Item 1A. Risk Factors
Investing in our common stock involves a high degree of risk. You should consider carefully the risks and uncertainties described below, together with all
of the other information in this report and our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, including the consolidated financial statements and the related notes appearing herein and therein, with respect to any
investment in shares of our common stock. If any of the following risks actually occurs, our business, financial condition, results of operations and future prospects would likely be materially and adversely affected. In that event, the market price
of our common stock could decline and you could lose all or part of your investment.
Risks related to our business and industry
If the U.S. Food and Drug Administration (FDA) does not approve our New Drug Application (NDA) for tasimelteon for the treatment of Non-24-Hour Disorder
(Non-24) or continued development of tasimelteon is significantly delayed or terminated, our business will be significantly harmed, and the market price of our stock could decline.
We commenced our Phase III program for tasimelteon for the treatment of Non-24 in the third quarter of 2010. In December 2012, we reported positive
top-line results in a randomized, double-blind, multi-center, placebo-controlled Phase III trial (SET study) that enrolled 84 patients. In January 2013, we announced positive results for the second Phase III study of tasimelteon for the treatment of
Non-24 (RESET study). In addition, we have two ongoing open-label safety studies for tasimelteon in treatment of Non-24. We met with the FDA in the first quarter of 2013 for a pre-NDA meeting regarding tasimelteon in the treatment of patients with
Non-24 and submitted an NDA to the FDA in May 2013. In July 2013, we announced that the FDA accepted the filing and granted a priority review classification to our NDA for tasimelteon for the treatment of Non-24 in the totally blind. The FDA
determined the action target date under the Prescription Drug User Fee Act (PDUFA-V) to be January 31, 2014. The FDA scheduled a Peripheral and Central Nervous System Drugs Advisory Committee meeting on November 14, 2013 for the review of
our NDA for tasimelteon, proposed trade name HETLIOZ
TM
, for the treatment of Non-24 in the totally blind. Any adverse developments or results or perceived adverse developments or results with
respect to our regulatory submission, the advisory committee meeting or the tasimelteon Phase III program will significantly harm our business and could cause the market price of our stock to decline. Examples of such adverse developments include,
but are not limited to:
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the FDA determining that additional clinical studies are required with respect to the Phase III program in Non-24;
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safety, efficacy or other concerns arising from clinical or non-clinical studies in this program, or the manufacturing processes or facilities used for the program; and
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the FDA determining that the Phase III program in Non-24 raises safety concerns or does not demonstrate adequate efficacy.
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We and our partners face heavy government regulation. FDA regulatory approval of our products is uncertain and we and our partners are also continually
at risk of the FDA requiring us or them to discontinue marketing any products that have obtained, or in the future may obtain, regulatory approval.
The research, testing, manufacturing and marketing of products such as those that we have developed or that we or our partners are developing are subject to
extensive regulation by federal, state and local government authorities, including the FDA. To obtain regulatory approval of such products, we or our partners must demonstrate to the satisfaction of the applicable regulatory agency that, among other
things, the product is safe and effective for its intended use. In addition, we or our partners must show that the manufacturing facilities used to produce such products are in compliance with current Good Manufacturing Practices regulations or
cGMP.
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The process of obtaining FDA and other required regulatory approvals and clearances can take many years and will
require us and our partners, as applicable, to expend substantial time and capital. Despite the time and expense expended, regulatory approval is never guaranteed. The number of pre-clinical and clinical trials that will be required for FDA approval
varies depending on the product, the disease or condition that the product is in development for, and the requirements applicable to that particular product. The FDA can delay, limit or deny approval of a product for many reasons, including that:
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a product may not be shown to be safe or effective;
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the FDA may interpret data from pre-clinical and clinical trials in different ways than we or our partners do;
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the FDA may not approve our or our partners manufacturing processes or facilities;
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a product may not be approved for all the indications we or our partners request;
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the FDA may change its approval policies or adopt new regulations;
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the FDA may not meet, or may extend, the Prescription Drug User Fee Act (PDUFA-V) date with respect to a particular NDA; and
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the FDA may not agree with our or our partners regulatory approval strategies or components of the regulatory filings, such as clinical trial designs.
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For example, if certain of our or our partners methods for analyzing trial data are not accepted by the FDA, we or our partners may fail to obtain
regulatory approval for our products.
Moreover, the marketing, distribution and manufacture of approved products remain subject to extensive ongoing
regulatory requirements. Failure to comply with applicable regulatory requirements could result in, among other things:
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recall or seizure of products;
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total or partial suspension of production;
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refusal of the government to grant future approvals;
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withdrawal of approvals; and
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Any delay or failure to obtain regulatory approvals for our products will result in
increased costs, could diminish competitive advantages that we may attain and would adversely affect the marketing and sale of our products. Other than Fanapt
®
in the U.S., Israel and
Argentina, we have not received regulatory approval to market any of our products in any jurisdiction.
Even following regulatory approval of our
products, the FDA may impose limitations on the indicated uses for which such products may be marketed, subsequently withdraw approval or take other actions against us, our partners or such products that are adverse to our business. The FDA
generally approves drugs for particular indications. An approval for a more limited indication reduces the size of the potential market for the product. Product approvals, once granted, may be withdrawn or modified if problems occur after initial
marketing.
32
We and our partners also are subject to numerous federal, state and local laws, regulations and recommendations
relating to safe working conditions, laboratory and manufacturing practices, the environment and the use and disposal of hazardous substances used in connection with discovery, research and development work. In addition, we cannot predict the extent
to which new governmental regulations might significantly impede the discovery, development, production and marketing of our products. We or our partners may be required to incur significant costs to comply with current or future laws or
regulations, and we may be adversely affected by the cost of such compliance or the inability to comply with such laws or regulations.
We intend to
seek regulatory approvals for our products in foreign jurisdictions, but we may not obtain any such approvals.
We intend to market our products
in foreign jurisdictions. In order to market our products in foreign jurisdictions, we or our partners may be required to obtain separate regulatory approvals and to comply with numerous and varying regulatory requirements. The approval procedure
varies among countries and jurisdictions and can involve additional trials, and the time required to obtain approval may differ from that required to obtain FDA approval. Additionally, the foreign regulatory approval process may include all of the
risks associated with obtaining FDA approval. For all of these reasons, we or our partners may not obtain foreign regulatory approvals on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory authorities in other
countries or jurisdictions, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries or jurisdictions or by the FDA. We or our partners may not be able to file for regulatory
approvals and may not receive necessary approvals to commercialize our products in any market. The failure to obtain these approvals could harm our business materially.
Even after we or our partners obtain regulatory approvals of a product, acceptance of such product in the marketplace is uncertain and failure to
achieve commercial acceptance will prevent or delay our ability to generate product revenues.
Even after obtaining regulatory approvals for the
sale of our products, the commercial success of these products will depend, among other things, on their acceptance by physicians, patients, third-party payors and other members of the medical community as a therapeutic and cost-effective
alternative to competing products and treatments. The degree of market acceptance of any product will depend on a number of factors, including the demonstration of its safety and efficacy, its cost-effectiveness, its potential advantages over other
therapies, the reimbursement policies of government and third-party payors with respect to such product, our ability to attract and maintain corporate partners, including pharmaceutical companies, to assist in commercializing our products, receipt
of regulatory clearance of marketing claims for the uses that we or our partners are developing and the effectiveness of our and our partners marketing and distribution capabilities. If our approved products fail to gain market acceptance, we
may be unable to earn sufficient revenue to continue our business. If our approved products do not become widely accepted by physicians, patients, third-party payors and other members of the medical community, it is unlikely that we will ever become
profitable on a sustained basis or achieve significant revenues.
If we fail to obtain the capital necessary to fund our research and development
activities and commercialization efforts, we may be unable to continue operations or we may be forced to share our rights to commercialize our products with third parties on terms that may not be attractive to us.
Our activities will necessitate significant uses of working capital throughout 2013 and beyond. As of September 30, 2013, our total cash and cash
equivalents and marketable securities were $142.2 million. In August 2013, we completed a public offering of 4,680,000 shares of our common stock resulting in net proceeds to us of $48.6 million after deducting underwriting discounts and commissions
and other estimated offering expenses. Our long term capital requirements are expected to depend on many factors, including, among others:
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our ability to commercialize tasimelteon globally;
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the amount of royalty and milestone payments received from our commercial partners;
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our ability to commercialize Fanapt
®
outside the U.S. and Canada;
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costs of developing and maintaining sales, marketing and distribution channels and our ability to sell our products;
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costs involved in establishing manufacturing capabilities for commercial quantities of our products;
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the number of potential formulations and products in development;
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progress with pre-clinical studies and clinical trials;
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time and costs involved in obtaining regulatory (including FDA) approval;
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costs involved in preparing, filing, prosecuting, maintaining and enforcing patent, trademark and other intellectual property claims;
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competing technological and market developments;
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market acceptance of our products;
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costs for recruiting and retaining employees and consultants;
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costs for training physicians; and
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legal, accounting, insurance and other professional and business related costs.
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We expect to continue to
receive royalty payments and hope to receive commercial and development milestone payments relating to Fanapt
®
in connection with our amended and restated sublicense agreement with Novartis.
Based on the current sales performance of Fanapt
®
in the U.S. and the decision by Novartis to cease development of the long-acting injectable (or depot) formulation of Fanapt
®
, we expect that some or all of these commercial and development milestones will not be achieved by Novartis. As a result, we may need to raise additional capital to fund our anticipated operating
expenses and execute on our business plans. In our capital-raising efforts, we may seek to sell debt securities or additional equity securities or obtain a bank credit facility, or enter into partnerships or other collaboration agreements. The sale
of additional equity or debt securities, if convertible, could result in dilution to our stockholders and may also result in a lower price for our common stock. The incurrence of indebtedness would result in increased fixed obligations and could
also result in covenants that could restrict our operations. However, we may not be able to raise additional funds on acceptable terms, or at all. If we are unable to secure sufficient capital to fund our planned activities, we may not be able to
continue operations, or we may have to enter into partnerships or other collaboration agreements that could require us to share commercial rights to our products to a greater extent or at earlier stages in the drug development process than is
currently intended. These partnerships or collaborations, if consummated prior to proof-of-efficacy or safety of a given product, could impair our ability to realize value from that product. If additional financing is not available when required or
is not available on acceptable terms, we may be unable to fund our operations and planned growth, develop or enhance our technologies or products, take advantage of business opportunities or respond to competitive market pressures, any of which
would materially harm our business, financial condition and results of operations.
34
We face substantial competition which may result in others developing or commercializing products before or
more successfully than we do.
Our future success will depend on our or our partners ability to demonstrate and maintain a competitive
advantage with respect to our products and our ability to identify and develop additional products through the application of our pharmacogenetics and pharmacogenomics expertise. Large, fully integrated pharmaceutical companies, either alone or
together with collaborative partners, have substantially greater financial resources and have significantly greater experience than we do in:
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undertaking pre-clinical testing and clinical trials;
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obtaining FDA and other regulatory approvals of products; and
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manufacturing, marketing and selling products.
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These companies may invest heavily and quickly to discover and
develop novel products that could make our products obsolete. Accordingly, our competitors may succeed in obtaining patent protection, receiving FDA or foreign regulatory approval or commercializing superior products or other competing products
before we do. Technological developments or the FDA or foreign regulatory approval of new therapeutic indications for existing products may make our products obsolete or may make them more difficult to market successfully, any of which could have a
material adverse effect on our business, results of operations and financial condition.
Our products, if successfully developed and approved for
commercial sale, will compete with a number of drugs and therapies currently manufactured and marketed by major pharmaceutical and other biotechnology companies. Our products may also compete with new products currently under development by others
or with products which may cost less than our products. Physicians, patients, third party payors and the medical community may not accept or utilize any of our products that may be approved. If tasimelteon, Fanapt
®
and our other products, if and when approved, do not achieve significant market acceptance, our business, results of operations and financial condition would be materially adversely affected. We
believe the primary competitors for tasimelteon and Fanapt
®
are as follows:
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For tasimelteon in the treatment of Non-24, there are no approved direct competitors. Insomnia treatments include, Rozerem
®
(ramelteon) by Takeda Pharmaceuticals
Company Limited, hypnotics such as Ambien
®
(zolpidem) by sanofi-aventis (including Ambien CR
®
), Lunesta
®
(eszopiclone) by Dainippon Sumitomo Pharma, Sonata
®
(zaleplon) by Pfizer Inc.,
Silenor
®
(doxepin) by Somaxon Pharmaceuticals, Inc., generic products such as zolpidem, trazodone and doxepin, and over-the-counter remedies such as Benadryl
®
and Tylenol PM
®
. The class of melatonin agonists includes Rozerem
®
(ramelteon) by
Takeda Pharmaceuticals Company Limited, Valdoxan
®
(agemelatine) by Servier, Circadin
®
(long-acting melatonin) by Neurim Pharmaceuticals
and the food supplement melatonin.
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For Fanapt
®
in the treatment of schizophrenia, the atypical antipsychotics Risperdal
®
(risperidone),
including the depot formulation Risperdal
®
Consta
®
, and Invega
®
(paliperidone), including the depot formulation Invega
®
Sustenna, each by Ortho-McNeil-Janssen Pharmaceuticals, Inc., Zyprexa
®
(olanzapine), including the depot formulation Zyprexa
®
Relprevv, by Eli Lilly and Company, Seroquel
®
(quetiapine) by AstraZeneca
PLC, Abilify
®
(aripiprazole) by BMS/Otsuka Pharmaceutical Co., Ltd., Geodon
®
(ziprasidone) by Pfizer Inc., Saphris
®
(asenapine) by Schering-Plough, Latuda
®
(lurasidone) by Dainippon Sumitomo Pharma, and generic clozapine, as well as the typical
antipsychotics haloperidol, chlorpromazine, thioridazine, and sulpiride (all of which are generic).
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Additionally, we may also face
competition from newly developed generic products. Under the U.S. Drug Price Competition and Patent Term Restoration Act of 1984, more commonly known as the Hatch-Waxman Act, newly approved drugs and indications may benefit from a
statutory period of non-patent marketing
35
exclusivity. The Hatch-Waxman Act seeks to stimulate competition by providing incentives to generic pharmaceutical manufacturers to introduce non-infringing forms of patented pharmaceutical
products and to challenge patents on branded pharmaceutical products. If we are unsuccessful at challenging an Abbreviated New Drug Application, or ANDA, filed pursuant to the Hatch-Waxman Act, cheaper generic versions of our products, which may be
favored by insurers and third-party payors, may be launched commercially, which would harm our business.
We have no experience selling, marketing
or distributing products, other than providing assistance to Novartis relating to the U.S. commercialization of Fanapt
®
, which may make commercializing our products difficult.
At present, we have no marketing experience, other than providing assistance to Novartis relating to the U.S. commercialization of Fanapt
®
. Therefore, in order for us to commercialize tasimelteon, Fanapt
®
(outside the U.S. and Canada) or our other products, we must either
acquire or internally develop sales, marketing and distribution capabilities, or enter into collaborations with partners to perform these services for us. We may, in some instances, rely significantly on sales, marketing and distribution
arrangements with our collaborative partners and other third parties. For example, we rely completely on Novartis to market, sell and distribute Fanapt
®
in the U.S. and Canada.
For the commercialization of tasimelteon, Fanapt
®
(outside the U.S. and Canada) or our other
products, we may not be able to establish additional sales and distribution partnerships on acceptable terms or at all. In regard to our current foreign partners and any additional distribution arrangements or other agreements we may enter into, our
success will be materially dependent upon the performance of our partner. In the event that we attempt to acquire or develop our own in-house sales, marketing and distribution capabilities, factors that may inhibit our efforts to commercialize our
products without partners or licensees include:
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our inability to recruit and retain adequate numbers of effective sales and marketing personnel;
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the inability of sales personnel to obtain access to or persuade adequate numbers of physicians to prescribe our products;
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the lack of complementary products to be offered by our sales personnel, which may put us at a competitive disadvantage against companies with broader product lines; and
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unforeseen costs associated with creating our own sales and marketing team or with entering into a partnering agreement with an independent sales and marketing organization.
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The cost of establishing and maintaining a sales, marketing and distribution organization may exceed its cost effectiveness. If we fail to develop sales and
marketing capabilities, if sales efforts are not effective or if costs of developing sales and marketing capabilities exceed their cost effectiveness, our business, results of operations and financial condition could be materially adversely
affected.
Novartis began selling, marketing and distributing our first approved product, Fanapt
®
, in the U.S. in the first quarter of 2010 and our ability to generate product revenue prior to the approval of any of our other products will depend on the success of this product in
the marketplace.
Our ability to generate product revenue prior to the approval of any of our other products will depend on the success of Fanapt
®
and the sales of this product by Novartis in the U.S. and Canada. The ability of Fanapt
®
to generate meaningful product revenue
will depend on many factors, including the following:
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the extent and effectiveness of the development, sales and marketing and distribution support Fanapt
®
receives;
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the amount of resources and efforts utilized by Novartis in relation to the commercialization of Fanapt
®
;
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36
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the ability of patients to be able to afford Fanapt
®
or obtain health care coverage that covers
Fanapt
®
;
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acceptance of, and ongoing satisfaction, with Fanapt
®
by the medical community, patients receiving therapy and third party payers;
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a satisfactory efficacy and safety profile as demonstrated in a broad patient population;
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the size of the market for Fanapt
®
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successfully expanding and sustaining manufacturing capacity to meet demand;
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cost and availability of raw materials;
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safety concerns in the marketplace for schizophrenia therapies;
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regulatory developments relating to the manufacture or continued use of Fanapt
®
;
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decisions as to the timing of product launches, pricing and discounts;
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the competitive landscape for approved and developing therapies that will compete with Fanapt
®
;
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Novartis ability to obtain regulatory approval in Canada for Fanapt
®
and our or our partners ability to obtain regulatory approval for Fanapt
®
in countries outside the U.S. and Canada;
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our ability to successfully develop and commercialize Fanapt
®
, including a long-acting injectable (or depot) formulation of Fanapt
®
, outside of the U.S. and Canada; and
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the unfavorable outcome or other negative effects of any potential litigation relating to Fanapt
®
.
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We entered into an amended and restated sublicense agreement with Novartis to commercialize
Fanapt
®
in the U.S. and Canada. As such, we are not directly involved in the marketing or sales efforts for Fanapt
®
in the
U.S. and Canada. Our ability to generate product revenue prior to the approval of any of our other products depends on royalties and milestone payments we may receive from Novartis. Pursuant to the amended and restated sublicense agreement with
Novartis, we received an upfront payment of $200.0 million and are eligible for additional payments totaling up to $265.0 million upon Novartis achievement of certain commercial and development milestones for Fanapt
®
in the U.S. and Canada. Based on the current sales performance of Fanapt
®
in the U.S. and the decision by Novartis to cease
development of the long-acting injectable (or depot) formulation of Fanapt
®
, we expect that some or all of these commercial and development milestones will not be achieved by Novartis. We also
receive royalties, which, as a percentage of net sales, are in the low double-digits, on net sales of Fanapt
®
in the U.S. and Canada. Such royalties may not be significant and will depend
on numerous factors, many of which we cannot control. We cannot control the amount and timing of resources that Novartis may devote to Fanapt
®
. If Novartis fails to successfully commercialize
Fanapt
®
in the U.S. or fails to develop and commercialize Fanapt
®
in Canada, if Novartis efforts are not effective, or
if Novartis focuses its efforts on other schizophrenia therapies or schizophrenia drug candidates, our business will be negatively affected. If Novartis does not successfully commercialize
Fanapt
®
in the U.S. or Canada, we will receive limited revenues from them. Although we have developed and continue to develop additional products intended for commercial introduction, in
the absence of any other approved product, our ability to generate product revenue will be dependent on sales from Fanapt
®
for the foreseeable future. For reasons outside of our control,
including those mentioned above, sales of Fanapt
®
may not meet our or financial or industry analysts expectations. Any significant negative developments relating to Fanapt
®
, such as safety or efficacy issues, the introduction or greater acceptance of competing products or adverse regulatory or legislative developments, will have an adverse effect on our financial
condition and results of operations.
37
If our products are determined to be unsafe or ineffective in humans, whether commercially or in clinical
trials, our business will be materially harmed.
Despite the FDAs approval of the NDA for
Fanapt
®
in May 2009 and the positive results of our completed trials for tasimelteon and Fanapt
®
, we are uncertain whether either of
these products will ultimately prove to be effective and safe in humans. Frequently, products that have shown promising results in clinical trials have suffered significant setbacks in later clinical trials or even after they are approved for
commercial sale. Future uses of our products, whether in clinical trials or commercially, may reveal that the product is ineffective, unacceptably toxic, has other undesirable side effects, is difficult to manufacture on a large scale, is
uneconomical, infringes on proprietary rights of another party or is otherwise not fit for further use. If our products are determined to be unsafe or ineffective in humans, our business will be materially harmed.
Clinical trials for our products are expensive and their outcomes are uncertain. Any failure or delay in completing clinical trials for our products
could severely harm our business.
Pre-clinical studies and clinical trials required to demonstrate the safety and efficacy of our products are
time-consuming and expensive and together take several years to complete. Before obtaining regulatory approvals for the commercial sale of any of our products, we or our partners must demonstrate through preclinical testing and clinical trials that
such product is safe and effective for use in humans. We have incurred, and we will continue to incur, substantial expense for, and devote a significant amount of time to, preclinical testing and clinical trials.
Historically, the results from preclinical testing and early clinical trials often have not predicted results of later clinical trials. A number of new drugs
have shown promising results in clinical trials, but subsequently failed to establish sufficient safety and efficacy data to obtain necessary regulatory approvals. Clinical trials conducted by us, by our partners or by third parties on our or our
partners behalf may not demonstrate sufficient safety and efficacy to obtain the requisite regulatory approvals for our products. Regulatory authorities may not permit us or our partners to undertake any additional clinical trials for our
products, may force us to stop any ongoing clinical trials and it may be difficult to design efficacy studies for our products in new indications.
Clinical development efforts performed by us or our partners may not be successfully completed. Completion of clinical trials may take several years or more.
The length of time can vary substantially with the type, complexity, novelty and intended use of the products and the size of the prospective patient population. The commencement and rate of completion of clinical trials for our products may be
delayed by many factors, including:
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the inability to manufacture or obtain from third parties materials sufficient for use in pre-clinical studies and clinical trials;
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delays in beginning a clinical trial;
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delays in patient enrollment and variability in the number and types of patients available for clinical trials;
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difficulty in maintaining contact with patients after treatment, resulting in incomplete data;
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poor effectiveness of our products during clinical trials;
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unforeseen safety issues or side effects; and
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governmental or regulatory delays and changes in regulatory requirements and guidelines.
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If we or our
partners fail to complete successfully one or more clinical trials for our products, we or they may not receive the regulatory approvals needed to market that product. Therefore, any failure or delay in commencing or completing these clinical trials
would harm our business materially.
38
Our products may cause undesirable side effects or have other properties that could delay, prevent or
result in the revocation of their regulatory approval or limit their marketability.
Undesirable side effects caused by our products could
interrupt, delay or halt clinical trials and could result in the denial of regulatory approval by the FDA or other regulatory authorities for any or all targeted indications, and in turn prevent us or our partners from commercializing or continuing
the commercialization of such products and generating revenues from their sale. We and our partners, as applicable, will continue to assess the side effect profile of our products in ongoing clinical development programs. However, we cannot predict
whether the commercial use of our approved products (or our products in development, if and when they are approved for commercial use) will produce undesirable or unintended side effects that have not been evident in the use of, or in clinical
trials conducted for, such products to date. Additionally, incidents of product misuse may occur. These events, among others, could result in product recalls, product liability actions or withdrawals or additional regulatory controls, all of which
could have a material adverse effect on our business, results of operations and financial condition.
In addition, if after receiving marketing approval
of a product, we, our partners or others later identify undesirable side effects caused by such product, we or our partners could face one or more of the following:
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regulatory authorities may require the addition of labeling statements, such as a black box warning or a contraindication;
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regulatory authorities may withdraw their approval of the product;
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we or our partners may be required to change the way the product is administered, conduct additional clinical trials or change the labeling of the product; and
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our, our partners or the products reputation may suffer.
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Any of these events could prevent us or
our partners from achieving or maintaining market acceptance of the affected product or could substantially increase the costs and expenses of commercializing the product, which in turn could delay or prevent us from generating significant revenues
from its sale.
We have a history of operating losses, anticipate future losses and may never become profitable on a sustained basis.
We have been engaged in identifying and developing products since March 2003, which has required, and will continue to require, significant research and
development expenditures. If the NDA for tasimelteon is approved, the commercial launch for tasimelteon will require substantial additional expenditures.
As of September 30, 2013, we had an accumulated deficit of $303.7 million, and we cannot estimate with precision the extent of our future losses. Our
ability to generate product revenue prior to the approval of any of our other products depends on Novartis and our ability to sell Fanapt
®
. Novartis launched Fanapt
®
in the U.S. in the first quarter of 2010 and sales to date have not met our expectations. Fanapt
®
may continue to not be as commercially
successful as we expected, Novartis may not succeed in gaining additional market acceptance of Fanapt
®
in the U.S. or developing and commercializing Fanapt
®
in Canada, and we may not succeed in commercializing Fanapt
®
outside of the U.S. and Canada. In addition, we may not succeed in
commercializing any other products. Although the FDA is currently reviewing the NDA for tasimelteon, the product is not yet approved and may require significant resources prior to market approval. We may not be profitable even if our products are
successfully commercialized. We may be unable to fully develop, obtain regulatory approval for, commercialize, manufacture, market, sell and derive revenue from our products in the timeframes we project, if at all, and our inability to do so would
materially and adversely impact the market price of our common stock and our ability to raise capital and continue operations.
39
There can be no assurance that we will achieve sustained profitability. Our ability to achieve sustained
profitability in the future depends, in part, upon:
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our and our partners ability to obtain and maintain regulatory approval for our products, particularly tasimelteon for the treatment of Non-24, both in the U.S. and in foreign countries;
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our ability to successfully commercialize tasimelteon following the receipt of regulatory approval, if any;
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Novartis ability to successfully market and sell Fanapt
®
in the U.S. and Canada and achieve certain product development and sales milestones;
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our and our partners ability to successfully commercialize Fanapt
®
outside the U.S. and Canada;
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our ability to enter into and maintain agreements to develop and commercialize our products;
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our and our partners ability to develop, have manufactured and market our products;
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our and our partners ability to obtain adequate reimbursement coverage for our products from insurance companies, government programs and other third party payors; and
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our ability to obtain additional research and development funding from collaborative partners or funding for our products.
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In addition, the amount we spend will impact our profitability. Our spending will depend, in part, upon:
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the progress of our research and development programs for our products, including clinical trials;
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the time and expense that will be required to pursue FDA and/or foreign regulatory approvals for our products and whether such approvals are obtained on a timely basis, if at all;
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the time and expense required to prosecute, enforce and/or challenge patent and other intellectual property rights;
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the cost of operating and maintaining development and research facilities;
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the cost of third party manufacturers;
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the number of additional products we pursue;
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how competing technological and market developments affect our products;
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the cost of possible acquisitions of technologies, products, product rights or companies;
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the cost of obtaining licenses to use technology owned by others for proprietary products and otherwise;
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the costs and effects of potential litigation; and
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the costs associated with recruiting and compensating a highly skilled workforce in an environment where competition for such employees may be intense.
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We may not achieve all or any of these goals and, thus, we cannot provide assurances that we will ever be profitable on a sustained basis or achieve
significant revenues. Even if we do achieve some or all of these goals, we may not achieve significant or sustained commercial success.
40
Our ability to use net operating loss carryforwards and tax credit carryforwards to offset future taxable
income may be limited as a result of transactions involving our common stock.
In general, under Section 382 of the Internal Revenue Code of
1986, as amended (Code), a corporation that undergoes an ownership change is subject to limitations on its ability to utilize its pre-change net operating losses, or NOLs, and certain other tax assets to offset future taxable income. In
general, an ownership change occurs if the aggregate stock ownership of certain stockholders increases by more than 50 percentage points over such stockholders lowest percentage ownership during the testing period (generally three years).
Transactions involving our common stock, even those outside our control, such as purchases or sales by investors, within the testing period could result in an ownership change. A limitation on our ability to utilize some or all of our NOLs or
credits could have a material adverse effect on our results of operations and cash flows.
If our contract research organizations do not
successfully carry out their duties or if we lose our relationships with contract research organizations, our drug development efforts could be delayed.
Our arrangements with contract research organizations are critical to our success in bringing our products to the market and promoting such marketed products
profitably. We are dependent on contract research organizations, third-party vendors and investigators for pre-clinical testing and clinical trials related to our drug discovery and development efforts and we will likely continue to depend on them
to assist in our future discovery and development efforts. These parties are not our employees and we cannot control the amount or timing of resources that they devote to our programs. As such, they may not complete activities on schedule or may not
conduct our clinical trials in accordance with regulatory requirements or our stated protocols. The parties with which we contract for execution of our clinical trials play a significant role in the conduct of the trials and the subsequent
collection and analysis of data. If they fail to devote sufficient time and resources to our drug development programs or if their performance is substandard, it will delay the development, approval and commercialization of our products. Moreover,
these parties may also have relationships with other commercial entities, some of which may compete with us. If they assist our competitors, it could harm our competitive position.
Our contract research organizations could merge with or be acquired by other companies or experience financial or other setbacks unrelated to our
collaboration that could, nevertheless, materially adversely affect our business, results of operations and financial condition.
If we lose our
relationship with any one or more of these parties, we could experience a significant delay in both identifying another comparable provider and then contracting for its services. We may be unable to retain an alternative provider on reasonable
terms, if at all. Even if we locate an alternative provider, it is likely that this provider may need additional time to respond to our needs and may not provide the same type or level of service as the original provider. In addition, any provider
that we retain will be subject to current Good Laboratory Practices or cGLP, and similar foreign standards and we do not have control over compliance with these regulations by these providers. Consequently, if these practices and standards are not
adhered to by these providers, the development and commercialization of our products could be delayed.
We rely on a limited number of third party
manufacturers to formulate and manufacture our products and our business will be seriously harmed if these manufacturers are not able to satisfy our demand and alternative sources are not available.
Our expertise is primarily in the research and development and pre-clinical and clinical trial phases of product development. We do not have an in-house
manufacturing capability and depend completely on a small number of third-party manufacturers and active pharmaceutical ingredient formulators for the manufacture of our products. Therefore, we are dependent on third parties for our formulation
development and manufacturing of our products. This may expose us to the risk of not being able to directly oversee the production and quality of the manufacturing process and provide ample commercial supplies to successfully launch and maintain the
marketing of our products. Furthermore, these third party contractors, whether foreign or domestic, may experience regulatory compliance difficulty, mechanical shut downs, employee strikes, or other unforeseeable events that may delay or limit
production. Our inability to adequately establish,
41
supervise and conduct (either ourselves or through third parties) all aspects of the formulation and manufacturing processes would have a material adverse effect on our ability to develop and
commercialize our products.
We do not have long-term agreements with any of these third parties, and if they are unable or unwilling to perform for any
reason, we may not be able to locate alternative acceptable manufacturers or formulators or enter into favorable agreements with them. Any inability to acquire sufficient quantities of our products in a timely manner from these third parties could
adversely affect sales of our products, delay clinical trials and prevent us from developing our products in a cost-effective manner or on a timely basis. In addition, manufacturers of our products are subject to cGMP and similar foreign standards
and we do not have control over compliance with these regulations by our manufacturers. If one of our contract manufacturers fails to maintain compliance, the production of our products could be interrupted, resulting in delays and additional costs.
In addition, if the facilities of such manufacturers do not pass a pre-approval or post-approval plant inspection, the FDA will not grant approval and may institute restrictions on the marketing or sale of our products.
Our manufacturing strategy presents the following additional risks:
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because most of our third-party manufacturers and formulators are located outside of the U.S., there may be difficulties in importing our products or their components into the U.S. as a result of, among other things,
FDA import inspections, incomplete or inaccurate import documentation or defective packaging; and
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because of the complex nature of our products, our manufacturers may not be able to successfully manufacture our products in a cost-effective and/or timely manner.
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Materials necessary to manufacture our products may not be available on commercially reasonable terms, or at all, which may delay the development,
regulatory approval and commercialization of our products.
We and our partners rely on manufacturers to purchase from third-party suppliers the
materials necessary to produce our products for clinical trials and commercialization. Suppliers may not sell these materials to such manufacturers at the times we or our partners need them or on commercially reasonable terms. We do not have any
control over the process or timing of the acquisition of these materials by these manufacturers. Moreover, we currently do not have any agreements for the commercial production of these materials. If the manufacturers are unable to obtain these
materials for our or our partners clinical trials, product testing, potential regulatory approval of our products and commercial scale manufacturing could be delayed, significantly affecting our and our partners ability to further
develop and commercialize our products. If we, our manufacturers or our partners, as applicable, are unable to purchase these materials for our products, there would be a shortage in supply or the commercial launch of such products would be delayed,
which would materially and adversely affect our or our partners ability to generate revenues from the sale of such products.
If we cannot
identify, or enter into licensing arrangements for, new products, our ability to develop a diverse product portfolio will be limited.
A component
of our business strategy is acquiring rights to develop and commercialize products discovered or developed by other pharmaceutical and biotechnology companies for which we may find effective uses and markets through our unique pharmacogenetics and
pharmacogenomics expertise for the treatment of central nervous system disorders. Competition for the acquisition of these products is intense. If we are not able to identify opportunities to acquire rights to commercialize additional products, we
may not be able to develop a diverse portfolio of products and our business may be harmed. Additionally, it may take substantial human and financial resources to secure commercial rights to promising products. Moreover, if other firms develop
pharmacogenetics and pharmacogenomics capabilities, we may face increased competition in identifying and acquiring additional products.
42
We may not be successful in the development of products for our own account.
In addition to our business strategy of acquiring rights to develop and commercialize products, we may develop products for our own account by applying our
technologies to off-patent drugs as well as developing our own proprietary molecules. Because we will be funding the development of such programs, there is a risk that we may not be able to continue to fund all such programs to completion or to
provide the support necessary to perform the clinical trials, obtain regulatory approvals or market any approved products. We expect the development of products for our own account to consume substantial resources. If we are able to develop
commercial products on our own, the risks associated with these programs may be greater than those associated with our programs with collaborative partners.
If we lose key scientists or management personnel, or if we fail to recruit additional highly skilled personnel, it will impair our ability to identify,
develop and commercialize products.
We are highly dependent on principal members of our management team and scientific staff, including our Chief
Executive Officer, Mihael H. Polymeropoulos, M.D. These executives each have significant pharmaceutical industry experience. The loss of any such executives, including Dr. Polymeropoulos, or any other principal member of our management team or
scientific staff, would impair our ability to identify, develop and market new products. Our management and other employees may voluntarily terminate their employment with us at any time. The loss of the services of these or other key personnel, or
the inability to attract and retain additional qualified personnel, could result in delays to development or approval, loss of sales and diversion of management resources. In addition, we depend on our ability to attract and retain other highly
skilled personnel, including research scientists. Competition for qualified personnel is intense, and the process of hiring and integrating such qualified personnel is often lengthy. We may be unable to recruit such personnel on a timely basis, if
at all, which would negatively impact our development and commercialization programs.
Additionally, we do not currently maintain key person
life insurance on the lives of our executives or any of our employees. This lack of insurance means that we may not have adequate compensation for the loss of the services of these individuals.
Product liability lawsuits could divert our resources, result in substantial liabilities and reduce the commercial potential of our products.
The risk that we may be sued on product liability claims is inherent in the development and sale of pharmaceutical products. For example, we face
a risk of product liability exposure related to the testing of our products in clinical trials and will face even greater risks upon commercialization by us or our partners of our products. We believe that we may be at a greater risk of product
liability claims relative to other pharmaceutical companies because our products are intended to treat central nervous system disorders, and it is possible that we may be held liable for the behavior and actions of patients who use our products.
These lawsuits may divert our management from pursuing our business strategy and may be costly to defend. In addition, if we are held liable in any of these lawsuits, we may incur substantial liabilities and we or our partners may be forced to limit
or forego further commercialization of one or more of our products. Although we maintain product liability insurance, our aggregate coverage limit under this insurance is $10.0 million, and while we believe this amount of insurance is sufficient to
cover our product liability exposure, these limits may not be high enough to fully cover potential liabilities. As our development activities and commercialization efforts progress and we and our partners sell our products, this coverage may be
inadequate, we may be unable to obtain adequate coverage at an acceptable cost or we may be unable to get adequate coverage at all or our insurer may disclaim coverage as to a future claim. This could prevent the commercialization or limit the
commercial potential of our products. Even if we are able to maintain insurance that we believe is adequate, our results of operations and financial condition may be materially adversely affected by a product liability claim. Uncertainties resulting
from the initiation and continuation of products liability litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace. Product liability litigation and other related proceedings may also require
significant management time.
Legislative or regulatory reform of the healthcare system in the U.S. and foreign jurisdictions may affect our or our
partners ability to sell our products profitably.
43
The continuing efforts of the U.S. and foreign governments, insurance companies, managed care organizations and
other payors of health care services to contain or reduce health care costs may adversely affect our or our partners ability to set prices for our products which we or our partners believe are fair, and our ability to generate revenues and
achieve and maintain profitability.
Specifically, in both the U.S. and some foreign jurisdictions there have been a number of legislative and regulatory
proposals to change the healthcare system in ways that could affect our or our partners ability to sell our products profitably. In the U.S., the Medicare Prescription Drug Improvement and Modernization Act of 2003 reformed the way Medicare
covered and provided reimbursement for pharmaceutical products. This legislation could decrease the coverage and price that we or our partners may receive for our products. Other third-party payors are increasingly challenging the prices charged for
medical products and services. It will be time-consuming and expensive for us or our partners to go through the process of seeking reimbursement from Medicare and private payors. Our products may not be considered cost effective, and coverage and
reimbursement may not be available or sufficient to allow the sale of such products on a competitive and profitable basis. Further federal and state proposals and healthcare reforms are likely which could limit the prices that can be charged for the
drugs we develop and may further limit our commercial opportunity. Our results of operations could be materially adversely affected by the Medicare prescription drug coverage legislation, by the possible effect of this legislation on amounts that
private insurers will pay and by other healthcare reforms that may be enacted or adopted in the future.
The Patient Protection and Affordable Care Act of
2010, as amended by the Health Care and Education Reconciliation Act of 2010, or PPACA, is a sweeping measure intended to expand healthcare coverage within the U.S., primarily through the imposition of health insurance mandates on employers and
individuals and expansion of the Medicaid program, and the establishment of health care exchanges. Several provisions of the new law, which have varying effective dates, may affect us, and will likely increase certain of our costs. For example, an
increase in the Medicaid rebate rate from 15.1% to 23.1% was effective as of January 1, 2010, and the volume of rebated drugs was expanded to include beneficiaries in Medicaid managed care organizations effective as of March 23, 2010. The
PPACA also imposes an annual fee on pharmaceutical manufacturers which began in 2011, based on the manufacturers sale of branded pharmaceuticals and biologics (excluding orphan drugs); expands the 340B drug discount program (excluding orphan
drugs) including the creation of new penalties for non-compliance; and includes a 50% discount on brand name drugs for Medicare Part D participants in the coverage gap, or doughnut hole. The law also revised the definition of
average manufacturer price for reporting purposes (effective October 1, 2010), which could increase the amount of Medicaid drug rebates to states. Substantial new provisions affecting compliance also have been added, which may
require us to modify our business practices with health care practitioners.
The reforms imposed by the new law will significantly impact the
pharmaceutical industry; however, the full effects of the PPACA cannot be known until these provisions are implemented and the Centers for Medicare & Medicaid Services and other federal and state agencies issue applicable regulations or
guidance. Moreover, in the coming years, additional changes could be made to governmental healthcare programs that could significantly impact the success of our products. We will continue to evaluate the PPACA, as amended, the implementation of
regulations or guidance related to various provisions of the PPACA by federal agencies, as well as trends and changes that may be encouraged by the legislation and that may potentially impact on our business over time. These developments could,
however, have a material adverse effect on our business, financial condition and results of operations.
In some foreign countries, including major
markets in the European Union and Japan, the pricing of prescription pharmaceuticals is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take nine to twelve months or longer after the
receipt of regulatory marketing approval for a product. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our product to other available therapies.
Our business could be materially harmed if reimbursement of our products is unavailable or limited in scope or amount or if pricing is set at unsatisfactory levels.
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Our business is subject to extensive governmental regulation and oversight and changes in laws could
adversely affect our revenues and profitability.
Our business is subject to extensive government regulation and oversight. As a result, we may
become subject to governmental actions which could materially and adversely affect our business, results of operations and financial condition, including:
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new laws, regulations or judicial decisions, or new interpretations of existing laws, regulations or decisions, related to patent protection and enforcement, health care availability, method of delivery and payment for
health care products and services or our business operations generally;
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changes in the FDA and foreign regulatory approval processes that may delay or prevent the approval of new products and result in lost market opportunity;
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new laws, regulations and judicial decisions affecting pricing or marketing; and
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changes in the tax laws relating to our operations.
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In addition, the Food and Drug Administration Amendments
Act of 2007 or the FDAAA included new authorization for the FDA to require post-market safety monitoring, along with a clinical trials registry, and expanded authority for the FDA to impose civil monetary penalties on companies that fail to meet
certain commitments. The amendments, among other things, require some new drug applicants to submit risk evaluation and minimization strategies to monitor and address potential safety issues for products upon approval, grant the FDA the authority to
impose risk management measures for marketed products and to mandate labeling changes in certain circumstances, and establish new requirements for disclosing the results of clinical trials. Companies that violate the law are subject to substantial
civil monetary penalties. Additional measures have also been enacted to address the perceived shortcomings in the FDAs handling of drug safety issues, and to limit pharmaceutical company sales and promotional practices. While the FDAAA has
had, and is expected to have, a substantial effect on the pharmaceutical industry, the full extent of that effect is not yet known. As the FDA issues further regulations, guidance and interpretations relating to this legislation, the impact on the
industry as well as our business will become clearer. The requirements and other changes that the FDAAA imposes may make it more difficult, and likely more costly, to obtain approval of new pharmaceutical products and to produce, market and
distribute existing products. Our and our partners ability to commercialize approved products successfully may be hindered, and our business may be harmed as a result.
Failure to comply with government regulations regarding the sale and marketing of our products could harm our business.
Our and our partners activities, including the sale and marketing of our products, are subject to extensive government regulation and oversight,
including regulation under the federal Food, Drug and Cosmetic Act and other federal and state statutes. We are also subject to the provisions of the Federal Anti-Kickback Statute and several similar state laws, which prohibit payments intended to
induce physicians or others either to purchase or arrange for or recommend the purchase of healthcare products or services. While the federal law applies only to products or services for which payment may be made by a federal healthcare program,
state laws may apply regardless of whether federal funds may be involved. These laws constrain the sales, marketing and other promotional activities of manufacturers of drugs and biologicals, such as us, by limiting the kinds of financial
arrangements, including sales programs, with hospitals, physicians, and other potential purchasers of drugs and biologicals. Other federal and state laws generally prohibit individuals or entities from knowingly presenting, or causing to be
presented, claims for payment from Medicare, Medicaid, or other third party payors that are false or fraudulent, or are for items or services that were not provided as claimed. Anti-kickback and false claims laws prescribe civil and criminal
penalties for noncompliance that can be substantial, including the possibility of exclusion from federal healthcare programs (including Medicare and Medicaid).
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Pharmaceutical and biotechnology companies have been the target of lawsuits and investigations alleging
violations of government regulation, including claims asserting antitrust violations, violations of the Federal False Claim Act, the Anti-Kickback Statute, the Prescription Drug Marketing Act and other violations in connection with off-label
promotion of products and Medicare and/or Medicaid reimbursement or related to environmental matters and claims under state laws, including state anti-kickback and fraud laws.
While we continually strive to comply with these complex requirements, interpretations of the applicability of these laws to marketing practices are ever
evolving. If any such actions are instituted against us or our partners and we or they are not successful in defending such actions or asserting our rights, those actions could have a significant and material adverse impact on our business,
including the imposition of significant fines or other sanctions. Even an unsuccessful challenge could cause adverse publicity and be costly to respond to, and thus could have a material adverse effect on our business, results of operations and
financial condition.
Future transactions may harm our business or the market price of our stock.
We regularly review potential transactions related to technologies, products or product rights and businesses complementary to our business. These
transactions could include:
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licensing agreements; and
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co-promotion and similar agreements.
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We may choose to enter into one or more of these transactions at any
time, which may cause substantial fluctuations in the market price of our stock. Moreover, depending upon the nature of any transaction, we may experience a charge to earnings, which could also materially adversely affect our results of operations
and could harm the market price of our stock.
We may undertake strategic acquisitions in the future, and difficulties integrating such acquisitions
could damage our ability to achieve or sustain profitability.
Although we have no experience in acquiring businesses, we may acquire businesses
or assets that complement or augment our existing business. If we acquire businesses with promising products or technologies, we may not be able to realize the benefit of acquiring such businesses if we are unable to move one or more products
through preclinical and/or clinical development to regulatory approval and commercialization. Integrating any newly acquired businesses or technologies could be expensive and time-consuming, resulting in the diversion of resources from our current
business. We may not be able to integrate any acquired business successfully. We cannot assure you that, following an acquisition, we will achieve revenues, specific net income or loss levels that justify the acquisition or that the acquisition will
result in increased earnings, or reduced losses, for the combined company in any future period. Moreover, we may need to raise additional funds through public or private debt or equity financing to acquire any businesses, which would result in
dilution for stockholders or the incurrence of indebtedness and may not be available on terms which would otherwise be acceptable to us. We may not be able to operate acquired businesses profitably or otherwise implement our growth strategy
successfully.
Our quarterly operating results may fluctuate significantly.
Our operating results will continue to be subject to quarterly fluctuations. The revenues we generate, if any, and our operating results will be affected by
numerous factors, including:
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our addition or termination of development programs;
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variations in the level of expenses related to our products or future development programs;
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our execution of collaborative, licensing or other arrangements, and the timing of payments we may make or receive under these arrangements;
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the timing and amount of royalties or milestone payments;
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regulatory developments affecting our products or those of our competitors;
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marketing and other expenses;
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manufacturing or supply issues;
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any intellectual property infringement or other lawsuit in which we may become involved; and
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the timing and recognition of stock-based compensation expense.
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If our quarterly operating results fall below
the expectations of investors or securities analysts, the price of our common stock could decline substantially. Furthermore, any quarterly fluctuations in our operating results may, in turn, cause the price of our stock to fluctuate substantially.
We believe that quarterly comparisons of our financial results are not necessarily meaningful and should not be relied upon as an indication of our future performance.
Risks related to intellectual property and other legal matters
Our rights to develop and commercialize our products are subject in part to the terms and conditions of licenses or sublicenses granted to us by other
pharmaceutical companies. With respect to tasimelteon, these terms and conditions include an option in favor of the licensor to reacquire rights to commercialize and develop this product in certain circumstances.
Tasimelteon is based in part on patents that we have licensed on an exclusive basis and other intellectual property licensed from Bristol-Myers Squibb Company
(BMS). BMS holds certain rights with respect to tasimelteon in the license agreement. BMS may terminate our license if we fail to meet certain milestones or if we otherwise breach our royalty or other obligations in the agreement. In the event that
we terminate our license, or if BMS terminates our license due to our breach, all of our rights to tasimelteon (including any intellectual property we develop with respect to tasimelteon) will revert back to BMS or otherwise be licensed back to BMS
on an exclusive basis. Any termination or reversion of our rights to develop or commercialize tasimelteon, including any reacquisition by BMS of our rights, may have a material adverse effect on our business.
Fanapt
®
(iloperidone) is based in part on patents and other intellectual property owned by
sanofi-aventis and Novartis. Titan Pharmaceuticals, Inc. (Titan) holds an exclusive license from sanofi-aventis to the intellectual property owned by sanofi-aventis, and Titan has sublicensed its rights under such license on an exclusive basis to
Novartis. We acquired exclusive rights to this and other intellectual property through a further sublicense from Novartis. The sublicense with Novartis was amended and restated in October of 2009 to provide Novartis with exclusive rights to
commercialize Fanapt
®
in the U.S. and Canada and further develop and commercialize a long-acting injectable or depot formulation of
Fanapt
®
in the U.S. and Canada. In October 2012, Novartis informed us that it had determined to cease development of the long-acting (or depot) formulation of Fanapt
®
. We retained exclusive rights to Fanapt
®
outside the U.S. and Canada and we have exclusive rights to use any of Novartis data for
Fanapt
®
for developing and commercializing Fanapt
®
outside the U.S. and Canada. At Novartis option, we will enter into good faith
discussions with Novartis relating to the co-commercialization of Fanapt
®
outside of the U.S. and Canada or, alternatively, Novartis will receive a royalty on net sales of Fanapt
®
outside of the U.S. and Canada. Novartis has chosen not to co-commercialize
47
Fanapt
®
in Europe and certain other countries and will instead receive a royalty on net sales in those countries. These include, but are
not limited to, the countries in the European Union, as well as Switzerland, Norway, Liechtenstein and Iceland. We may lose our rights to develop and commercialize Fanapt
®
outside the U.S. and
Canada if we fail to comply with certain requirements in the amended and restated sublicense agreement regarding our financial condition, or if we fail to comply with certain diligence obligations regarding our development or commercialization
activities or if we otherwise breach the amended and restated sublicense agreement and fail to cure such breach. Our rights to develop and commercialize Fanapt
®
outside the U.S. and Canada may
be impaired if we do not cure breaches by Novartis of similar obligations contained in its sublicense agreement with Titan. Our loss of rights in Fanapt
®
to Novartis would have a material
adverse effect on our business, financial condition and results of operations. In addition, if Novartis breaches the amended and restated sublicense agreement with respect to its commercialization activities in the U.S. or Canada, we may terminate
Novartis commercialization rights in the applicable country. We would no longer receive royalty payments from Novartis in connection with such country in the event of such termination.
VLY-686 is based in part on patents that we have licensed on an exclusive basis and other intellectual property licensed from Lilly. Lilly may terminate our
license if we fail to use our commercially reasonable efforts to develop and commercialize VLY-686 or if we materially breach the agreement and fail to cure that breach. In the event that we terminate our license, or if Lilly terminates our license
for the reasons stated above, all of our rights to VLY-686 (including any intellectual property we develop with respect to VLY-686) will revert back to Lilly, subject to payment by Lilly to us of a royalty on net sales of products that contain
VLY-686.
If our efforts to protect the proprietary nature of the intellectual property related to our products are not adequate, we may not be able
to compete effectively in our markets.
In addition to the rights we have licensed from BMS, Novartis and Lilly relating to our products, we rely
upon intellectual property we own relating to these products, including patents, patent applications and trade secrets. As of September 30, 2013, excluding in-licensed patents and patent applications, we had 25 patent and patent application
families, most of which have been filed in key markets including the U.S., relating to tasimelteon and Fanapt
®
. In addition, we had eight other patent applications relating to products not
presently in clinical studies. Our patent applications may be challenged or fail to result in issued patents and our existing or future patents may be too narrow to prevent third parties from developing or designing around these patents. In
addition, we generally rely on trade secret protection and confidentiality agreements to protect certain proprietary know-how that is not patentable, for processes for which patents are difficult to enforce and for any other elements of our drug
development processes that involve proprietary know-how, information and technology that is not covered by patent applications. While we require all of our employees, consultants, advisors and any third parties who have access to our proprietary
know-how, information and technology to enter into confidentiality agreements, we cannot be certain that this know-how, information and technology will not be disclosed or that competitors will not otherwise gain access to our trade secrets or
independently develop substantially equivalent information and techniques. Further, the laws of some foreign countries do not protect proprietary rights to the same extent as the laws of the U.S. As a result, we may encounter significant problems in
protecting and defending our intellectual property both in the U.S. and abroad. If we are unable to protect or defend the intellectual property related to our technologies, we will not be able to establish or maintain a competitive advantage in our
market.
If we do not obtain protection under the Hatch-Waxman Act and similar foreign legislation to extend our patents and to obtain market
exclusivity for our products, our business will be harmed.
The Hatch-Waxman Act provides for an extension of patent term for drugs for a period
of up to five years to compensate for time spent in development. Assuming we gain a five-year patent term restoration for tasimelteon, and that we continue to have rights under our license agreement with respect to this product, we would have
exclusive rights to tasimelteons U.S. new chemical entity patent (the primary patent covering the product as a new composition of matter) until 2022. In August 2011, the U.S. Patent and Trademark Office issued a certificate of
extension under the Hatch-Waxman Act, extending by five years the term of sanofi-aventis new chemical entity patent relating to Fanapt
®
to November 2016. Fanapt
®
will also be
48
eligible for 6 months of additional protection for successfully completing studies in the pediatric population potentially extending the term of the new chemical entity parent in the U.S. until
May 2017. The patent for the microsphere long-acting injectable (or depot) formulation of Fanapt
®
expires in 2024 in the U.S. and 2022 in most of the major markets in Europe. The pending
patent application for the aqueous microcrystals long acting injectable (or depot) formulation of Fanapt
®
will expire in 2023 in the U.S. The patent for the aqueous microcrystals long acting
injectable (or depot) formulation of Fanapt
®
will expire in 2023 in most of the major markets in Europe. A directive in the European Union provides that companies that receive regulatory
approval for a new product will have a 10-year period of market exclusivity for that product (with the possibility of a further one-year extension) in most countries in Europe, beginning on the date of such European regulatory approval, regardless
of when the European new chemical entity patent covering such product expires. A generic version of the approved drug may not be marketed or sold in Europe during such market exclusivity period. This directive is of material importance with respect
to Fanapt
®
, since the European new chemical entity patent for Fanapt
®
has expired. Assuming we gain a five-year patent term restoration
for VLY-686, and that we continue to have rights under our license agreement with respect to this product, we would have exclusive rights to VLY-686s U.S. new chemical entity patent until 2029.
However, there is no assurance that we will receive the extensions of our patents or other exclusive rights available under the Hatch-Waxman Act or similar
foreign legislation. If we fail to receive such extensions or exclusive rights, our or our partners ability to prevent competitors from manufacturing, marketing and selling generic versions of our products will be materially impaired.
Litigation or third-party claims of intellectual property infringement could require us to divert resources and may prevent or delay our drug discovery
and development efforts.
Our commercial success depends in part on our not infringing the patents and proprietary rights of third parties. Third
parties may assert that we are employing their proprietary technology without authorization. In addition, third parties may obtain patents in the future and claim that use of our technologies infringes upon these patents.
Furthermore, parties making claims against us may obtain injunctive or other equitable relief, which could effectively block our ability to develop and
commercialize one or more of our products. Defense of these claims, regardless of their merit, would divert substantial financial and employee resources from our business. In the event of a successful claim of infringement against us, we may have to
pay substantial damages, obtain one or more licenses from third parties or pay royalties. In addition, even in the absence of litigation, we may need to obtain additional licenses from third parties to advance our research or allow commercialization
of our products. We may fail to obtain any of these licenses at a reasonable cost or on reasonable terms, if at all. In that event, we would be unable to develop and commercialize further one or more of our products.
In addition, in the future we could be required to initiate litigation to enforce our proprietary rights against infringement by third parties. Prosecution of
these claims to enforce our rights against others could divert substantial financial and employee resources from our business. If we fail to enforce our proprietary rights against others, our business will be harmed.
Risks related to our common stock
Our stock price
has been highly volatile and may be volatile in the future, and purchasers of our common stock could incur substantial losses.
The realization of
any of the risks described in these risk factors or other unforeseen risks could have a dramatic and adverse effect on the market price of our common stock. Between January 1, 2013 and September 30, 2013, the high and low sale prices of
our common stock as reported on The NASDAQ Global Market varied between $3.57 and $13.47. Additionally, market prices for securities of biotechnology and pharmaceutical companies, including ours, have historically been very volatile. The market for
these securities has from time to time experienced significant price and volume fluctuations for reasons that were unrelated to the operating performance of any one company.
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The following factors, in addition to the other risk factors described in this section, may also have a
significant impact on the market price of our common stock:
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publicity regarding actual or potential testing or trial results relating to products under development by us or our competitors;
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the outcome of regulatory review relating to products under development by us or our competitors;
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regulatory developments in the U.S. and foreign countries;
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developments concerning any collaboration or other strategic transaction we may undertake;
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announcements of patent issuances or denials, technological innovations or new commercial products by us or our competitors;
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termination or delay of development or commercialization program(s) by our partners;
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safety issues with our products or those of our competitors;
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our or our partners ability to successfully commercialize our products;
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our ability to successfully execute our commercialization strategies;
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announcements of technological innovations or new therapeutic products or methods by us or others;
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actual or anticipated variations in our quarterly operating results;
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changes in estimates of our financial results or recommendations by securities analysts or failure to meet such financial expectations;
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changes in government regulations or policies;
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changes in patent legislation or patent decisions or adverse changes to patent law;
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additions or departures of key personnel or members of our board of directors;
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the publication of negative research or articles about our company, our business or our products by industry analysts or others;
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publicity regarding actual or potential transactions involving us; and
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economic, political and other external factors beyond our control.
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We may be subject to litigation,
which could harm our stock price, business, results of operations and financial condition.
We have been the subject of litigation in the past and
may be subject to litigation in the future. In the past, following periods of volatility in the market price of their stock, many companies, including us, have been the subjects of securities class action litigation. Any such litigation can
result in substantial costs and diversion of managements attention and resources and could harm our stock price, business results of operations and financial condition. As a result of these factors, holders of our common stock might be unable
to sell their shares at or above the price they paid for such shares. On June 24, 2013, a securities class action complaint was filed in the United States District Court for the District of Columbia, naming the Company and certain of our
officers as defendants seeking to assert violations of Section 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, in connection with allegedly false and misleading
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statements and alleged omissions regarding our Phase III trial results for tasimelteon and other disclosures between December 18, 2012 and June 18, 2013. A similar complaint was filed
on July 8, 2013. Our management believes that we have meritorious defenses and intends to defend these lawsuits vigorously. We do not anticipate that this litigation will have a material adverse effect on our business, results of
operations or financial condition. However, the lawsuits are subject to inherent uncertainties, the actual cost may be significant, and we may not prevail. We believe we are entitled to coverage under our relevant insurance policies, subject to a
retention, but coverage could be denied or prove to be insufficient.
If there are substantial sales of our common stock, our stock price could
decline.
A small number of institutional investors and private equity funds hold a significant number of shares of our common stock. Sales by
these stockholders of a substantial number of shares, or the expectation of such sales, could cause a significant reduction in the market price of our common stock.
In addition to our outstanding common stock, as of September 30, 2013, there were a total of 5,381,620 shares of common stock that we have registered and
that we are obligated to issue upon the exercise of currently outstanding options and settlement of restricted stock unit awards granted under our Second Amended and Restated Management Equity Plan and 2006 Equity Incentive Plan. Upon the exercise
of these options or settlement of the shares underlying these restricted stock units, as the case may be, in accordance with their respective terms, these shares may be resold freely, subject to restrictions imposed on our affiliates under Rule 144.
If significant sales of these shares occur in short periods of time, these sales could reduce the market price of our common stock. Any reduction in the trading price of our common stock could impede our ability to raise capital on attractive terms,
if at all.
If we fail to maintain the requirements for continued listing on The NASDAQ Global Market, our common stock could be delisted from
trading, which would adversely affect the liquidity of our common stock and our ability to raise additional capital.
Our common stock is
currently listed for quotation on The NASDAQ Global Market. We are required to meet specified listing criteria in order to maintain our listing on The NASDAQ Global Market. If we fail to satisfy The NASDAQ Global Markets continued listing
requirements, our common stock could be delisted from The NASDAQ Global Market, in which case we may transfer to The NASDAQ Capital Market, which generally has lower financial requirements for initial listing or, if we fail to meet its listing
requirements, the over-the-counter bulletin board. Any potential delisting of our common stock from The NASDAQ Global Market would make it more difficult for our stockholders to sell our stock in the public market and would likely result in
decreased liquidity and increased volatility for our common stock.
If securities or industry analysts do not publish research or reports or publish
unfavorable research about our business, our stock price and trading volume could decline.
The trading market for our common stock will depend in
part on the research and reports that securities or industry analysts publish about us or our business. We currently have research coverage by securities and industry analysts. If one or more of the analysts who covers us downgrades our stock, our
stock price would likely decline. If one or more of these analysts ceases coverage of our Company or fails to regularly publish reports on us, interest in the purchase of our stock could decrease, which could cause our stock price or trading volume
to decline.
You may experience future dilution as a result of future equity offerings.
In order to raise additional capital, we may in the future offer additional shares of our common stock or other securities convertible into or exchangeable
for our common stock at prices that may not be the same as the price per share in recent offerings. We may sell shares or other securities in any other offering at a price per share that is less than the price per share paid by investors in recent
offerings, and investors purchasing shares or other securities in the future could have rights superior to existing stockholders. The price per share at which we sell additional shares of our common stock, or securities convertible or exchangeable
into common stock, in future transactions may be higher or lower than the price per share paid by investors in recent offerings.
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Our management will have broad discretion over the use of the proceeds we receive in future equity
offerings and might not apply the proceeds in ways that increase the value of your investment.
Our management will have broad discretion to use
the net proceeds from equity offerings, and you will be relying on the judgment of our management regarding the application of the net proceeds. They might not apply the net proceeds in ways that increase the value of your investment. Our management
might not be able to yield a significant return, if any, on any investment of net proceeds. You will not have the opportunity to influence our decisions on how to use the proceeds.
Our business could be negatively affected as a result of the actions of activist stockholders.
Proxy contests have been waged against many companies in the biopharmaceutical industry, including us, over the last few years. If faced with a proxy contest
or other type of shareholder activism, we may not be able to respond successfully to the contest or dispute, which would be disruptive to our business. Even if we are successful, our business could be adversely affected by a proxy contest or
shareholder dispute involving us or our partners because:
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responding to proxy contests and other actions by activist stockholders can be costly and time-consuming, disrupting operations and diverting the attention of management and employees;
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perceived uncertainties as to future direction may result in the loss of potential acquisitions, collaborations or in-licensing opportunities, and may make it more difficult to attract and retain qualified personnel and
business partners; and
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if individuals are elected to a board of directors with a specific agenda, it may adversely affect our ability to effectively and timely implement our strategic plan and create additional value for our stockholders.
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These actions could cause our stock price to experience periods of volatility.
Anti-takeover provisions in our charter and bylaws, and in Delaware law, and our rights plan could prevent or delay a change in control of our company.
We are a Delaware corporation and the anti-takeover provisions of Section 203 of the Delaware General Corporation Law may discourage, delay
or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the person becomes an interested stockholder, even if a change of control would be beneficial
to our existing stockholders. In addition, our amended and restated certificate of incorporation and bylaws may discourage, delay or prevent a change in our management or control over us that stockholders may consider favorable. Our amended and
restated certificate of incorporation and bylaws:
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authorize the issuance of blank check preferred stock that could be issued by our board of directors to thwart a takeover attempt;
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do not provide for cumulative voting in the election of directors, which would allow holders of less than a majority of the stock to elect some directors;
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establish a classified board of directors, as a result of which the successors to the directors whose terms have expired will be elected to serve from the time of election and qualification until the third annual
meeting following their election;
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require that directors only be removed from office for cause;
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provide that vacancies on the board of directors, including newly-created directorships, may be filled only by a majority vote of directors then in office;
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limit who may call special meetings of stockholders;
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prohibit stockholder action by written consent, requiring all actions to be taken at a meeting of the stockholders; and
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establish advance notice requirements for nominating candidates for election to the board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.
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Moreover, in September 2008, our board of directors adopted a rights agreement, the provisions of which could result in significant dilution of the
proportionate ownership of a potential acquirer and, accordingly, could discourage, delay or prevent a change in our management or control over us.
Prolonged economic uncertainties or downturns, as well as unstable market, credit and financial conditions, may exacerbate certain risks affecting our
business and have serious adverse consequences on our business.
The global economic downturn and market instability has made the business climate
more volatile and more costly. These economic conditions, and uncertainty as to the general direction of the macroeconomic environment, are beyond our control and may make any necessary debt or equity financing more difficult, more costly, and more
dilutive. While we believe we have adequate capital resources to meet current working capital and capital expenditure requirements, a lingering economic downturn or significant increase in our expenses could require additional financing on less than
attractive rates or on terms that are excessively dilutive to existing stockholders. Failure to secure any necessary financing in a timely manner and on favorable terms could have a material adverse effect on our stock price and could require us to
delay or abandon clinical development plans.
Sales of our products will be dependent, in large part, on reimbursement from government health
administration authorities, private health insurers, distribution partners and other organizations. As a result of negative trends in the general economy in the U.S. or other jurisdictions in which we may do business, these organizations may be
unable to satisfy their reimbursement obligations or may delay payment. In addition, federal and state health authorities may reduce Medicare and Medicaid reimbursements, and private insurers may increase their scrutiny of claims. A reduction in the
availability or extent of reimbursement could negatively affect our or our partners product sales and revenue.
In addition, we rely on third
parties for several important aspects of our business. For example, we depend upon Novartis for Fanapt
®
royalty revenue, we use third party contract research organizations for many of our
clinical trials, and we rely upon several single source providers of raw materials and contract manufacturers for the manufacture of our products. During challenging and uncertain economic times and in tight credit markets, there may be a disruption
or delay in the performance of our third party contractors, suppliers or partners. If such third parties are unable to satisfy their commitments to us, our business and results of operations would be adversely affected.