of research reports about us, our competitors or our industry, or positive or negative recommendations or withdrawal of research coverage by securities or industry analysts; and |
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▪ | other events or factors, many of which are beyond our control. |
▪any delay in our regulatory approval or filings for XHANCE for a follow-on indication for the treatment of chronic sinusitis or any other product candidate we may develop, and any adverse development or perceived adverse development with respect to the applicable regulatory authority's review of such filings, including without limitation the FDA's issuance of a "refusal to file" letter, a request for additional information, or a CRL;
▪the success of competitive products, technologies or services;
▪adverse regulatory actions with respect to our product candidates, including the failure to receive regulatory approval, or our competitors' products or product candidates;
▪discovery of previously unknown problems with XHANCE, such as AEs of unanticipated severity or frequency,
▪issues involving manufacturing of XHANCE or any of our products that may be under development;
▪actual or anticipated changes in our growth rate relative to our competitors;
▪announcements by us or our competitors of significant acquisitions or divestitures, strategic collaborations, joint ventures, collaborations or capital commitments;
▪the impact of COVID-19 on our business, including the manufacture, supply, distribution and sale of XHANCE;
▪the commencement, enrollment or results of planned clinical trials of our product candidates or any future clinical trials we may conduct, or any changes generally in the development status of our product candidates or those of our competitors;
▪regulatory or legal developments in the U.S. and other countries;
▪the outcome of any investigations or regulatory scrutiny of our operations or litigation that may be brought against us;
▪developments or disputes concerning patent applications, issued patents or other proprietary rights;
▪the level of expenses related to any of our product candidates or clinical development programs;
▪actual or anticipated variations in our quarterly operating results;
▪the number and characteristics of our efforts to in-license or acquire additional product candidates or products;
▪failure to meet the estimates and projections of the investment community or financial guidance that we may otherwise provide to the public;
▪actual or anticipated changes in estimates as to financial results, development timelines or recommendations by securities analysts;
▪actual or anticipated changes in estimates as to development timelines that we may provide to the public;
▪variations in our financial results or those of companies that are perceived to be similar to us;
▪fluctuations in the valuation of companies perceived by investors to be comparable to us;
▪share price and volume fluctuations attributable to inconsistent trading volume levels of our shares;
▪announcement or expectation of additional financing efforts;
▪sales of our common stock by us, our insiders or our other stockholders;
▪significant lawsuits, including patent or stockholder litigation;
▪changes in the structure of healthcare payment systems;
▪market conditions in the pharmaceutical and biotechnology sectors;
▪general political, economic, industry and market conditions;
▪investors' general perception of our company and our business;
▪publication of research reports about us, our competitors or our industry, or positive or negative recommendations or withdrawal of research coverage by securities or industry analysts; and
▪other events or factors, many of which are beyond our control.
In addition, the stock market in general, and pharmaceutical companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. Broad market and industry factors may negatively affect the market price of our common stock, regardless of our actual operating performance. The realization of any of the above risks or any of a broad range of other risks stated above could have a material adverse effect on the market price of our common stock.
A significant portion of our total outstanding shares are restricted from resale but may be sold into the market in the near future. Sales of a substantial number of shares of our common stock in the public market could cause our stock price to fall, even if our business is doing well.
Sales of a substantial number of shares of our common stock in the public market could occur at any time. If our stockholders sell, or the market perceives that the holders of a large number of shares intend to sell, substantial amounts of our common stock in the public market, the market price of our common stock could decline significantly.
As of March 1, 2019,2021, there were 41,264,42252,945,865 outstanding shares of our common stock. Holders of an aggregate of 15,674,05514,461,137 shares of our common stock have rights, subject to specified conditions, that require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. If we were to register the resale ofOf these shares, they could14,273,017 are already covered by a registration statement and may be freely sold in the public market.market pursuant to such registration statement. Additionally, these shares are also eligible for sale without registration under Rule 144, subject to volume limitations applicable to affiliates. If these additional shares are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline.
Future issuances of our common stock or rights to purchase common stock, including pursuant to our equity incentive plans, could result in additional dilution of the percentage ownership of our stockholders and could cause our stock price to fall.
We will likely require additional capital in the future to execute our business plan. To raise capital, we may sell substantial amounts of common stock or securities convertible into or exchangeable for common stock. These future issuances of common stock or common stock-related securities, together with the exercise of outstanding options, restricted stock units, warrants and any additional shares issued in connection with acquisitions, if any, may result in material dilution to our investors.investors and may cause our stock price to fall. Such sales may also result in material dilution to our existing stockholders, and new investors could gainreceiving rights, preferences and privileges senior to those of holders of our common stock.
Our principal stockholders and management own a majority of our stock and are able to exert significant control over matters subject to stockholder approval, which could prevent new investors from influencing significant corporate decisions.
Our executive officers, directors, beneficial owners of 5% or more of our capital stock and their respective affiliates, in the aggregate, beneficially own approximately 78.6%50.9% of our outstanding common stock as of March 1, 2019.2021. Entities associated with Avista Capital Partners II, L.P. (Avista), our largest stockholder, collectively hold as a group approximately 37.6%27.0% of our outstanding common stock as of March 1, 2019.2021. As a result, Avista can significantly influence the outcome of matters requiring stockholder approval, including the election 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. The interests of Avista may not always coincide with your interests or the interests of other stockholders and they may act in a manner that advances their best interests and not necessarily those of other stockholders, including seeking a premium value for their common stock. For instance, under the terms of our fourth amended and restated certificate of incorporation, neither Avista nor any of its respective representatives whom in the future may be on our board of directors are required to offer us any transaction opportunity of which they become aware, and they could take any such opportunity for themselves or offer it to other companies in which they have an investment, unless that opportunity is expressly offered to a person serving on our board of directors solely in his or her capacity as one of our directors. These actions might affect the prevailing market price for our common stock. In addition, because Avista and certain of our other principal stockholders have held their shares for several years, they may be more interested in selling our company to an acquiror than other investors, or they may want us to pursue strategies that deviate from the interests of other stockholders. Such concentration of ownership control may also:
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▪ | delay, defer or prevent a change in control; |
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▪ | entrench our management and/or the board of directors; or |
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▪ | impede a merger, consolidation, takeover or other business combination involving us that other stockholders may desire. |
▪delay, defer or prevent a change in control;
▪entrench our management and/or the board of directors; or
▪impede a merger, consolidation, takeover or other business combination involving us that other stockholders may desire.
We may also take actions that our other stockholders do not view as beneficial, which may adversely affect our results of operations and financial condition and cause the value of your investment to decline.
Some provisions of our charter documents and Delaware law may have anti-takeover effects that could discourage an acquisition of us by others, even if an acquisition would be beneficial to our stockholders, and may prevent attempts by our stockholders to replace or remove our current management.
Provisions in our fourth amended and restated certificate of incorporation and our amended and restated bylaws, as well as provisions of Delaware law, could make it more difficult for a third party to acquire us or increase the cost of acquiring us, even if doing so would benefit our stockholders, or remove our current management. These include provisions that:
▪permit our board of directors to issue up to five million shares of preferred stock, with any rights, preferences and privileges as it may designate, which issuance could result in the loss of voting control by other stockholders;
▪provide that :our board of directors will be classified into three classes with staggered, three-year terms and that, subject to the rights of Avista to remove its respective director nominees with or without cause, directors may only be removed for cause by the affirmative vote of the holders of at least a majority of the voting power of outstanding shares of our capital stock;
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▪ | permit our board of directors to issue up to five million shares of preferred stock, with any rights, preferences and privileges as it may designate, which issuance could result in the loss of voting control by other stockholders; |
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▪ | provide that our board of directors will be classified into three classes with staggered, three-year terms and that, subject to the rights of Avista to remove its respective director nominees with or without cause, directors may only be removed for cause by the affirmative vote of the holders of at least a majority of the voting power of outstanding shares of our capital stock; |
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▪ | subject to any director nomination rights afforded Avista, provide that all vacancies on our board of directors, including as a result of newly created directorships, may, except as otherwise required by law, be filled only by the affirmative vote of a majority of directors then in office, even if less than a quorum; |
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▪ | require that any action to be taken by our stockholders must be effected at a duly called annual or special meeting of stockholders and not be taken by written consent; |
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▪ | provide that, with the exception of director nominees submitted by Avista pursuant to our Stockholders Agreement, dated October 2, 2017 with Avista, stockholders seeking to present proposals before a meeting of stockholders or to nominate candidates for election as directors at a meeting of stockholders must provide advance notice in writing, and also specify requirements as to the form and content of a stockholder's notice; |
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▪ | require that the amendment of certain provisions of our certificate of incorporation relating to anti-takeover measures may only be approved by a vote of 662/3% of our outstanding common stock;▪subject to any director nomination rights afforded Avista, provide that all vacancies on our board of directors, including as a result of newly created directorships, may, except as otherwise required by law, be filled only by the affirmative vote of a majority of directors then in office, even if less than a quorum; ▪require that any action to be taken by our stockholders must be effected at a duly called annual or special meeting of stockholders and not be taken by written consent; ▪provide that, with the exception of director nominees submitted by Avista pursuant to our Stockholders Agreement, dated October 2, 2017 with Avista, stockholders seeking to present proposals before a meeting of stockholders or to nominate candidates for election as directors at a meeting of stockholders must provide advance notice in writing, and also specify requirements as to the form and content of a stockholder's notice; ▪require that the amendment of certain provisions of our certificate of incorporation relating to anti-takeover measures may only be approved by a vote of 662/3% of our outstanding common stock; ▪require that the amendment of our bylaws be approved by the affirmative vote of a majority of directors then in office or 662/3% of our outstanding common stock entitled to vote thereon; ▪do not provide for cumulative voting rights, thereby allowing the holders of a majority of the shares of common stock entitled to vote in any election of directors to elect all of the directors standing for election; and ▪provide that special meetings of our stockholders may be called only by the chairman or vice chairman of our board of directors, our chief executive officer, or a majority of our board of directors. |
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▪ | require that the amendment of our bylaws be approved by the affirmative vote of a majority of directors then in office or 662/3% of our outstanding common stock entitled to vote thereon;
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▪ | not provide for cumulative voting rights, thereby allowing the holders of a majority of the shares of common stock entitled to vote in any election of directors to elect all of the directors standing for election; and |
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▪ | provide that special meetings of our stockholders may be called only by the chairman or vice chairman of our board of directors, our chief executive officer, or a majority of our board of directors. |
These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, who are responsible for appointing the members of our management. Under our fourth amended and restated certificate of incorporation, we have elected not to be governed by Section 203 of the Delaware General Corporation Law until such time that Avista ceases to own 15% or more of our capital stock. Our fourth amended and restated certificate of incorporation does, however, contain a provision that generally mirrors Section 203 of the Delaware General Corporation Law, except that it excludes Avista and its affiliates from the definition of "interested stockholder." At such time that Avista ceases to own 15% or more of our capital stock, we will be governed by the provisions of Section 203 of the Delaware General Corporation Law. These provisions may discourage, delay or prevent someone from acquiring us or merging with us whether or not it is desired by or beneficial to our stockholders. Under Section 203, a corporation may not, in general, engage in a business combination with any holder of 15% or more of its capital stock unless the holder has held the stock for three years or, among other things, prior to the time the stockholder has become an interested stockholder, the board of directors has approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder.
These provisions of our fourth amended and restated certificate of incorporation, our amended and restated bylaws and Delaware law could have the effect of discouraging potential acquisition proposals and delaying or preventing a change in control. They could also have the effect of discouraging others from making tender offers for our common stock, including transactions that may be in your best interests or provide an opportunity for our stockholders to
receive a premium for their shares of our common stock. These provisions could also affect the price that some investors are willing to pay for our common stock.
Our certificate of incorporation also provides that the Court of Chancery of the State of Delaware will be the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders' ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.
Our fourth amended and restated certificate of incorporation provides that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be the exclusive forum for any derivative action or proceeding brought on our behalf; any action asserting a breach of fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders; any action asserting a claim against us arising pursuant to the Delaware General Corporation Law, our certificate of incorporation or our bylaws; or any action asserting a claim against us that is governed by the internal affairs doctrine. Our fourth amended and restated certificate of incorporation also provides that the U.S. District Court for the District of Delaware and any appellate courts thereof will be the exclusive forum for resolving any such complaint for which subject matter jurisdiction of such claim is vested exclusively in the federal courts of the U.S. of America. These choice of forum provisions may limit a stockholder's ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and other employees. Alternatively, if a court were to find the choice of forum provisions contained in our certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions.
We may fail to qualify for continued listing on Nasdaq which could make it more difficult for investors to sell their shares.
We list our common stock on The Nasdaq Global Select Market. We will need to satisfy the continued listing requirements of The Nasdaq Stock Market, LLC (Nasdaq) for inclusion on The Nasdaq Global Select Market to maintain such listing, including, among other things, the maintenance of a minimum bid price of $1.00 per share and stockholders' equity of at least $10.0 million. There can be no assurance that we will be able to maintain compliance with the continued listing requirements or that our common stock will not be delisted from Nasdaq in the future. If our common stock is delisted by Nasdaq, we could face significant material adverse consequences, including:
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▪ | a limited availability of market quotations for our securities; |
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▪ | reduced liquidity with respect to our securities; |
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▪ | a determination that our shares are a "penny stock," which will require brokers trading in our shares to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for our shares; |
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▪ | a limited amount of news and analyst coverage for our company; and |
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▪ | a decreased ability to issue additional securities or obtain additional financing in the future. |
If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.
The trading market for our common stock will be influenced by the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. If one or more of the analysts who cover us downgrade our stock or publish inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, demand for our stock could decrease, which might cause our stock price and trading volume to decline.
Because we do not anticipate paying any cash dividends on our capital stock in the foreseeable future, capital appreciation, if any, will be your sole source of gain and you may never receive a return on your investment.
We have never declared or paid cash dividends on our capital stock, and you should not rely on an investment in our common stock to provide dividend income. We currently intend to retain all of our future earnings, if any, to finance the growth and development of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. In addition, the terms of the Note Purchase Agreement precludes us from paying dividends. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.
We may be subject to securities litigation, which is expensive and could divert our management's attention.
As we operate in the pharmaceutical industry, we may be especially vulnerable to volatility in the market price of our common stock, especially to the extent that various factors affect the common stock of companies in our industry. In the past companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management's attention from other business concerns, which could seriously harm our business, and could also require us to make substantial payments to satisfy judgments or to settle litigation.
We are an "emerging growth company" and intend to take advantage of reduced disclosure and governance requirements applicable to emerging growth companies, which could result in our common stock being less attractive to investors.
We are an "emerging growth company," as defined in the Jumpstart Our Business Startups Act of 2012 (the JOBS Act) and we are eligible to and intend to take advantage of some of the exemptions from reporting requirements applicable to other public companies, but not to emerging growth companies, including, but not limited to, an exemption from the auditor attestation requirement of Section 404 of the Sarbanes-Oxley Act, reduced disclosure about executive compensation arrangements pursuant to the rules applicable to smaller reporting companies and no requirement to seek non-binding advisory votes on executive compensation or golden parachute arrangements. We will remain an emerging growth company until the earliest of (1) the beginning of the first fiscal year following the fifth anniversary of our initial public offering, or January 1, 2023, (2) the beginning of the first fiscal year after our annual gross revenue is $1.07 billion or more, (3) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt securities and (4) the end of any fiscal year in which the market value of our common stock held by non-affiliates exceeded $700.0 million as of the end of the second quarter of that fiscal year.
In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, for complying with new or revised accounting standards. An emerging growth company can therefore delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we have chosen to "opt out" of such extended transition period and, as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.
We cannot predict if investors will find our common stock less attractive as a result of our taking advantage of these exemptions. If some investors find our common stock less attractive as a result of our choices, there may be a less active trading market for our common stock and our stock price may be more volatile. We may also be unable to raise additional capital as and when we need it.
IfGeneral RIsk Factors
We may acquire other assets or businesses, or form collaborations or make investments in other companies or technologies, which could negatively impact our operating results, dilute our stockholders' ownership, increase our debt or cause us to incur significant expense.
As part of our business strategy, we failmay pursue acquisitions of assets, including preclinical, clinical or commercial-stage products or product candidates, businesses or strategic alliances and collaborations, to maintain an effective systemexpand our existing technologies and operations. We may not identify or complete these transactions in a timely manner, on a cost-effective basis, or at all, and we may not realize the anticipated benefits of internal control over financial reporting,any such transaction. We may not be able to find suitable acquisition candidates, and if we make any acquisitions, we may not be able to timelycomplete technology transfers and accurately reportintegrate these acquisitions successfully into our financial condition, results of operationsexisting business and we may incur additional debt or cash flows, which may adversely affect investor confidence in us and,assume unknown or contingent liabilities as a result, the value of our common stock.
We are subject to the reporting requirementspart of the Securities Exchange Acttransaction. Integration of 1934 (the Exchange Act), as well asan acquired company or assets may also disrupt ongoing operations, require the Sarbanes-Oxley Acthiring of additional personnel and the rulesimplementation of additional internal systems and regulationsinfrastructure, especially the acquisition of the stock marketcommercial assets, and require management resources that would otherwise focus on whichdeveloping our common stock is listed. The Sarbanes-Oxley Act requires, among other things, that we maintain effective internal control over financial reporting. Commencing with our fiscal year ending December 31, 2018, we are required, under Section 404 of the Sarbanes-Oxley Act, to include in our Form 10-K filing for that year a report by management on, among other things, the effectiveness of our internal control over financial reporting. This assessment will need to include disclosure of any
material weaknesses identified by our management in our internal control over financial reporting. A material weakness is a control deficiency, or combination of control deficiencies, in internal control over financial reporting that results in more than a reasonable possibility that a material misstatement of annual or interim consolidated financial statements will not be prevented or detected on a timely basis. Section 404 of the Sarbanes-Oxley Act also generally requires an attestation from our independent registered public accounting firm on the effectiveness of our internal control over financial reporting. However, for as long as we remain an emerging growth company as defined in the JOBS Act, we intend to take advantage of an exemption from the independent registered public accounting firm attestation requirement.
Our compliance with Section 404's requirement to furnish a report by management requires that we incur substantial accounting expense and expend significant management efforts. Prior to our initial public offering in October 2017, we were never required to test our internal control within a specified period, and, as a result, we may experience difficulty in meeting these reporting requirements in a timely manner. We currently do not have an internal audit function.existing business. We may not be able to complete our evaluation, testingfind suitable strategic collaborators or identify other investment opportunities, and we may experience losses related to any required remediation in a timely fashion, which could potentially subject ussuch investments.
To finance any acquisitions or collaborations, we may choose to sanctionsissue debt or investigations by the Securities and Exchange Commission (the SEC) or other regulatory authorities.
We may identify weaknesses in our system of internal financial and accounting controls and procedures that could result in a material misstatementshares of our consolidated financial statements. Duringcommon or preferred stock as consideration. Any such issuance of shares would dilute the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal control over financial reporting is effective. We cannot assure you that there will not be material weaknesses or significant deficiencies in our internal control over financial reporting in the future. Our internal control over financial reporting will not prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud will be detected.
Any failure to maintain internal control over financial reporting could severely inhibit our ability to timely and accurately report our financial condition, results of operations or cash flows. If we are unable to conclude that our internal control over financial reporting is effective, or if our independent registered public accounting firm determines we have a material weakness in our internal control over financial reporting once that firm begins the testing procedures over internal controls, we could lose investor confidence in the accuracy and completenessownership of our financial reports,stockholders. If the market price of our common stock is low or volatile, we may not be able to acquire other assets or companies or fund a transaction using our stock as consideration. Alternatively, it may be necessary for us to raise additional funds for acquisitions through public or private financings. Additional funds may not be available on terms that are favorable to us, or at all.
Our sales force and other employees, PPN partners, CMOs, CROs, principal investigators, co-promotion partners, collaborators, independent contractors, consultants and other vendors may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements.
We are exposed to the risk that our sales force and other employees, PPN partners, CMOs, CROs, principal investigators, collaborators, independent contractors, consultants and other vendors may engage in fraudulent or other illegal activity with respect to our business. Misconduct by these employees could decline,include intentional, reckless and/or negligent conduct or unauthorized activity that violates:
▪FDA promotion or other regulations, including those laws requiring the reporting of true, complete and accurate information to the FDA;
▪manufacturing standards;
▪federal and state healthcare fraud and abuse laws and regulations; or
▪laws that require the true, complete and accurate reporting of financial information or data.
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. Misconduct by these parties could also involve individually identifiable information, including, without limitation, the improper use of information obtained in the course of clinical trials, or illegal misappropriation of drug product, which could result in regulatory sanctions and serious harm to our reputation. Any incidents or any other conduct that leads to an employee receiving an FDA debarment could result in a loss of business from third parties and severe reputational harm.
We have a Code of Business Conduct and Ethics to govern and deter such behaviors, but it is not always possible to identify and deter employee misconduct, and the precautions we take to detect and prevent this activity 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 civil, criminal and administrative penalties, damages, monetary fines, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, contractual damages, reputational harm, diminished profits and future earnings, additional reporting requirements and oversight if we become subject to a corporate integrity agreement or similar agreement to resolve allegations of non-compliance with these laws, and curtailment of our operations.
If we fail to comply with data and privacy protection laws and regulations, we could be subject to sanctionsgovernment enforcement actions, which could include civil or criminal penalties, as well as private litigation and/or adverse publicity, any of which could negatively affect our operating results and business.
Our business is subject to complex and evolving U.S., state and international data and privacy protection laws. In the U.S., numerous federal and state laws and regulations, including state data breach notification laws, state health information privacy laws, and federal and state consumer protection laws (e.g., Section 5 of the Federal Trade Commission Act) govern the collection, use, disclosure, and protection of health-related and other personal information. Compliance with these laws is difficult, constantly evolving, and time consuming. These laws may differ from each other in significant ways, thus complicating compliance efforts. Many of the state laws enable a state attorney general to bring actions and provide private rights of action to consumers as enforcement mechanisms. Failure to comply with data protection laws and regulations could result in government enforcement actions and create liability for us (which could include civil and/or criminal penalties), private litigation and/or adverse publicity. Federal regulators, state attorneys general, and plaintiffs’ attorneys have been and will likely continue to be active in this space. We may also obtain health information from third parties (e.g., healthcare providers who prescribe our products) that are subject to privacy and security requirements under HIPAA. Although we are not directly subject to HIPAA, other than potentially with respect to providing certain employee benefits, we could potentially be subject to criminal penalties if we, our affiliates, or our agents knowingly obtain, use, or disclose individually identifiable health information maintained by a HIPAA-covered entity in a manner that is not authorized or permitted by HIPAA.
Additionally, the General Data Protection Regulation (GDPR), applicable in the European Union (EU) as of May 25, 2018, applies to all of our activities conducted from an establishment in the EU or related to products and services that we may offer to EU users. The GDPR created a range of new compliance obligations, which could cause us to change our business practices, and has significantly increased financial penalties for noncompliance (including possible fines of up to 4% of global annual turnover for the preceding financial year or €20 million (whichever is higher) for the most serious infringements).
The California Consumer Privacy Act, or CCPA, took effect on January 1, 2020. The CCPA establishes certain requirements for data use and sharing transparency and provides California residents certain rights concerning the use, disclosure, and retention of their personal data. The CCPA and its implementing regulations have already been amended multiple times since their enactment. These laws and regulations are evolving and subject to interpretation, and may impose limitations on our activities or otherwise adversely affect our business. Similarly, there are a number of legislative proposals in the European Union, the United States, at both the federal and state level, and in other jurisdictions that could impose new obligations or limitations in areas affecting our business. In addition, some countries are considering or have passed legislation implementing data protection requirements or requiring local storage and processing of data or similar requirements that could increase the cost and complexity of delivering our services and research activities. These laws and regulations, as well as any associated claims, inquiries, or investigations by Nasdaq,or any other government actions may lead to unfavorable outcomes including increased compliance costs, delays or impediments in the SECdevelopment of new products, negative publicity, increased operating costs, diversion of management time and attention, and remedies that harm our business, including fines or demands or orders that we modify or cease existing business practices.
Certain of these laws and regulations are described in greater detail in the previous section under "Business — Government Regulation — Healthcare Privacy Laws." If we, our agents, or our third party partners fail to comply or are alleged to have failed to comply with these or other regulatory authorities. Failureapplicable data protection and privacy laws and regulations, or if we were to remedy anyexperience a data breach involving personal information, we could be subject to government enforcement actions or private lawsuits. Any associated claims, inquiries, or investigations or other government actions could lead to unfavorable outcomes that have a material weaknessimpact on our business including through significant penalties or fines, monetary judgments or settlements including criminal and civil liability for us and our officers and directors, increased compliance costs, delays or impediments in the development of new products, negative publicity, increased operating costs, diversion of management time and attention, or other remedies that harm our business, including orders that we modify or cease existing business practices.
Our business and operations would suffer in the event of computer system failures, cyberattacks or a deficiency in our cybersecurity or those of any business partners.
Despite the implementation of security measures, our internal controlcomputer systems and those of our contractors, vendors, customers and consultants are vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures, cyberattacks or cyber-intrusions over financial reporting,the Internet, loss of funds or information from phishing or other fraudulent schemes, attachments to implementemails, persons inside our organization, or maintain other effective control systems required of public companies, could also restrict our futurepersons with access to systems inside our organization or those with whom we do
business. The risk of a security breach or disruption, particularly through cyber-attacks or cyber intrusion, including by computer hackers, foreign governments, and cyber terrorists, has generally increased as the capital markets.number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. Such an event could cause interruption of our operations or loss of Company funds and have a negative financial consequence on our business. For example, the loss of data from completed or ongoing clinical trials for our product candidates could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data, or could result in a delay of the services provided by our vendor. Although we are targeted for cyber-attacks from time to time, we are only aware of one instance where an unauthorized third party accessed certain parts of our computer systems and we believe we have addressed the matter without any known financial implication, loss of data or exposure of confidential or personal information. To the extent that any disruption or security breach were to result in a loss of or damage to our data, misappropriation of funds to unintended recipients, or inappropriate disclosure of confidential, proprietary or personal information, we could incur material legal claims and liabilities and damage to our reputation and the development and commercialization of XHANCE and our other product candidates could be delayed. Additionally, breach remediation costs may be significant.
Our disclosure controlsWe may be exposed to liabilities under the U.S. Foreign Corrupt Practices Act and procedures may not prevent or detect all errors or acts of fraud.other U.S. and foreign anti-corruption anti-money laundering, export control, sanctions, and other trade laws and regulations, and any determination that we violated these laws could have a material adverse effect on our business.
We are subject to export control and import laws and regulations, including the periodic reporting requirementsU.S. Export Administration Regulations, U.S. Customs regulations, and various economic and trade sanctions regulations administered by the U.S. Treasury Department's Office of Foreign Assets Control. We are also subject to the U.S. Foreign Corrupt Practices Act of 1977, as amended (FCPA), the U.S. domestic bribery statute contained in 18 U.S.C. § 201, the U.S. Travel Act, the USA PATRIOT Act, the United Kingdom Bribery Act 2010, the Proceeds of Crime Act 2002, and possibly other anti-bribery and anti-money laundering laws in countries outside of the Exchange Act. Our disclosure controlsU.S. in which we conduct our activities. Anti-corruption laws are interpreted broadly and proceduresprohibit companies and their employees and third-party intermediaries from authorizing, promising, offering, providing, soliciting, or accepting, directly or indirectly, improper payments or benefits to or from any person whether in the public or private sector. As we commercialize XHANCE and any other product candidates that we may develop, we may engage with third-party manufacturers and collaborators who operate abroad and are designed to reasonably assure that information required to be disclosed by us in reports we file or submit under the Exchange Act is accumulatedobtain certain necessary permits, licenses 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, 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 reflect the reality that judgments 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 due to error or fraud may occur and not be detected. 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.
We have incurred and will continue to incur increased costs as a result of operating as a public company, and our management is required to devote substantial time to new compliance initiatives.
Prior to the consummation of our initial public offering in October 2017, we were not subject to public company reporting obligations. We now incur significant additional legal, accounting, administrative and other costs and expenses as a public company. Compliance with the Sarbanes-Oxley Act, the Dodd-Frank Act of 2010, the Exchange Act, as well as rules of the SEC and Nasdaq, for example, resulted in, and will result in further, significant
initial costs to us as well as ongoing increases in our legal, audit and financial compliance costs, particularly after we are no longer an "emerging growth company." In addition, changing laws, regulations and standards relating to corporate governance and public disclosure, including regulations implemented by Nasdaq and the SEC, may increase legal and financial compliance costs and make some activities more time-consuming. These laws, regulations and standards are subject to varying interpretations and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management's time and attention from revenue-generating activities to compliance activities. Any changes that 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.
The Exchange Act requires, among other things, that we file annual, quarterly and current reportsapprovals with respect to our businessbusiness. Our activities abroad create the risk of unauthorized payments or offers of payments by employees, consultants, sales agents or distributors, even though they may not always be subject to our control. We have implemented policies to discourage these practices by our employees, consultants, sales agents and financial condition. Our boarddistributors. However, our employees, consultants, sales agents, or distributors of directors, management and other personnel need to devote a substantial amount of time to these compliance initiatives. Moreover, failure to comply with these rules and regulations might make it more difficult and more expensiveour company may engage in conduct for us to obtain director and officer liability insurance, orwhich we might be forcedheld responsible, even if we do not explicitly authorize such activities.
Noncompliance with anti-corruption, anti-money laundering, export control, sanctions, and other trade laws could subject us to accept reduced policy limitswhistleblower complaints, investigations, sanctions, settlements, prosecution, other enforcement actions, disgorgement of profits, significant fines, damages, other civil and criminal penalties or injunctions, suspension and/or debarment from contracting with certain persons, the loss of export privileges, reputational harm, adverse media coverage and other collateral consequences. If any subpoenas or incur substantially higherinvestigations are launched, or governmental or other sanctions are imposed, or if we do not prevail in any possible civil or criminal litigation, our business, results of operations and financial condition could be materially harmed. Responding to any action will likely result in a materially significant diversion of management's attention and resources and significant defense and compliance costs and other professional fees. In addition, the U.S. government may seek to maintain the samehold us liable for successor liability FCPA violations committed by companies in which we invest or similar coverage.that we acquire. As a general matter, enforcement actions and sanctions could harm our business, results of operations, and financial condition.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our principal office is located in Yardley, Pennsylvania, where we lease approximately 30,000 square feet of office space pursuant to a lease that expires in May 2021.2024. We also lease facilities in Ewing, New Jersey and Oslo, Norway and Swindon, England.Norway. We believe our facilities are adequate to meet our current needs, although we may seek to negotiate new leases or evaluate additional or alternate space for our operations. We believe appropriate alternative space will be readily available on commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
We are not currently a party to any material pending legal proceedings.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR RESISTRANT'SREGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on The Nasdaq Global Select Market under the symbol “OPTN”. As of March 1, 2019,2021, there were 41,264,42252,945,865 shares of our common stock outstanding. There were approximately 2517 stockholders of record at March 1, 2019.2021. Because many of our shares are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders.
Securities Authorized for Issuance under Equity Compensation Plans
Information required by Item 5 of Form 10-K regarding our equity compensation plans is incorporated herein by reference to Item 12 of Part III of this Annual Report on Form 10-K.
Recent Sales of Unregistered Securities
In May 2018 and July 2018, we issued an aggregate of 14,647 shares of common stock to pursuant to the exercise of certain warrants issued prior to our initial public offering. The shares of common stock issued upon exercise of the warrants were offered and sold without registration under the Securities Act pursuant to the exemption provided by Section 4(a)(2) of the Securities Act and Rule 506 promulgated thereunder as transactions not involving a public offering.
The certificates representing the issued shares of common stock described in this Item 5 included appropriate legends setting forth that the applicable securities have not been registered and reciting the applicable restrictions on transfer. There were no underwriters employed in connection with any of the transactions set forth in this Item 5. Except as set forth above, weWe did not sell any shares of our common stock or our preferred stock, or grant any stock options, warrants or restricted stock awards, during the year ended December 31, 20182020 that were not registered under the Securities Act of 1933, as amended (the Securities Act) and that have not otherwise been described in a Quarterly Report on Form 10-Q or a Periodic Report on Form 8-K.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
We did not purchase any of our registered equity securities during the period covered by this Annual Report on Form 10-K.
Use of Proceeds from Registered Securities
Our initial public offering (IPO) was effected through a Registration Statement on Form S-1 (File No. 333-220515) that was declared effective by the SEC on October 12, 2017. On October 17, 2017, 8,625,000 shares of our common stock were sold at a price to the public of $16.00 per share, for aggregate gross proceeds of $138.0 million. All of the securities registered pursuant to the offering were sold prior to termination of the offering. Jefferies
and Piper Jaffray acted as joint lead book-running managers in the IPO, and BMO Capital Markets and RBC Capital Markets acted as joint book-running managers in the IPO.
On October 17, 2017 we received proceeds from the IPO of $128.3 million, which was net of underwriting discounts and commissions of approximately $9.7 million. Of this amount, we paid offering expenses of approximately $2.8 million.
There has been no material change in the use of proceeds from the IPO as described in the final prospectus for the IPO filed with the SEC on October 12, 2017 (the Final Prospectus). During the period from the closing of our IPO to December 31, 2018, we used $115.4 million of the proceeds as follows:
approximately $70.3 million to support the launch of XHANCE, including investments in marketing and sales, inventory and our commercial infrastructure;
approximately $9.7 million to fund further development efforts for XHANCE; and
approximately $35.4 million to fund other working capital and general corporate purposes, including costs of operating as a public company.
The balance of the funds totaling approximately $10.1 million are expected to be used in a manner consistent with the use of proceeds described in the Final Prospectus.
The foregoing expenses are a reasonable estimate of the expenses incurred by us in the offering and do not represent the exact amount of expenses incurred. All of the foregoing expenses were direct or indirect payments to persons other than (i) our directors, officers or any of their associates; (ii) persons owning 10% or more of our common stock; or (iii) our affiliates.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
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 historical consolidated financial statements and the related notes thereto appearing in this Annual Report. In addition to historical information, some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, includes forward‑lookingforward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the “Risk Factors” section of this Annual Report, our actual results could differ materially from the results described in or implied by the forward‑lookingforward-looking statements contained in the following discussion and analysis. See "Note Regarding Forward-Looking Statements"
Company Overview
We are a specialty pharmaceutical company focused on the development and commercialization of products for patients treated by ear, nose and throat (ENT) and allergy specialists. Our first commercial product, XHANCE® (fluticasone propionate) nasal spray, 93 mcg,micrograms (mcg), is a therapeutic utilizing our proprietary Optinose Exhalation Delivery System (EDS) that delivers a topically-acting corticosteroid for the treatment of chronic rhinosinusitis with nasal polyps and, if approved, chronic rhinosinusitis without nasal polyps (also known as chronic sinusitis). Chronic rhinosinusitis is a serious nasal inflammatory disease that is currently treated using therapies, such as intranasal steroids (INS), which have significant limitations. We believe XHANCE has a differentiated clinical profile with the potential to become part of the standard of care for this disease because it is able to deliver medication to the primary site of inflammation high and deep in the nasal passages in regions not adequately reached by currentconventional INS.
OnIn September 18, 2017, the U.S. Food and Drug Administration (FDA) approved XHANCE for the treatment of nasal polyps in patients 18 years of age or older. XHANCE was made widely available through retailcommercial channels in April 2018.
SinceBusiness Updates in Response to the FDA approvalCOVID-19 Pandemic
The COVID-19 pandemic has caused business and economic disruption, and the duration and impact of that disruption is uncertain at this time.
•In mid-March 2020, we transitioned to a full-time, virtual work environment in which all employees, including sales representatives (whom we refer to as territory managers), were encouraged to work from their place of residence. Our decision was based on actions taken by federal, state and local governments to contain the spread of severe acute respiratory coronavirus 2 (SARS-CoV-2) and the related Coronavirus Disease 2019 (COVID-19), as well as the impact of “social distancing” efforts and various mitigation actions implemented by healthcare practices across the United States.
•Federal, state and local government requirements and guidances have impacted virtually all of the physicians' offices in which our territory managers detail XHANCE. These impacts include reduced patient visits, temporary halt of territory managers' visits, and temporary closings of physicians' offices. Shortly after our transition to a full-time, virtual work environment, our territory managers began virtual details of XHANCE to target audience physicians.
•We have been monitoring, and will continue to monitor, federal, state, and local government requirements and guidances. In certain instances, the various mitigation efforts have been updated to facilitate a return to a working environment with fewer restrictions. Where permitted by governmental requirements and the policies of physician offices, our territory managers began to return to in-person detailing of physicians in May and June 2020. Given the localized nature of the restrictions that are in place and the potential for restrictions to return, we have focused on executingequipped our integrated launch plan and have made progress in each of these key strategic areas:
Customer Model. We have defined a sales force footprint of approximately 120 territories targeting approximately 14,000 ENTs, allergists and “specialty-like” primary care physicians and have deployed a hybrid sales model that combines an internal sales leadership team with a fully-dedicated contract sales
force to call on our target health care provider (HCP) customer universe. We prioritized approximately 80 territories within our sales force footprint to deploy in 2018 based upon pre-launch expectations regarding where we could achieve an estimated 65% commercial market access within each territory. The initial 80 territory managers were deployed in March 2018, actively engaging approximately 7,600 ENTs, allergists and "specialty like" primary care physician targets to promote XHANCE for the treatment of nasal polyps. During the first half of 2019, we plan to internalize our contract sales team and deploy an additional 20 territory managers in “XHANCE naive” geographies to expand our reach among our target physician audience. This is expected to grow the target audience for our sales team by approximately 25% to approximately 9,500 HCPs. We intend to eventually increase the size of our sales force to approximately 120 territory managers to expand our calledoperate in an environment that will include a mix of virtual and in-person physician detailing with dependencies on target audience to approximately 14,000 ENT, allergistsgeography and specialty-like primary care physicians. Additionally, we expect to target additional physicians through digital and non-personal promotion in areas where we do and do not have territory managers.time.
XHANCE Patient Affordability Programs. In late August 2018, we implemented our current co-pay savings program. We believe this program, with an indefinite duration, provides an affordability solution for patients that physicians will support. The current program provides patient co-pay assistance including a first prescription at no out-of-pocket cost to patients ($0 co-pay) to commercially insured patients and low subsequent co-pays for refills. Our data suggests these programs are playing a role in building demand for XHANCE, particularly as they become more widely understood•Late in the prescribing community.
Market Access. In meeting with pharmacy benefit managers (PBMs) and health insurers/potential payors,first quarter of 2020 we share what we believe is a compelling economic value proposition. Our analyses suggestbegan to observe an adverse impact of the COVID-19 pandemic on XHANCE prescription growth. This adverse impact was most pronounced during the "shelter-in-place" mitigation efforts that were prevalent from late-March through May 2020. Although XHANCE will have a comparatively low pharmacy budget impact and our clinical trial data suggest that XHANCE may produce an offsetting benefit by helping reduce other healthcare resource utilization, most notably the rate of endoscopic surgery and, therefore, surgery-related costs. For an insurance plan, this could represent potential for overall cost reductionprescription growth (and in the population of patients with nasal polyps, as the overall cost of XHANCE couldparticular, new prescription growth) continues to be less than the offsetting costs related to the reduction in surgeries. During clinical trials, XHANCE was also associated with an improvement in reported work productivity in treated patients, which should be valued by employers and patients. Further, we believe the cost of XHANCE to insurance plans will likely be significantly less than the projected costs of monoclonal antibodies that are currently in development for the treatment of nasal polyps, including dupilumab, for which the submission of an Supplemental Biologics License Application (sBLA) was recently publicly announced.
Based on currently available third-party data and our internal analyses, we believe that greater than 75% of commercially insured lives are currently in a plan in which XHANCE is covered in a Tier 3 formulary position, and approximately 60% of commercially insured lives are in a plan that covers XHANCE in a “low hassle factor” position. However, payors may change coverage levels for XHANCE or controls such as step edits and prior authorization (PAs), positively or negatively, at any time. We use the term “hassle factor” to characterize the level of difficulty that physicians and patients must overcome to prescribe and fill XHANCE. We define a low “hassle factor” as Tier 3 unrestricted, Tier 3 single step edit, or Tier 3 with a simple PA requiring, for example, only the prior use of an over-the-counter or generic INS - although we acknowledge that any step edit or PA involves a level of burden for physicians and patients that could negatively impact XHANCE utilization. Our initial goal was for 75% of commercially insured lives to have access to XHANCE in a Tier 3 formulary position with a “low hassle factor"adversely impacted by the endCOVID-19 pandemic, the magnitude of 2018. While at approximately 60% "low hassle factor" at December 31, 2018 we did not meet this goal, it remains an important concept for usthe impact has slowly improved as we seekfederal, state and local government requirements and guidances have been updated to expand overall coverage for XHANCE.
We have also contracted with the Centers for Medicare and Medicaid Services for coverage of certain government insured lives and continue to expand XHANCE market access for other government-insured populations. As noted above, we have in place a co-pay assistance program for patients covered by commercial insurers and plan to continue to analyze affordability issues and assess patient affordability programs to appropriately support patient access to XHANCE for government insured patients.
Infrastructure. We continue to develop our internal capabilities in a manner commensurate with having become a fully integrated and publicly traded commercial-stage specialty pharmaceutical company. We have implemented an enterprise resource planning system to expand our operational and commercial finance capabilities. We have also implemented a robust healthcare compliance program to guide our staff’s and our partners' compliance with rules and regulations regarding pharmaceutical sales. In managing our growth, we have remained focused on fostering our One Mission culture.
XHANCE Prescriptions.facilitate economic reopening. Based on third-party prescription data as well as data from preferred pharmacy networkPreferred Pharmacy Network (PPN) partners, XHANCE prescriptions increased 11% from first quarter 2020 to second quarter 2020, 11% from second quarter 2020 to third quarter 2020, and 7% from third quarter 2020 to fourth quarter 2020. Although XHANCE prescriptions have grown during this initial COVID-19 period, the rate of growth was below our pre-pandemic expectations. Due to the adverse effect of the COVID-19 pandemic on XHANCE prescription growth, as well as the unknown effect in the future, in May 2020 we withdrew our previous XHANCE revenue guidance for 2020. Additionally, the duration and magnitude of the negative impact from the COVID-19 pandemic on XHANCE net revenue are uncertain and may affect the availability of additional capital under our Pharmakon Note Purchase Agreement and our ability to remain in compliance with our revenue covenants thereunder.
•Due to the impacts of the COVID-19 pandemic, one of our contract manufacturers implemented a reduced work schedule and additional precautions which resulted in delays relating to the manufacture of XHANCE in second quarter 2020 but did not result in an interruption to commercial or clinical supply. As of December 31, 2020, all of our manufacturers were manufacturing XHANCE finished goods on time. Additionally, we believe we are maintaining appropriate levels of finished product inventories in the event of future supply
disruption; however, the duration and magnitude of a future negative impact from the COVID-19 pandemic could constrain our supply of XHANCE.
•Previous guidance related to the expected timing of results from our two ongoing chronic sinusitis clinical trials indicated that top-line results from both trials would be available in the second half of 2021. Pauses in patient enrollment due to factors related to the COVID-19 pandemic have had, and may continue to have, varying effects in different geographies and over time have led to a change in our projected timeline for initial data availability and may lead to additional changes in the future. We now expect top-line from at least one of our ongoing chronic sinusitis trials by the end of 2021 and for the other trial in the first half of 2022. For those subjects currently participating in these studies, procedures to facilitate ongoing treatment and capture of data during periods of in-person care restrictions have been put in place.
•In light of the uncertainties created by the COVID-19 pandemic, in May 2020 we announced actions to reduce 2020 operating expenses while preserving our ability to drive XHANCE growth and successfully complete our ongoing chronic sinusitis trials. These expense reductions included a reprioritization of project spending, a reduction in payroll costs, and lower near-term clinical trial expenses as the result of temporarily paused patient enrollment at research sites in response to the acute COVID-19 environment.
The full impact of the COVID-19 pandemic on our business is still unknown. It is likely to continue to have adverse impacts on XHANCE prescription growth and net revenues as a result of fewer patients visiting physician offices, restrictions imposed by some physician offices relating to territory managers' visits, increased unemployment adversely affecting demand and payor mix, and the availability and cost of capital for us to fund our business operations and service our debt. We will continue to assess the evolving impact of the COVID-19 pandemic and will make adjustments to our operations as necessary.
Additional Business Updates
We track and report metrics that we believe are an important part of assessing our progress in key strategic areas including:
•XHANCE Prescriptions and Market Share. Based on third-party prescription data as well as data from PPN partners, the total estimated number of XHANCE prescriptions in the second quarter, third quarter and fourth quarter 2018 were 8,611, 9,427, and 14,106, respectively,of 2020 was 73,900, which represents 50%36% growth for prescriptions when comparingcompared to estimated fourth quarter to third quarter.2019 prescriptions of 54,300. The INS prescription market increaseddecreased approximately 11%13% from thirdfourth quarter 2019 to fourth quarter of 2018 based on third-party prescription data. Estimated XHANCE prescriptions in December 2018 and January 2019 were 4,570 and 6,292, respectively, which represents 38% month-over-month growth. The INS market increased approximately 5% from December 2018 to January 20192020 based on third-party prescription data. In addition, the total estimated number of XHANCE prescriptions forwas 56,100 in the 4-week periods ended January 25first quarter of 2020, 62,500 in the second quarter of 2020, and February 22, 2019 were 5,156 and 7,186, respectively, which represents period-over-period growth69,000 in the third quarter of 39%. The INS market decreased approximately 1% from the 4-week period ended January 25 to the 4-week period ended February 22 based on third-party prescription data.
2020.XHANCE prescribing may be subject to aA seasonal effect has historically been observed in the INS prescription market in which market volume generally peaks innear the middle of the second quarter and declines ininto the early part of the third quarter of each calendar year. As a result of the COVID-19 pandemic, INS prescription market volumes did not experience the expected peak in the second quarter of 2020. Based on third-party prescription data, INS market prescriptions increased 8% from the fourth quarter of 2019 to the first quarter of 2020, decreased 16% from the first quarter of 2020 to the second quarter of 2020, decreased 6% from the second quarter of 2020 to the third quarter of 2020, and increased 2% from the third quarter of 2020 to the fourth quarter of 2020. In addition, based on third-party prescription data, INS market prescriptions were flat from full year 2018 to full year 2019, and decreased 7% from full year 2019 to full year 2020.
Although the underlying disease that we are treating is chronic and causes symptoms year-round, we believe the variation in patient flow through the offices of relevant physician specialists, and seasonality in disease flare-ups, may havehas an impact on the number of patients that present themselves and who are therefore available for prescribingto receive a new medication likeprescription for XHANCE. We also believeDemand has historically been, and we expect will continue to be, impacted by the INS market seasonality and the seasonal variation in patient visits with their doctor resulting in reduced XHANCE prescription demand in the third quarter.
Additionally, as we experienced in 2020, we expect that the first quarter prescription demand and average net revenue per prescription for XHANCE will be adversely impacted in 2021 and future years by the annual resetting of patient healthcare insurance plan deductibles may have a negative impactand changes in individual patients' healthcare insurance coverage, both of which often occur in January.
We track the market share of XHANCE within our current target audience. For this purpose, we calculate market share as the proportion of XHANCE prescriptions to the number of prescriptions written for other
INS within our current target audience of approximately 18,000 physicians. Our target physician audience includes all ENT and Allergy specialist physicians who, based on demandthird-party data, write intranasal steroid spray prescriptions. In addition, our current target audience includes specialty-like primary care physicians called on by our territory managers or kaléo sales representatives. Prior to the fourth quarter 2020 initiation of XHANCE co-promotion by kaléo, our target audience included approximately 10,000 physicians called on by Optinose sales territory managers.
We believe market share, in addition to XHANCE prescription volume, provides important information regarding XHANCE utilization because market share normalizes XHANCE prescriptions for XHANCE. Based on our limited commercial history, we are unable to estimatemarket effects including the extent to which INS market seasonality, andseasonal variation in patient visits with their doctor, annual deductible resets and annual changes in individual patient's healthcare insurance coverage referenced above. Based on third-party prescription data as well as data from PPN partners, we estimate XHANCE had a market share in our current target audience of 18,000 physicians of 3.4% in the fourth quarter of 2019, 3.4% in the first quarter of 2020, 4.4% in the second quarter of 2020, 4.9% in the third quarter of 2020, and 5.1% in the fourth quarter of 2020. Note that most of the INS prescriptions written within our target physician audience are for chronic sinusitis, allergic rhinitis and other conditions outside of our nasal polyp indication. Our target physician audience is subject to revision each quarter to account for changes such as revised sales target prioritization, and physician retirements. Changes to the target physician audience can contribute some of the quarter over quarter change in market share.
•XHANCE New Prescriptions and Refill Prescriptions. The underlying disease that we are treating is chronic and, as a result, many patients may affect XHANCE.fill multiple prescriptions per year. We monitor new prescriptions as they create the potential for future refill prescriptions. Based on third-party prescription data as well as data from PPN partners, the total estimated number of XHANCE new prescriptions in the fourth quarter of 2020 was 24,600, which represents 16% growth for new prescriptions when compared to estimated fourth quarter 2019 new prescriptions of 21,200. In addition, the total estimated number of XHANCE new prescriptions was 22,300 in first quarter 2020, 18,700 in second quarter 2020, and 23,000 in third quarter 2020. Based on third-party prescription data, the INS market for new prescriptions decreased 21% from the fourth quarter of 2019 to the fourth quarter of 2020 and increased 5% from the third quarter of 2020 to the fourth quarter of 2020. In addition, based on third-party prescription data, the INS market for new prescriptions increased 13% from the fourth quarter of 2019 to the first quarter of 2020, decreased 30% from the first quarter of 2020 to the second quarter of 2020, decreased 5% from the second quarter of 2020 to the third quarter of 2020, and increased 5% from the third quarter of 2020 to the fourth quarter of 2020. In addition, based on third-party prescription data, the INS market for new prescriptions increased 1% from full year 2018 to full year 2019, and decreased 13% from full year 2019 to full year 2020
We track refill prescriptions and provide patient assistance to support refill programs that are administered by our PPN partners. Based on third-party prescription data as well as data from PPN partners, the total estimated number of XHANCE refill prescriptions in the fourth quarter of 2020 was 49,300, which represents 49% growth for refill prescriptions when compared to estimated fourth quarter 2019 refill prescriptions of 33,000. In addition, the total estimated number of XHANCE refill prescriptions was 33,700 in first quarter 2020, 43,800 in second quarter 2020, and 46,100 in third quarter 2020.
•Prescribing Breadth and Depth. We track the number of physicians who prescribe XHANCE in a time period to evaluate the breadth of prescribing. Based on third-party prescription data as well as data from PPN partners, the total estimated number of physicians who had at least one patient fill a prescription for XHANCE in the fourth quarter of 2020 was 6,708, which represents 14% growth when compared to the estimated 5,859 physicians who had at least one patient fill a prescription for XHANCE in the fourth quarter of 2019. In addition, the total estimated number of physicians who had at least one patient fill a prescription for XHANCE was 6,345 in the first quarter of 2020, 6,209 in the second quarter of 2020, and 6,443 in the third quarter of 2020.
We also track the number of prescriptions filled by a prescribing physician's patients in a time period to evaluate depth of prescribing. Based on third-party prescription data as well as data from PPN partners, the total estimated number of physicians who had more than 15 XHANCE prescriptions filled by their patients in the fourth quarter of 2020 was 1,275, which represents 54% growth when compared to the estimated 828 physicians who had more than 15 XHANCE prescriptions filled by their patients in the fourth quarter of 2019. In addition, the total estimated number of physicians who had more than 15 XHANCE prescriptions filled by their patients was 895 in the first quarter of 2020, 1,028 in the second quarter of 2020, and 1,153 in the third quarter of 2020.
•XHANCE Net Product Revenues per Prescription. We calculate average net product revenues per prescription, one metric that we use to gauge the profitability of XHANCE, by dividing net product revenues for the quarter by the estimated number of XHANCE prescriptions dispensed during the quarter. XHANCE net product revenues per prescription were $204 in the fourth quarter of 2019, $126 in the first quarter of 2020, $164 in the second quarter of 2020, $224 in the third quarter of 2020, and $211 in the fourth quarter of 2020.
XHANCE Development Update
In addition to XHANCE’s existing indication for the treatment of nasal polyps, in order to broaden our U.S. market opportunity, we initiated a clinical researchtrial program in pursuit of a follow-on indication for the treatment of chronic sinusitis in the U.S. TheWe believe XHANCE has the potential to be the first drug therapy approved by the FDA for the treatment of chronic sinusitis. We expect the program will comprisebe comprised of two phasePhase 3b clinical trials, the first of which was initiated in the fourth quarter of 2018.2018 and is estimated to enroll approximately 378 subjects and the second of which was initiated in the second quarter of 2019 and is estimated to enroll approximately 399 subjects. Estimated enrollment for both trials is subject to change for factors that may include interim analyses intended to inform the statistical powering of both trials. We expect top-line results from one of our ongoing chronic sinusitis trials by the end of 2021 and the other in the first half of 2022.
OPN-019 Development Update
In June 2020, we announced the initiation of development of a new product candidate, OPN-019, which combines our proprietary intranasal Exhalation Delivery System (EDS) with an antiseptic.
Because components of the drug-device combination product candidate, including both the active drug and delivery device, are currently commercially available in the U.S., we anticipate that the development of OPN-019 may be streamlined and accelerated. Subsequent to a pre-Investigational New Drug (IND) submission we have engaged with the FDA regarding an IND and clinical development pathway.
We have performed in vitro testing against SARS-CoV-2 with a candidate formulation in which a 4-log reduction (a 99.99% reduction) in virus count was produced. In addition,we performed tests against other pathogens. For most pathogens tested, 3-log to 6-log reductions (99.9% to 99.9999% reductions) in virus count were observed.
In April 2021, we expect to initiate a randomized, proof of concept study in subjects who have tested positive for SARS-CoV-2 infection, are recently infected, and who have mild or no symptoms. This pilot study will evaluate both the second trial in 2019.magnitude and duration of viral load reduction after a single dose of OPN-019.
We are focused on supporting the initial stages of development within our current operating expense guidance and intend to seek grants, partnerships, and/or other sources of capital to fund future development.
Financial Operations Overview
The following discussion sets forth certain components of our consolidated statements of operations as well as factors that impact those items.
Net product revenues
Sales of XHANCE generated $7.1$48.4 million and $30.4 million in net product revenues for the yearyears ended December 31, 2018.2020 and 2019, respectively. In accordance with GAAP, we determine net product revenues for XHANCE, with specific assumptions for variable consideration components including but not limited to trade discounts and allowances, co-pay assistance programs and payor rebates.
Based on available XHANCE prescription data purchased from third parties and data from our pharmacy network,PPN partners, our average net revenuesproduct revenue per prescription for the fourth quarter of 20182020 was approximately $214,$211, which is favorablerepresents an increase compared to our average net product revenuesrevenue per prescription of approximately $202 and $148 in the third and second quarters of 2018, respectively. The 6% improvement in the average net revenue per prescription$204 in the fourth quarter vs.of 2019. Average net product revenue per prescription for the third quarteryear ended December 31, 2020 was $185, which represents an decrease compared to our average net product revenue per prescription of 2018 is primarily attributable to lower ratesapproximately $198 for the year ended December 31, 2019.
We calculate average net product revenues per prescription, one metric that we use to gauge the profitability of XHANCE, by dividing net product revenues for the quarter by the estimated number of XHANCE prescriptions dispensed during the quarter. As a result, average net product revenues per prescription is subject to variability. That variability is impacted by factors that do not necessarily reflect a change in the price that is paid for an individual unit of XHANCE, including but not limited to ordering patterns and inventory levels for our wholesale customers and preferred pharmacy networkPPN partners, patient utilization rates of affordability programs and the proportion of patients acquiring XHANCE through an insurance benefit. There is also the potential for variability that results from changes in estimation methodology by the third parties that we rely upon to provide prescription data which may lead to revisions of historical estimates of prescription volumes and our calculated average revenuenet product revenues per prescription.
Based on data availableWe expect full year 2021 net product revenues to date, we expectbe at least $80.0 million. This includes our expectation that first quarter 20192021 net revenueproduct revenues will decrease compared to fourth quarter 2020. The primary driver of the sequential decrease to net product revenues is our expectation that XHANCE average net product revenues per prescription tofor the first quarter of 2021 will be between $155 - $175.$120 and $140. This expected decrease from the fourth quarter 20182020 is largely a consequence of the reset of many patient insurance deductibles in January. As a result of this annual reset, we expect greater copay support to be provided by us under our assistance programsprograms. In addition, we believe another contributor to the expected first quarter 2021 decrease is related to changes in patients' healthcare insurance coverage that reduce demand for refill prescriptions early in the year. This reduction in refill prescriptions also has the effect of lowering average net product revenues per prescription as it reduces the proportion of prescriptions that are covered (reimbursed) by a commercial insurer, which are designed toresults in us providing greater copay support continued volume growth.under our assistance programs. For the remainder of 2019,2021, we believe averageXHANCE net revenueproduct revenues per prescription will improve and we expect that the full-year 2019 average net
revenue per prescription will be between $185 - $205.substantially. Factors supporting this expected growth include patients meeting their out-of-pocket expense thresholds, expected improvements in insurance coverage and an increasecontinued strength in the proportion of prescription refills. In addition, we expect XHANCE net product revenues per prescription for the full year 2021 to increase compared to full year 2020. We do not expect to repeat the pandemic-response ASSIST program in 2021, and its termination is expected to be a factor in driving 2021 XHANCE net product revenues per prescription higher than what was seen in 2020.
Licensing revenues
In September 2019, OptiNose AS, a wholly owned subsidiary of the Company, entered into the Currax License Agreement. Under the terms of the Currax License Agreement, Currax paid us a $3.7 million upfront payment in 2019, an additional $0.8 million in December 2020 upon expiration of the escrow that was established for a limited period to cover potential indemnification obligations, and an additional $1.0 million milestone payment in January 2021 upon the achievement of a specified regulatory milestone. We do not expect to receive any further payments from Currax under the terms of the License Agreement other than reimbursement for certain expenses.
In January 2019, OptiNose AS entered into the Inexia License Agreement. Under the terms of the Inexia License Agreement, Inexia paid us a $0.5 million upfront payment. For each product developed under the Inexia License Agreement, we are eligible to receive up to $8.0 million of development milestone payments and up to $37.0 million of sales milestone payments. In addition, we are eligible to receive tiered, low-to-mid single digit royalties based on net sales of any products successfully developed and commercialized under the Inexia License Agreement. Other than the upfront payment, we do not anticipate the receipt of any milestone or royalty payments from Inexia in the near term.
Costs of product sales
Costs of product sales includes the cost of inventory sold, which includes direct and indirect manufacturing and supply chain costs.
Research and development expense
Prior to the FDA approval of XHANCE in September 2017, research and development expense consisted primarily of costs incurred in connection with the development and pursuit of regulatory approval for XHANCE for the treatment of nasal polyps. Post-FDA approval of XHANCE, researchResearch and development expense consists primarily of expenses incurred to prepare for, initiate and conduct our planned clinical trials, ongoing research efforts of new products and device improvements. We expense research and development costs as incurred. These expenses include:
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▪ | personnel expenses, including salaries, benefits and stock-based compensation expense; |
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▪ | costs of funding clinical development performed by third parties, including pursuant to agreements with contract research organizations (CROs), as well as investigative sites and consultants that conduct or support our nonclinical studies and clinical trials; |
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▪ | expenses associated with the continued development of our EDS devices; |
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▪ | ▪personnel expenses, including salaries, benefits and stock-based compensation expense; ▪costs of funding clinical development performed by third parties, including pursuant to agreements with contract research organizations (CROs), as well as investigative sites and consultants that conduct or support our nonclinical studies and clinical trials;
▪expenses associated with the continued development of our EDS devices; ▪expenses related to the continued development of our product sample portfolio; |
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▪ | expenses incurred under agreements with contract manufacturing organizations (CMOs), including manufacturing scale-up expenses prior to regulatory approval of products for commercial sale and the cost of acquiring and manufacturing preclinical study and clinical trial materials; |
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▪ | consultant fees and expenses associated with outsourced professional scientific development services; |
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▪ | expenses for regulatory activities, including filing fees paid to regulatory agencies and costs incurred to compile and respond to filings with the FDA prior to regulatory approval of products for commercial sale; |
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▪ | costs incurred to maintain, expand and protect our patent portfolio as it relates to product candidates in development; and |
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▪ | allocated expenses for facility costs, including rent, utilities, depreciation and maintenance. |
Certain regulatory, patent and pre-commercialization expenses that were previously classified as research and development expenses (prior to the FDAcontinued development of our product sample portfolio;
▪expenses incurred under agreements with contract manufacturing organizations (CMOs), including manufacturing scale-up expenses prior to regulatory approval of XHANCE in September 2017) have been classified as selling, generalproducts for commercial sale and administrativethe cost of acquiring and manufacturing preclinical study and clinical trial materials;
▪consultant fees and expenses ifassociated with outsourced professional scientific development services;
▪expenses for regulatory activities, including filing fees paid to regulatory agencies and costs incurred postto compile and respond to filings with the FDA prior to regulatory approval of XHANCE to the extent that theseproducts for commercial sale; and
▪allocated expenses support the commercialization of XHANCE.for facility costs, including rent, utilities, depreciation and maintenance.
We typically use our employee, consultant and infrastructure resources across our research and development programs. Although we track certain outsourced development costs by product candidate, we do not allocate personnel costs or other internal costs to specific product candidates.
We plan to incur research and development expenses for the foreseeable future as we expect to continue the development of XHANCE for the treatment of chronic sinusitis and our other product candidates.candidates, including OPN-019. At this time, due to the inherently unpredictable nature of preclinical and clinical development includingand the regulatory approval process, compounded by the uncertainty introduced by the COVID-19 pandemic, the rate of subject enrollment, number of subjectsubjects required, and trial duration, and the early stage of our other product candidates, we are unable to estimate with anyreasonable certainty the costs we will incur and the timelines we will require in our continued development efforts.
Selling, general and administrative expense
General and administrative expense consists primarily of personnel expenses, including salaries, benefits and stock-based compensation expense, for employees in executive, finance, accounting, business development, information technology, legal and human resource functions. General and administrative expense also includes corporate facility costs, including rent, utilities, depreciation and maintenance, not otherwise included in research and development expense, as well as regulatory fees and professional fees for legal, patent, accounting and other consulting services.
Early salesSales and marketing related expenses included expenses related to building brand awareness through advertising and the deployment of our nurse educator team, training and deploying our contract sales force and securing market access for XHANCE as well as salaries and related benefits for employees focused on such efforts. Current and expected commercial investments include our sales team and supporting promotional materials, digital promotion, peer to peerpeer-to-peer education, congresses / conventions, samples, and marketing activities such as directdirect-to-patient / direct-to-consumer initiatives. Additionally, sales and marketing-related expenses include fees paid to patient / directour PPN partners for services unrelated to consumer initiatives.
Selling, generaltraditional distribution functions, such as data fees and administrative expenses increased in 2018 as compared to 2017 as a result of an expanded infrastructure and an increased headcount to support the commercial launch of XHANCE. We also incurred higher corporate infrastructure costs in 2018 as compared to 2017 including, but not limited to, accounting, legal, human resources, consulting and investor relations expenses, and increased director and officer insurance premiums associated with operating as a public company.benefit claims adjudication.
Interest (income) expense
Interest (income) expense consists of interest earned on our cash and cash equivalents held with institutional banks and interest expense is primarily related to our long-term debtnote purchase agreement (Pharmakon Senior Secured Notes) with Pharmakon Advisors, LP (Pharmakon) and amounts amortized and accrued under our convertible notes that were converted into preferred stock in March 2017.former note purchase agreement (Athyrium Senior Secured Notes) with Athyrium Opportunities III Acquisition LP (Athyrium).
Other (income) expense
Other (income) expense consists primarily of grant and other income as a resultthe loss on the extinguishment of government cost reimbursements for research and development activities over a contractually defined period,the Athyrium Senior Secured Notes, as well as foreign currency (income) losses due to exchange rate fluctuations on transactions denominated in a currency other than our functional currency.
Critical accounting policies
Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (GAAP). The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of expenses during the reported period. We base our estimates on historical experience, known trends and events and various other factors that we believe to be 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. We evaluate our estimates
and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions and conditions.
While our significant accounting policies are described in more detail in the notes to our consolidated financial statements appearing elsewhere in this report, we believe that the following accounting policies are those most critical to the preparation of our consolidated financial statements.
Revenue recognition
We account for revenue in accordance with ASCAccounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers, which was adopted on January 1, 2018. This standard applies to all contracts with customers with the exception of contracts that are within the scope of other standards, such as leases, insurance and financial instruments. Under ASC Topic 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration that the entity expects to be entitled in exchange for those goods or services.
We perform the following five steps to recognize revenue under ASC Topic 606: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. We only recognize revenue when it is probable that we will collect the consideration to which we are entitled in exchange for the goods or services that will be transferred to the customer.
Net Product Revenuesproduct revenues
We sellrecognized XHANCE to preferred pharmacy network partners and wholesalers in the U.S. (collectively, Customers). These Customers subsequently resell our products to healthcare providers, patients and other retail pharmacies. In addition to agreements with Customers, we enter into arrangements with healthcare providers and payors that provide for government-mandated and/or privately-negotiated rebates, chargebacks and discounts for the purchase of our products.
We recognize revenue from product sales at the point the Customercustomer obtains control of the product, which generally occurs upon delivery. The transaction price that is recognized as revenue for products includes an estimate of variable consideration, which is described below.consideration. Payment terms with Customerscustomers do not exceed one year and, therefore, we do not account for a financing component in our arrangements. Incremental costs of obtaining a contract with a Customercustomer (for example, sales commissions) are expensed when incurred as the period of benefit is less than one year. Shipping and handling costs for product shipments to Customerscustomers are recorded as selling, general and administrative expenses.
Transaction Price, including Estimates of Variable Consideration
Revenue from products is recognized at the estimated net sales price (transaction price), which includes estimates of variable consideration. We include estimated amounts in the transaction price to the extent it is determined probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all information (historical, current and forecasted) that is reasonably available. The components of our variable consideration include the following:
Components of Variable Consideration
ComponentsProvider Chargebacks and Discounts. Chargebacks for fees and discounts to providers represent the estimated obligations resulting from contractual commitments to sell products to qualified healthcare providers at prices lower than the list prices charged to customers who directly purchase the product from us. Customers charge us for the difference between what they pay for the product and the ultimate selling price to the qualified healthcare providers. These components of variable consideration are established in the same period that the related revenue is recognized, resulting in a reduction of product revenue and accounts receivable.
Trade Discounts and Allowances. We generally provide customers with discounts that include provider chargebacksincentive fees which are explicitly stated in the Company’s contracts. These discounts are recorded as a reduction of revenue and discounts, trade discounts and allowances,accounts receivable in the period in which the related product revenue is recognized.
Product Returns. Consistent with industry practice, we have a product returns government rebates, third-party payor rebates, sales order management feespolicy that provides customers a right of return for product purchased within a specified period prior to and subsequent to the product’s expiration date. We estimate the amount of our product that may be returned and present this amount as a reduction of revenue in the period the related product revenue is recognized, in addition to establishing a current liability. We consider several factors in the estimation process, including expiration dates of product shipped to customers, inventory levels within the distribution channel, product shelf life, prescription trends and other incentives, such as voluntary patient assistancerelevant factors.
Government Rebates. We are subject to discount obligations under state Medicaid programs and other allowances that are offered within contracts between us and our Customers, payors and other indirect customers relatingMedicare. Reserves related to our sale of products. Those components, as described below, are based on the amounts earned or to be claimed on the related sales and are presented as reductions of accounts receivable (if the amount is payable to the Customer) or as a current liability (if the amount is payable to a party other than the Customer). We consider all relevant factors, such as current contractual and statutory requirements, specific known market events and trends, industry data and forecasted customer buying and payment patterns.
Variable Consideration - Accounts Receivable Reductions
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◦ | Provider Chargebacks and Discounts.Chargebacks for fees and discounts to providers represent the estimated obligations resulting from contractual commitments to sell products to qualified healthcare providers at prices lower than the list prices charged to Customers who directly purchase the product from us. Customers charge us for the difference between what they pay for the product and the ultimate selling price to the qualified healthcare providers. These components of variable consideration are established in the same period that the related revenue is recognized, resulting in a reduction of product revenue and accounts receivable. Reserves for chargebacks consist of credits we expect to issue for units that remain in the distribution channel inventories at each reporting period-end that we expect will be sold to qualified healthcare providers, as well as chargebacks that Customers have claimed but for which we have not yet issued a credit.
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◦ | Trade Discounts and Allowances. We generally provide Customers with discounts that include incentive fees which are explicitly stated in our contracts. These discounts are recorded as a reduction of revenue and accounts receivable in the period in which the related product revenue is recognized. In addition, we reimburse our Customers (through discounts and allowances) for sales order management, data and distribution services.
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Variable Consideration - Current Liabilities
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◦ | Product Returns. Consistent with industry practice, we have a product returns policy that provides Customers a right of return for product purchased within a specified period prior to and subsequent to the product’s expiration date. The right of return lapses upon shipment of the goods to a patient. We estimate the amount of our products that may be returned and present this amount as a reduction of revenue in the period the related product revenue is recognized in addition to establishing a liability. We consider several factors in the estimation process, including expiration dates of product shipped to preferred pharmacy network partners and wholesalers, inventory levels within the distribution channel, product shelf life, prescription trends and other relevant factors.
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◦ | Government Rebates. We are subject tothese discount obligations under state Medicaid programs and Medicare. These reserves are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability. For Medicaid, accruals are
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based on estimates of future Medicaid beneficiary utilization applied to the Medicaid unit rebate formula established by the Center for Medicaid and Medicare Services. The Medicare Part D prescription drug benefit mandates manufacturers to fund approximately 50% of the Medicare Part D insurance coverage gap for prescription drugs sold to eligible patients. To estimate the cost to us of this Medicare coverage gap responsibility, we estimate the number of patients in the prescription drug coverage gap for whom we will owe an additional liability under the Medicare Part D program. Our liability for these rebates consists of estimates of claims for the current quarter and estimated future claims that will be made for product that has been recognized as revenue but remains in the distribution channel inventories at the end of the reporting period.
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◦ | Payor Rebates. We contract with certain third-party payors, primarily health insurance companies and pharmacy benefit managers, for the payment of rebates with respect to utilization of our products. These rebates are based on contractual percentages applied to the amount of product prescribed to patients who are covered by the plan or the organization with which we contract. We estimate these rebates and record such estimates in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability.
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◦ | Other Incentives. Other incentives that we offer include voluntary patient assistance programs, such as co-pay assistance programs, which are intended to provide financial assistance to qualified commercially insured patients with prescription drug co-payments required by payors, and coupon programs for cash payors. The calculation of the accrualsPayor Rebates. We contract with certain third-party payors, primarily health insurance companies and pharmacy benefit managers, for the payment of rebates with respect to utilization of its products. These rebates are based on contractual percentages applied to the amount of product prescribed to patients who are covered by the plan or the organization with which it contracts. We estimate these rebates and record such estimates in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability.
Patient Assistance. Other programs that we offer include voluntary co-pay patient assistance programs intended to provide financial assistance to eligible patients with prescription drug co-payments required by payors and coupon programs for cash payors. The calculation of the current liability for this assistance is based on an estimate of claims and the cost per claim that we expect to receive associated with product that has been recognized as revenue but remains in the distribution channel inventories at the end of each reporting period. |
Licensing Revenues
Through December 31, 2017, our revenues were generated pursuant to the terms of a single license agreement (the AVP-825 License Agreement), with Avanir Pharmaceuticals, Inc. (Avanir) (Note 7). The AVP-825 License Agreement included licensed rights to patented technology, non-refundable up-front payment, research services, and regulatory and sales milestones as well as royalty payments. Through December 31, 2018, under the terms of the AVP-825 License Agreement, we received aggregate cash payments of $70.0 million in connection with the initial signing and the achievement of certain development milestones.
On December 10, 2018, we received written notice from Avanir of its election to terminate the AVP-825 License Agreement. As a result, the AVP-825 License Agreement is expected to terminate on March 10, 2019. Upon termination we may elect to continue to commercialize Onzetra Xsail ourselves or through a new licensee. We do not expect to receive any additional proceeds from the AVP-825 License Agreement.
Prior to the receipt of notice of termination of the License Agreement, we analyzed the performance obligations under the AVP-825 License Agreement, the consideration received to date and the consideration we could have received in the future as part of our analysis related to ASU 2014-09. The consideration received to date, which included an upfront payment, research and development funding and development milestone payments was recognized in prior years and our performance obligations pursuant to the arrangement have been completed.
Research and development expenses
Prior to the FDA approval of XHANCE in September 2017, research and development expense consisted primarily of costs incurred in connection with the development and pursuit of regulatory approval for XHANCE for the treatment of nasal polyps. Post-FDA approval of XHANCE, research and development expense consists primarily of expenses incurred to prepare for, initiate and conduct our clinical trials, ongoing research efforts of new products and device improvements. We expense research and development costs as incurred.
At the end of each reporting period, we compare payments made to third-party service providers to the estimated progress toward completion of the applicable research or development objectives. Such estimates are subject to change as additional information becomes available. Depending on the timing of payments to the service providers and the progress that we estimate has been made as a result of the service provided, we may record net prepaid or accrued expenses relating to these costs. To date, we have not made any material adjustments to our prior estimates of accrued research and development expenses.
period.
Stock-based compensation
We account for stock-based compensation awards in accordance with the FASB Accounting Standards Codification (ASC),ASC Topic 718, Compensation — Stock Compensation (ASC 718). ASC 718 requires all stock-based compensation awards to employees to be recognized as expense based on their grant date fair values. We use the Black-Scholes option pricing model to value our stock option awards and shares issued under our employee stock purchase plan. Restricted stock units are valued at the fair market value per share of our common stock on the date of grant. We account for forfeitures of stock option awards as they occur. For awards issued to employees, we recognize compensation expense on a straight-line basis over the requisite service period, which is generally the vesting period of the award. Stock-based awards issued to nonemployees are revalued at each reporting period until the award vests in accordance with ASC Topic 505, Equity. The resulting increase or decrease in value, if any, is recognized as expense or income, respectively, during the period the related services are rendered. Expense for awards with performance conditions is estimated and adjusted on a quarterly basis based upon our assessment of the probability that the performance condition will be met. We have not issued awards where vesting is subject to market conditions; however, if we were to grant such awards in the future, recognition would be based on the derived service period.
Estimating the fair value of stock option awards and shares issued under the employee stock purchase plan requires the input of subjective assumptions, including the estimated fair value of our common stock, the expected life of the option, stock price volatility, the risk-free interest rate and expected dividends. The assumptions used in our Black-Scholes option-pricing model represent management's best estimates and involve a number of variables, uncertainties and assumptions and the application of management's judgment, as they are inherently subjective. If any assumptions change, our stock-based compensation expense could be materially different in the future.
These assumptions used in our Black-Scholes option-pricing model are estimated as follows:
•Expected Term. Due to the lack of sufficient company-specific historical data, the expected term of employee options is determined using the "simplified" method, as prescribed in SEC's Staff Accounting Bulletin (SAB) No. 107, whereby the expected life equals the arithmetic average of the vesting term and the original contractual term of the option. The expected term of nonemployee options is equal to the contractual term.
•Expected Volatility. The expected volatility is based on historical volatilities of similar entities within our industry which were commensurate with the expected term assumption as described in SAB No. 107.
•Risk-Free Interest Rate. The risk-free interest rate is based on the interest rate payable on U.S. Treasury securities in effect at the time of grant for a period that is commensurate with the assumed expected term.
•Expected Dividends. The expected dividend yield is 0% because we have not historically paid, and do not expect for the foreseeable future to pay, a dividend on our common stock.
The following table reflects the weighted average assumptions used to estimate the fair value of optionsstock option awards granted and shares issued under the employee stock purchase plan during the periods presented.year ended December 31, 2020.
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| Year Ended December 31, 2020 |
| 2010 A&R Stock Incentive Plan (1) | | 2017 Employee Stock Purchase Plan |
| Risk free interest rate | 0.70 | % | | 0.96 | % |
| Expected term (in years) | 6.03 | | 0.5 |
| Expected volatility | 68.96 | % | | 84.56 | % |
| Annual dividend yield | 0.00 | % | | 0.00 | % |
(1) Includes options and RSUs granted outside the 2010 A&R Stock Incentive Plan. The grants were made pursuant to the Nasdaq inducement grant exception in accordance with Nasdaq Listing Rule 5635(c)(4).
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| | Year Ended December 31, |
| | 2018 | | 2017 |
Expected term (in years)
| 5.95 |
| | 6.06 |
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| Expected volatility | 74.42 | % | | 78.67 | % |
| Risk free interest rate | 2.74 | % | | 2.06 | % |
| Expected dividend yield | 0.00 | % | | 0.00 | % |
| Fair value of common stock | $ | 12.85 |
| | $ | 9.68 |
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For information about our employee stock purchase plan, see Note 13 to the Consolidated Financial Statements.
Recent Accounting Pronouncements
See Note 3 of our audited consolidated financial statements beginning on page F-1 of this Annual Report on Form 10-K for a description of recent accounting pronouncements applicable to our consolidated financial statements.
JOBS Act
The JOBS Act permits an “emerging growth company”, such as us, to take advantage of an extended transition
period to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies. We have irrevocably elected to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards when they are required to be adopted by public companies that are not emerging growth companies.
Consolidated Results of Operations
Comparison of the years ended December 31, 20182020 and 20172019
The following table sets forth our selected consolidated statements of operations data for the periods indicated (in thousands):
| | | | | | | | Year Ended December 31, |
| | Year Ended December 31, | | 2020 | | 2019 |
| | 2018 | | 2017 | |
| Revenues: | | Revenues: | |
| Net product revenues | $ | 7,065 |
| | $ | — |
| Net product revenues | $ | 48,367 | | | $ | 30,401 | |
| Licensing revenues | | Licensing revenues | 750 | | | 4,230 | |
| Total revenues | | Total revenues | 49,117 | | | 34,631 | |
| Costs and expenses: | | Costs and expenses: | | | |
| Cost of product sales | 1,588 |
| | — |
| Cost of product sales | 7,520 | | | 5,294 | |
| Gross margin | 5,477 |
| | — |
| |
| Operating expenses: | | | | |
| Research and development | 10,099 |
| | 16,832 |
| Research and development | 23,378 | | | 20,783 | |
| Selling, general and administrative | 95,618 |
| | 31,698 |
| Selling, general and administrative | 105,438 | | | 104,155 | |
| Total operating expenses | 105,717 |
| | 48,530 |
| Total operating expenses | 136,336 | | | 130,232 | |
| Loss from operations | (100,240 | ) | | (48,530 | ) | Loss from operations | (87,219) | | | (95,601) | |
| Other (income) expense: | |
| | |
| Other (income) expense: | | | |
| Interest (income) expense | 6,776 |
| | 607 |
| Interest (income) expense | 12,582 | | | 7,264 | |
| Other (income) expense | (358 | ) | | (235 | ) | Other (income) expense | (16) | | | 7,188 | |
| Total other (income) expense | 6,418 |
| | 372 |
| Total other (income) expense | 12,566 | | | 14,452 | |
| Net loss | $ | (106,658 | ) | | $ | (48,902 | ) | Net loss | $ | (99,785) | | | $ | (110,053) | |
Net product revenues
Net product revenues related to sales of XHANCE were $7.1$48.4 million and $30.4 million for the yearyears ended December 31, 2018. We did not record any net product revenues2020 and 2019, respectively. Revenue growth was attributable primarily to an increase in units sold to customers, as a result of a greater number of XHANCE prescriptions dispensed during the year ended December 31, 2017.2020.
Licensing revenues
Licensing revenues were $0.8 million and $4.2 million for the years ended December 31, 2020 and 2019, respectively, as a result of payments received under the terms of the Inexia License Agreement entered into in January 2019 and the Currax License Agreement entered into in September 2019.
Cost of product sales
Cost of product sales related to XHANCE were $1.6$7.5 million and $5.3 million for the yearyears ended December 31, 2018. We did not record any cost2020 and 2019, respectively, with the increase attributable primarily to an increase in units sold to customers, the result of product salesa greater number of XHANCE prescriptions dispensed during the year ended December 31, 2017.period.
Research and development expense
Research and development expenses were $10.1$23.4 million and $16.8$20.8 million for the years endedDecember 31, 20182020 and 2017,2019, respectively. The $6.7$2.6 million decreaseincrease in 20182020 was attributable primarily to:
| |
▪ | a $6.5 million decrease in regulatory and medical affairs expenses, including payroll and administrative expenses, as a result of a shift in departmental focus from research and development to commercialization activities as a result of the FDA approval of XHANCE in September 2017; and |
| |
▪ | a $3.0 million decrease related to the substantial completion of the preparation of contract manufacturing capabilities prior to the receipt of FDA approval of XHANCE in September of 2017 in anticipation of the expected commercial launch of XHANCE in the U.S. in 2018. |
These decreases were offset by:85
| |
▪ | a $3.0 million increase in clinical expenses related to the preparation for and initiation of our clinical trials of XHANCE for a follow-on indication for the treatment of chronic sinusitis and FDA-mandated pediatric studies. |
▪a $1.3 million increase in clinical expenses related to our clinical trial program in pursuit of a follow-on indication for XHANCE for the treatment of chronic sinusitis in the U.S. and FDA-mandated post-marketing pediatric study; and
▪a $1.2 million increase in payroll-related expenses due primarily to an increase in personnel costs allocated to research and development as a result of the development of OPN-019.
Selling, general and administrative expense
Selling, general and administrative expenses were $95.6$105.4 million and $31.7$104.2 million for the years ended December 31, 20182020 and 2017,2019, respectively. The $63.9$1.2 million increase was due primarily to:
| |
▪ | a $37.3 million increase in sales and marketing expenses related to our preparation for and support of the commercial launch of XHANCE in the U.S. for the treatment of nasal polyps, of which: |
| |
◦ | $22.2 million related to the deployment of our contract sales force and our nurse educator team; |
| |
◦ | $15.1 million related primarily to marketing expenses for XHANCE; |
| |
▪ | a $12.4 million increase in payroll-related expenses due to increases in headcount; |
| |
▪ | a $6.5 million increase in regulatory and medical affairs expenses, including payroll-related and administrative expenses, as a result of a shift in departmental focus from research and development to commercialization activities as a result of the FDA approval of XHANCE in September 2017; |
| |
▪ | a $1.6 million increase in facilities expense, professional fees and consultancy expenses to support our expanding infrastructure to prepare for and support the commercial launch of XHANCE and operate as a public company; and |
▪•a $3.7$5.1 million increase in stock-basedservice fees paid to our PPN partners, as a result of a greater number of XHANCE prescriptions dispensed by our PPN partners;
▪a $1.9 million increase in personnel expenses, including stock compensation, expense.due to increases in headcount;
▪a $0.8 million increase in insurance and infrastructure expenses;
▪a $0.7 million increase in bad debt expense; and
▪a $0.4 million increase in market access expenses.
This increase was offset by:
▪a $5.1 million decrease related to delayed expenses and/or expenses not incurred as a result of the impact of COVID-19 on business operations, including marketing and selling efforts, including travel;
▪a $1.7 million decrease in direct-to-consumer marketing expenses; and
▪a $0.9 million decrease in patent, legal, consulting and professional fees.
Interest (income) expense, net
Interest expense, net, was $6.8$12.6 million and $0.6$7.3 million for the years ended December 31, 20182020 and 2017,2019, respectively. The increase in interest expense, net, for the year ended December 31, 20182020, was relateddue to $9.2 million in interest expense on our long-term debt which was issued in December 2017,the increased principal balance of the Pharmakon Senior Secured Notes offset by $2.5 million in interest income.income of $0.4 million. Interest income increased $2.2decreased by $1.9 million during the year ended December 31, 2018, as compared to the year ended December 31, 20172019 as a result of higherlower interest rates and lower average cash balances. Interest expense for the year ended December 31, 2017 was related to our convertible notes, which were converted to shares of preferred stock in March 2017.
Other (income) expense, net
Other income,(income) expense, net, was $0.4 million$(16,000) and $0.2$7.2 million for the years ended December 31, 20182020 and 2017,2019, respectively. TheOther expense, net, for the year ended December 31, 2019 was related primarily to the loss on the extinguishment of the Athyrium Senior Secured Notes. Other income, in both periodsnet, for the year ended December 31, 2020 was attributable primarily to grant eligible research and development expenses incurred by OptiNose AS, our Norwegian subsidiary.foreign currency gains.
Liquidity and Capital Resources
Since inception, we have incurred significant net losses and expect to continue to incur net losses for the foreseeable future. We incurred net losses of $106.7$99.8 million and $48.9$110.1 million for the years ended December 31, 20182020 and 2017,2019, respectively. As of December 31, 2018,2020, we had an accumulated deficit of $317.9$527.8 million. We have funded our operations primarily through the sale of stock and the issuance of debt, as well as through licensing revenues received under the terms of the AVP-825 License Agreementour license agreements and revenues from sales of XHANCE. As of December 31, 2018,2020, we had $201.0$144.2 million in cash and cash equivalents.
The following table shows a summary of our cash flows for the periods indicated (in thousands):
| | | | | Year Ended December 31, | | | Year Ended December 31, |
| | | 2018 | | 2017 | | | 2020 | | 2019 |
| Net cash used in operating activities | | $ | (91,817 | ) | | $ | (35,680 | ) | Net cash used in operating activities | | $ | (86,206) | | | $ | (90,815) | |
| Net cash used in investing activities | | (1,690 | ) | | (2,406 | ) | Net cash used in investing activities | | (546) | | | (557) | |
| Net cash provided by financing activities | | 59,579 |
| | 236,125 |
| Net cash provided by financing activities | | 83,810 | | | 37,529 | |
| Effects of exchange rates on cash and cash equivalents | | 64 |
| | (11 | ) | Effects of exchange rates on cash and cash equivalents | | (44) | | | (3) | |
| Net (decrease) increase in cash and cash equivalents | | $ | (33,864 | ) | | $ | 198,028 |
| |
| Net decrease in cash and cash equivalents | | Net decrease in cash and cash equivalents | | $ | (2,986) | | | $ | (53,846) | |
We expect that our total GAAP operating expenses (consisting of selling, general & administrative expenses and research & development expenses) for 20182021 will be between $135.0 -$137.0 million and $142.0 million of which $10 - $12approximately $11.0 million is
We expect to continue to incur significant expenses in connection with our ongoing activities, particularly as we:
Our future funding requirements, both near and long-term, will depend on many factors, including, but not limited to:
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by Item 8 including the financial statements and notes thereto, and report of the independent registered public accounting firm thereon, are included in this Form 10-K as set forth in the “Index to Consolidated Financial Statements” on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
The term "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
Act, refers to controls and procedures that are designed to ensure that information required to be disclosed by a
company 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 SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to a company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a control system, misstatements due to error or fraud may occur and may not be detected.
Our Chief Executive Officer and our Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a 15(e) and 15d 15(e) under the Exchange Act, as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2018.2020.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance of the reliability of financial reporting and of the preparation of financial statements for external reporting purposes, in accordance with U.S. generally accepted accounting principles.
Internal control over financial reporting includes policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and disposition of assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with the authorization of its management and directors; and (3) provide reasonable assurance regarding the prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on its financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures included in such controls may deteriorate.
Our management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2018.2020. In making this assessment, management used the criteria established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework (2013). These criteria are in the areas of control environment, risk assessment, control activities, information and communication, and monitoring. Management’s assessment included extensive documentation, evaluating and testing the design and operating effectiveness of its internal controls over financial reporting.
Based on management’s processes and assessment, as described above, management has concluded that, as of December 31, 2018,2020, our internal control over financial reporting was effective.
This Annual Report on Form 10-K does not include an attestation report of our registered public accounting firm
There were no changes in our internal control over financial reporting that occurred during our the quarter ended December 31, 20182020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is incorporated by reference to our Proxy Statement for the 20192021 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days of the fiscal year ended December 31, 2018.2020.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to our Proxy Statement for the 20192021 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days of the fiscal year ended December 31, 2018.2020.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated by reference to our Proxy Statement for the 20192021 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days of the fiscal year ended December 31, 2018.2020.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated by reference to our Proxy Statement for the 20192021 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days of the fiscal year ended December 31, 2018.2020.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by reference to our Proxy Statement for the 20192021 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days of the fiscal year ended December 31, 2018.2020.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) (1) Consolidated Financial Statements.
The Consolidated Financial Statements are filed as part of this report. See the Index to the Consolidated Financial Statements on page F-1.
(2) Consolidated Financial Statement Schedule.
Schedules are omitted because they are not applicable, or are not required, or because the information is included in the Consolidated Financial Statements and Notes thereto.
(3) The exhibits listed under Item 15(b), which are incorporated herein by reference, are filed or furnished as part of this report or are incorporated into this report by reference.
(b) Exhibits.
ITEM 16. FORM 10-K SUMMARY
Not applicable.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized in the capacities and on the date indicated.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
We have audited the accompanying consolidated balance sheets of OptiNose, Inc. (the Company) as of December 31, 20182020 and 2017,2019, the related consolidated statements of operations, comprehensive loss, redeemable convertible preferred stock and stockholders’ equity (deficit) and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 20182020 and 2017,2019, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 2016.
OptiNose, Inc.
OptiNose, Inc.
OptiNose, Inc.
OptiNose, Inc.
OptiNose, Inc.
