Overview
Vanda Pharmaceuticals Inc. (we, Vanda or the Company) is a biopharmaceutical company focused on the development and commercialization of
products for the treatment of central nervous system disorders. Vanda commenced its operations in 2003. Vandas product portfolio includes:
|
|
|
HETLIOZ (tasimelteon), a product for the treatment of Non-24-Hour Sleep-Wake Disorder (Non-24), which was approved by the U.S. Food and Drug
Administration (FDA) in January 2014;
|
|
|
|
Fanapt
®
(iloperidone), a product for the
treatment of schizophrenia, the oral formulation of which is currently being marketed and sold in the U.S. by Novartis Pharma AG (Novartis); and
|
|
|
|
VLY-686 (tradipitant), a small molecule neurokinin-1 receptor (NK-1R) antagonist.
|
Since we began operations in March 2003, we have devoted substantially all of our resources to the in-licensing and
clinical development of our products. Our products target prescription markets with significant unmet medical needs. Our ability to generate revenue and achieve profitability largely depends on our ability, alone or with others, to complete the
development of our products, and to obtain the regulatory approvals for and manufacture, market and sell our products, including HETLIOZ for the treatment of Non-24 and Novartis ability to successfully commercialize Fanapt
®
in the U.S. The results of our operations will vary significantly and depend on a number of factors, including risks
related to our business, risks related to our industry, and other risks which are detailed in Item 1A of Part I of this annual report on Form 10-K, entitled Risk Factors.
Our activities will necessitate significant uses of working capital throughout 2014 and beyond. We are currently
concentrating our efforts on the U.S. commercial launch of HETLIOZ. Additionally, we and our partners continue to pursue market approval of Fanapt
®
in a number of foreign jurisdictions, with Mexico, Israel and Argentina having already approved Fanapt
®
for the treatment of schizophrenia.
Our
founder and Chief Executive Officer, Mihael H. Polymeropoulos, M.D., started Vandas operations early in 2003 after establishing and leading the Pharmacogenetics Department at Novartis. In acquiring and developing our products, we have relied
upon our deep expertise in the scientific disciplines of pharmacogenetics and pharmacogenomics. These scientific disciplines examine both genetic variations among people that influence response to a particular drug, and the multiple pathways through
which drugs affect people.
Our strategy
Our goal is to create a leading biopharmaceutical company focused on developing and commercializing products that address critical unmet medical needs relating to central nervous system disorders through
the application of our drug development expertise and our pharmacogenetics and pharmacogenomics expertise. The key elements of our strategy to accomplish this goal are to:
|
|
|
Maximize the commercial success of HETLIOZ;
|
|
|
|
Enter into strategic partnerships to supplement our capabilities and to extend our commercial reach;
|
|
|
|
Pursue the clinical development and regulatory approval of our products;
|
|
|
|
Apply our pharmacogenetics and pharmacogenomics expertise to differentiate our products; and
|
|
|
|
Expand our product portfolio through the identification and acquisition of additional products.
|
3
Products
We have the following products on the market or in clinical development:
|
|
|
|
|
Product
|
|
Target Indications
|
|
Select Milestones
|
HETLIOZ (tasimelteon)
|
|
Non-24
|
|
FDA approval in January 2014;
Two ongoing open label safety studies;
Expected
U.S. commercial launch in second quarter of 2014
|
|
|
Major Depressive
Disorder (MDD)
|
|
Phase IIb/III trial (MAGELLAN) completed in January 2013;
All development activities have been discontinued
|
Fanapt
®
(Oral)
(iloperidone)
|
|
Schizophrenia
|
|
FDA approval in May 2009;
Commercial rights in the U.S. and Canada sublicensed to Novartis in October 2009;
Launched in the
U.S. by Novartis in January 2010
|
VLY-686 (tradipitant)
|
|
Pruritus in patients with Atopic Dermatitis
|
|
Proof of concept study initiated in second half of 2013;
Phase II study expected to begin in 2014.
|
HETLIOZ
In January 2014, HETLIOZ was approved in the U.S. for the treatment of Non- 24. Non-24 is a serious, rare, and chronic circadian rhythm disorder characterized by the inability to entrain
(synchronize) the master body clock with the 24-hour day-night cycle. HETLIOZ is the first FDA approved treatment for Non-24. The precise mechanism by which HETLIOZ exerts its therapeutic effect in patients with Non-24 is not known.
HETLIOZ is a melatonin agonist of the human MT1 and MT2 receptors, with greater specificity for MT2. These receptors are thought to be involved in the control of circadian rhythms. HETLIOZ is believed to reset the master body clock in
the suprachiasmatic nucleus (SCN), located in the hypothalamus, resulting in the entrainment and alignment of the bodys melatonin and cortisol rhythms to the 24-hour day-night cycle. We expect the U.S. commercial launch of HETLIOZ to
occur in the second quarter of 2014. In addition, we are preparing to file a Marketing Authorization Application (MAA) for HETLIOZ
TM
for the treatment of Non-24 with the European Medicines Agency (EMA) during 2014.
In January 2010, the FDA granted orphan drug designation status for HETLIOZ in Non-24 in blind individuals. The FDA grants orphan
drug designation to drugs that may provide significant therapeutic advantage over existing treatments and target conditions affecting 200,000 or fewer U.S. patients per year. Orphan drug designation provides potential financial and regulatory
incentives, including study design assistance, tax credits, waiver of FDA user fees, and up to seven years of market exclusivity upon marketing approval. In February 2011, the EMA designated HETLIOZ as an orphan medicinal product for the same
indication.
HETLIOZ has also been studied in Major Depressive Disorder (MDD) and insomnia.
Therapeutic opportunity
Sleep disorders are segmented into three major categories: primary insomnia, secondary insomnia and circadian rhythm sleep disorders (CRSDs). Insomnia is a symptom complex that comprises difficulty
falling asleep or staying asleep, or non-refreshing sleep, in combination with daytime dysfunction or distress. The symptom complex can be an independent disorder (primary insomnia) or be a result of another condition such as depression or anxiety
(secondary insomnia). CRSDs result from a misalignment of the sleep/wake cycle and an individuals daily activities or lifestyle. The circadian rhythm is the rhythmic output of the human biological
4
clock and is governed by the hormones melatonin and cortisol. Both the timing of behavioral events (activity, sleep, and social interactions) and the environmental light/dark cycle result in a
sleep/wake cycle that follows the circadian rhythm. Examples of CRSDs include transient disorders such as jet lag and chronic disorders such as shift work sleep disorder and Non-24.
Non-24 is a serious, rare, and chronic circadian rhythm disorder characterized by the inability to entrain (synchronize) the master body
clock with the 24-hour day-night cycle. Non-24 affects a majority of totally blind individuals, or between 65,000 and 95,000 people in the U.S. Non-24 occurs almost entirely in individuals who lack the light sensitivity necessary to entrain the
master body clock in the brain with the 24-hour day-night cycle. Most people have a master body clock that naturally runs longer than 24-hours and light is the primary environmental cue that resets it to 24 hours each day. Individuals with Non-24
have a master body clock that is not reset, and continually delays, resulting in prolonged periods of misalignment between their circadian rhythms and the 24-hour day-night cycle, including the timing of melatonin and cortisol secretion. As a result
of this misalignment, Non-24 is associated with significant disruption of the sleep-wake cycle and impairments in social and occupational functioning, and marked subjective distress. Individuals with Non-24 cycle in-and out-of phase and suffer from
disrupted nighttime sleep patterns and/or excessive daytime sleepiness.
While there are no FDA-approved
treatments for CRSDs, other than HETLIOZ for the treatment of Non-24, there are a number of drugs approved and prescribed for patients with sleep disorders. The most commonly prescribed drugs are hypnotics, such as generic zolpidem, Ambien
®
(zolpidem) by Sanofi (including Ambien CR
®
), Lunesta
®
(eszopiclone) by
Sunovion Pharmaceuticals Inc., Sonata
®
(zaleplon) by Pfizer Inc. and Silenor
®
(doxepin) by Pernix Therapeutics. Hypnotics work by acting upon a set of brain receptors known as GABA receptors,
which are separate and distinct from the melatonin receptors to which HETLIOZ binds. Several drugs in development also utilize a mechanism of action involving binding to GABA receptors. Members of the benzodiazepine class of sedatives are also
approved for insomnia, but their usage has declined due to an inferior safety profile compared to hypnotics. Anecdotal evidence also suggests that sedative antidepressants, such as trazodone and doxepin, are prescribed off-label for insomnia. FDA
approved drugs for the treatment of insomnia also includes Rozerem
®
(ramelteon) by Takeda Pharmaceuticals
Company Limited, a compound with a mechanism of action similar to HETLIOZ. 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.
Overview of HETLIOZ clinical development
In January 2014, HETLIOZ was approved in the U.S. for the treatment of Non- 24. The HETLIOZ
New Drug Application (NDA) included efficacy and safety data from the Non-24 development program as well as safety
data from previously conducted clinical studies.
Two open-label safety studies are ongoing for HETLIOZ in Non-24. The
3202 and 3204 clinical trials are open-label, multicenter, studies in totally blind subjects with Non-24 to further assess the safety of HETLIOZ.
Vanda previously conducted double blind, placebo controlled studies of
HETLIOZ
in chronic primary insomnia and transient insomnia. No additional development is being conducted for
these indications.
In November 2006, we reported positive top-line results in a randomized, double-blind, multi-center,
placebo-controlled Phase III trial that enrolled 412 adults in a sleep laboratory setting using a phase-advance, first-night assessment model of induced transient insomnia. The trial examined HETLIOZ dosed 30 minutes before bedtime at 20mg,
50mg and 100mg versus placebo.
HETLIOZ achieved significant results in multiple endpoints, demonstrating a benefit in
both sleep onset, or time to fall asleep, and sleep maintenance, or ability to stay asleep. In June 2008, we reported positive top-line results in a randomized, double-blind, placebo-controlled Phase III trial in chronic primary insomnia that
enrolled 324 patients. The trial examined HETLIOZ at 20mg and 50mg versus placebo over a period of 35 days. The trial measured time to fall asleep and sleep maintenance, as well as next-day performance.
In January 2013, Vanda reported top-line results of the Phase IIb/III clinical study (MAGELLAN) in MDD, investigating the efficacy and
safety of HETLIOZ as a monotherapy in the treatment of patients with MDD. The clinical study did not meet the primary endpoint of change from baseline in the Hamilton Depression Scale
5
(HAMD-17) after eight weeks of treatment as compared to placebo. HETLIOZ was shown to be safe and well-tolerated, consistent with observations in prior studies. Based on the proof of
concept clinical study results, we decided to discontinue all activities in this indication.
Intellectual property
HETLIOZ and its formulations, genetic markers and uses are covered by a total of 11 patent and patent
application families worldwide. The primary new chemical entity patent covering HETLIOZ expires normally in 2017 in the U.S. and in most European markets. In the U.S., the United States Drug Price Competition and Patent Term Restoration Act of
1984, more commonly known as the Hatch-Waxman Act provides for an extension of new chemical entity patents for a period of up to five years following the expiration of the patent covering that compound to compensate for time spent in
development. We believe that HETLIOZ will meet the various criteria of the Hatch-Waxman Act and will receive five additional years of patent protection in the U.S., which would extend its new chemical entity patent protection in the U.S. until
2022. In Europe, statutes provide for ten years of data exclusivity (with the potential for an additional year if the drug is developed for a significant new indication). As such, in Europe, data exclusivity will protect HETLIOZ for at least
ten years from approval. Outside the U.S. and Europe, data exclusivity will protect HETLIOZ from generic competition for varying number of years depending on the country. Additional patent applications directed to specific sleep disorders and
to methods of administration, if issued, would provide exclusivity for such indications and methods of administration. Patent applications directed to the treatment of Non-24, if granted, would provide exclusivity for this indication until at least
2033.
Our rights to the new chemical entity patent covering HETLIOZ and related intellectual property have been acquired
through a license with Bristol-Myers Squibb Company (BMS). Please see License agreements below for a discussion of this license.
Fanapt
®
Fanapt
®
is a product for the treatment of schizophrenia. In May
2009, the FDA granted U.S. marketing approval of Fanapt
®
for the acute treatment of schizophrenia in adults. In
October 2009, we entered into an amended and restated sublicense agreement with Novartis. We had originally entered into a sublicense agreement with Novartis in June 2004 pursuant to which we obtained certain worldwide exclusive licenses from
Novartis relating to Fanapt
®
. Pursuant to the amended and restated sublicense agreement, Novartis has exclusive
commercialization rights to all formulations of Fanapt
®
in the U.S. and Canada. In January 2010, Novartis
launched Fanapt
®
in the U.S. We do not expect Novartis to commercialize Fanapt
®
in Canada.
We continue to explore the regulatory path and commercial opportunity for
Fanapt
®
oral formulation outside of the U.S. and Canada. In December 2012, the EMAs CHMP issued a negative
opinion recommending against approval of Fanaptum (oral iloperidone tablets) for the treatment of schizophrenia in adult patients in the European Union. The CHMP was of the opinion that the benefits of Fanaptum did not outweigh its risks
and recommended against marketing authorization. We initiated an appeal of this opinion and requested a re-examination of the decision by the CHMP, but withdrew our MAA in the first quarter of 2013 because the additional clinical data requested by
the CHMP would not have been available in the timeframe allowed by the EMAs Centralized Procedure. We intend to reassess our European regulatory strategy for Fanaptum once the results from the REPRIEVE study being conducted by Novartis
become available.
We have entered into agreements with the following partners for the commercialization
of Fanapt
®
in the countries set forth below:
|
|
|
Country
|
|
Partner
|
Mexico
|
|
Probiomed S.A. de C.V.
|
Israel
|
|
Megapharm Ltd.
|
In August 2012, the Israeli Ministry of Health granted market approval for Fanapt
®
for the treatment of schizophrenia. In November 2012, we were notified that Fanapt
®
had been granted market approval in Argentina for the treatment of schizophrenia. In October 2013, the Mexican
Federal Commission for Protection Against Sanitary Risks (COFEPRIS) granted market approval for Fanapt
®
for the
treatment of schizophrenia.
6
Our rights to the new chemical entity patent covering Fanapt
®
and related intellectual property have been acquired through a sublicense with Novartis. Please see License
agreements below for a discussion of this license.
Therapeutic opportunity
Schizophrenia is a chronic, debilitating mental disorder characterized by hallucinations, delusions, racing thoughts
and other psychotic symptoms (collectively referred to as positive symptoms), as well as moodiness, anhedonia (inability to feel pleasure), loss of interest, eating disturbances and withdrawal (collectively referred to as negative
symptoms), and attention and memory deficits (collectively referred to as cognitive symptoms). Schizophrenia develops in late adolescence or early adulthood in approximately 1% of the worlds population. Most schizophrenia
patients today are treated with drugs known as atypical antipsychotics, which were first approved in the U.S. in the late 1980s. These antipsychotics have been named atypical for their ability to treat a broader range of
negative symptoms than the first-generation typical antipsychotics, which were introduced in the 1950s and are now generic. Atypical antipsychotics are generally regarded as having improved side effect profiles and efficacy relative to
typical antipsychotics and currently comprise approximately 90% of schizophrenia prescriptions. Currently approved atypical antipsychotics include, in addition to Fanapt
®
, 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 Merck & Co. Inc.,
Latuda
®
(lurasidone) by Sunovion Pharmaceuticals Inc., and generic clozapine.
Intellectual property
Fanapt
®
and its metabolites, formulations, genetic markers and uses
are covered by a total of 17 patent and patent application families worldwide. The primary new chemical entity patent covering Fanapt
®
was set to expire normally in 2011 in the U.S. and expired in 2010 in major markets outside the U.S. Fanapt
®
has qualified for the full five-year patent term extension under the Hatch-Waxman Act and so the term of the new chemical entity patent in the U.S. has been extended
until November 2016. Previously we expected Fanapt
®
to be eligible for six additional months of pediatric
exclusivity; however, in 2014, we became aware of events that led us to believe that Novartis would not complete the ongoing pediatric efficacy studies in a time that would enable it to receive the incremental six-month pediatric term extension.
This will result in a six-month reduction to the estimated patent life of Fanapt
®
from May 2017 to November
2016. In Europe, statutes provide for ten years of data exclusivity (with the potential for an additional year if the drug is developed for a significant new indication). No generic versions of
Fanapt
®
would be permitted to be marketed or sold during this 10-year (or 11-year) period in most European
countries. Consequently, we expect that Novartis rights to commercialize Fanapt
®
will be exclusive until
November 2016 in the U.S. and our rights to commercialize Fanapt
®
will be exclusive for at least 10 years from
approval in Europe. Outside the U.S. and Europe, data exclusivity will protect Fanapt
®
from generic competition
for varying numbers of years depending upon the country. Several other patent applications covering metabolites, uses, formulations and genetic markers relating to Fanapt
®
extend beyond 2020.
We
acquired worldwide, exclusive rights to the new chemical entity patent covering Fanapt
®
and certain related
intellectual property from Novartis under a sublicense agreement we entered into in 2004, which was amended and restated in 2009. Please see License agreements below for a more complete description of the rights we acquired from and
relinquished to Novartis with respect to Fanapt
®
.
VLY-686
VLY-686 is an NK-1R antagonist that we licensed from Eli Lilly and
Company (Lilly) in April 2012. NK-1R antagonists have been evaluated in a number of indications including chemotherapy-induced nausea and vomiting (CINV), post-operative nausea and vomiting (PONV), alcohol dependence, anxiety, depression and
pruritus. We initiated a proof of concept study in the second half of 2013 to evaluate VLY-686 in the treatment of pruritus in patients with atopic dermatitis. We plan to commence a Phase II clinical study of VLY-686 in the treatment of pruritus in
patients with atopic dermatitis in 2014.
7
Intellectual property
VLY-686 is covered by a total of three patent and patent application families worldwide. The new chemical patent covering VLY-686 expires
in April 2023, except in the U.S., where it expires in June 2024 absent any applicable patent term adjustments.
License agreements
Our rights to develop and commercialize our products are subject to the terms and conditions of licenses granted to us by
other pharmaceutical companies.
HETLIOZ
In February 2004, we entered into a license agreement with Bristol-Myers Squibb (BMS) under which we received an exclusive worldwide
license under certain patents and patent applications, and other licenses to intellectual property, to develop and commercialize HETLIOZ. In partial consideration for the license, we paid BMS an initial license fee of $0.5 million. Pursuant to
the license agreement, we would be obligated to make future milestone payments to BMS of up to $37.0 million in the aggregate. We made a milestone payment to BMS of $1.0 million under the license agreement in 2006 relating to the initiation of our
first Phase III clinical trial for HETLIOZ. As a result of the FDA acceptance of our NDA for HETLIOZ for the treatment of Non-24 in July 2013, we incurred a $3.0 million milestone obligation under our license agreement with BMS. As a
result of the FDAs approval of our HETLIOZ NDA in January 2014, we incurred an $8.0 million milestone obligation in the first quarter of 2014 under the same license agreement that will be capitalized as an intangible asset and amortized
over the expected HETLIOZ patent life in the U.S.. We will be obligated to make future milestone payments to BMS of up to $25.0 million in the event that sales of HETLIOZ reach a certain agreed upon sales threshold. Additionally, we will
be obligated to make royalty payments based on net sales of HETLIOZ which, as a percentage of net sales, are in the low teens. We are also obligated under the license agreement to pay BMS a percentage of any sublicense fees, upfront payments
and milestone and other payments (excluding royalties) that we receive from a third party in connection with any sublicensing arrangement, at a rate which is in the mid-twenties. We have agreed with BMS in our license agreement for HETLIOZ to
use our commercially reasonable efforts to develop and commercialize HETLIOZ.
Either party may terminate the
HETLIOZ license agreement under certain circumstances, including a material breach of the agreement by the other. In the event we terminate our license, or if BMS terminates our license due to our breach, all rights licensed and developed by
us under this agreement will revert or otherwise be licensed back to BMS on an exclusive basis.
Fanapt
®
We acquired exclusive worldwide rights to patents and patent applications for Fanapt
®
through a sublicense agreement with Novartis. A predecessor company of Sanofi, Hoechst Marion Roussel, Inc. (HMRI),
discovered Fanapt
®
and completed early clinical work on the compound. In 1996, HMRI licensed its rights to the
Fanapt
®
patents and patent applications to Titan Pharmaceuticals, Inc. (Titan) on an exclusive basis. In 1997,
soon after it had acquired its rights, Titan sublicensed its rights to Fanapt
®
on an exclusive basis to
Novartis. In June 2004, we acquired exclusive worldwide rights to these patents and patent applications as well as certain Novartis patents and patent applications to develop and commercialize
Fanapt
®
through a sublicense agreement with Novartis.
In October 2009, we entered into an amended and restated sublicense agreement with Novartis which amended and
restated our June 2004 sublicense agreement with Novartis relating to Fanapt
®
. Pursuant to the amended and
restated sublicense agreement, Novartis has exclusive commercialization rights to all formulations of Fanapt
®
in
the U.S. and Canada. Novartis began selling Fanapt
®
in the U.S. during the first quarter of 2010. Novartis is
responsible for the further clinical development activities in the U.S. and Canada. We do not expect Novartis to commercialize Fanapt
®
in Canada. Pursuant to the amended and restated sublicense agreement, we received an upfront payment of $200.0 million and are eligible for additional payments
totaling up to $265.0 million upon the 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., 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
8
percentage of net sales, are in the low double-digits, on net sales of
Fanapt
®
in the U.S. and Canada. We retain 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.
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 for Fanapt
®
. 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 and we would no longer receive royalty
payments from Novartis in connection with such country in the event of such termination.
VLY-686
In April 2012, we entered into a license agreement with Lilly pursuant to which we acquired an exclusive worldwide license under certain
patents and patent applications, and other licenses to intellectual property, to develop and commercialize an NK-1R antagonist, VLY-686, for all human indications.
Pursuant to the agreement, we paid Lilly an initial license fee of $1.0 million and we will be responsible for all development costs for VLY-686. Lilly is also eligible to receive additional payments
based upon achievement of specified development and commercialization milestones as well as tiered-royalties on net sales at percentage rates up to the low double digits. These milestones include $4.0 million for pre-NDA approval milestones and up
to $95.0 million for future regulatory approval and sales milestones. We have agreed to use commercially reasonable efforts to develop and commercialize VLY-686.
Either party may terminate the agreement under certain circumstances, including a material breach of the agreement by the other. In the event that we terminate the agreement, or if Lilly terminates the
agreement due to our breach or for certain other reasons set forth in the agreement, all rights licensed and developed by us under the agreement will revert or otherwise be licensed back to Lilly on an exclusive basis, subject to payment by Lilly to
us of a royalty on net sales of products that contain VLY-686.
Government regulation
Government authorities in the U.S., at the federal, state and local level, as well as foreign countries and local
foreign governments, regulate the research, development, testing, manufacture, labeling, promotion, advertising, distribution, sampling, marketing, import and export of our products. Other than HETLIOZ in the U.S. and Fanapt
®
in the U.S., Israel, Mexico and Argentina, all of our products will require regulatory approval by government
agencies prior to commercialization. In particular, human pharmaceutical products are subject to rigorous pre-clinical and clinical trials and other approval procedures of the FDA and similar regulatory authorities in foreign countries. The process
of obtaining these approvals and the subsequent compliance with appropriate domestic and foreign laws, rules and regulations require the expenditure of significant time and human and financial resources.
United States government regulation
FDA approval process
In the U.S., the FDA regulates drugs under the
Federal Food, Drug and Cosmetic Act, as amended, and implements regulations. If we fail to comply with the applicable requirements at any time during the product development process, approval process, or after approval, we may become subject to
administrative or judicial sanctions. These sanctions could include the FDAs refusal to approve pending applications, withdrawals of
9
approvals, clinical holds, warning letters, product recalls, product seizures, total or partial suspension of our operations, injunctions, fines, civil penalties or criminal prosecution. Any such
sanction could have a material adverse effect on our business.
The steps required before a drug may be marketed in the U.S.
include:
|
|
|
pre-clinical laboratory tests, animal studies and formulation studies under Current Good Laboratory Practices (cGLP);
|
|
|
|
submission to the FDA of an investigational new drug application (IND), which must become effective before human clinical trials may begin;
|
|
|
|
execution of adequate and well-controlled clinical trials to establish the safety and efficacy of the drug for each indication for which approval is
sought;
|
|
|
|
submission to the FDA of an NDA;
|
|
|
|
satisfactory completion of an FDA inspection of the manufacturing facility or facilities at which the drug is produced to assess compliance with
Current Good Manufacturing Practices (cGMP); and
|
|
|
|
FDA review and approval of the NDA.
|
Pre-clinical studies generally are conducted in laboratory animals to evaluate the potential safety and activity of a drug. Violation of the FDAs cGLP regulations can, in some cases, lead to
invalidation of the studies, requiring these studies to be replicated. In the U.S., drug developers submit the results of pre-clinical trials, together with manufacturing information and analytical and stability data, to the FDA as part of the IND,
which must become effective before clinical trials can begin in the U.S. An IND becomes effective 30 days after receipt by the FDA unless before that time the FDA raises concerns or questions about issues such as the proposed clinical trials
outlined in the IND. In that case, the IND sponsor and the FDA must resolve any outstanding FDA concerns or questions before clinical trials can proceed. If these concerns or questions are unresolved, the FDA may not allow the clinical trials to
commence.
Pilot studies generally are conducted in a limited patient population, approximately three to 25 subjects, to
determine whether the drug warrants further clinical trials based on preliminary indications of efficacy. These pilot studies may be performed in the U.S. after an IND has become effective or outside of the U.S. prior to the filing of an IND in the
U.S. in accordance with applicable government regulations and institutional procedures.
Clinical trials involve the
administration of the investigational new drug to human subjects under the supervision of qualified investigators. Clinical trials are conducted under protocols detailing, among other things, the objectives of the study, the parameters to be used in
assessing the safety and the effectiveness of the drug. Each protocol must be submitted to the FDA as part of the IND prior to beginning the trial.
Typically, clinical evaluation involves a time-consuming and costly three-Phase sequential process, but the phases may overlap. Each trial must be reviewed, approved and conducted under the auspices of an
independent Institutional Review Board, and each trial must include the patients informed consent.
|
|
|
Phase I: refers typically to closely-monitored clinical trials and includes the initial introduction of an investigational new drug into human patients
or healthy volunteer subjects. Phase I trials are designed to determine the safety, metabolism and pharmacologic actions of a drug in humans, the potential side effects associated with increasing drug doses and, if possible, to gain early evidence
of the drugs effectiveness. Phase I trials also include the study of structure-activity relationships and mechanism of action in humans, as well as studies in which investigational new drugs are used as research tools to explore biological
phenomena or disease processes. During Phase I trials, sufficient information about a drugs pharmacokinetics and pharmacological effects should be obtained to permit the design of well-controlled, scientifically valid Phase II studies. The
total number of subjects and patients included in Phase I trials varies, but is generally in the range of 20 to 80 people.
|
|
|
|
Phase II: refers to controlled clinical trials conducted to evaluate appropriate dosage and the effectiveness of a drug for a particular indication or
indications in patients with a disease or condition under study and
|
10
|
to determine the common short-term side effects and risks associated with the drug. These trials are typically well-controlled, closely monitored and conducted in a relatively small number of
patients, usually involving no more than several hundred subjects.
|
|
|
|
Phase III: refers to expanded controlled and uncontrolled clinical trials. These trials are performed after preliminary evidence suggesting
effectiveness of a drug has been obtained. Phase III trials are intended to gather additional information about the effectiveness and safety that is needed to evaluate the overall benefit-risk relationship of the drug and to provide an adequate
basis for physician labeling. Phase III trials usually include several hundred to several thousand subjects.
|
Phase I, II and III testing may not be completed successfully within any specified time period, if at all. The FDA closely monitors the
progress of each of the three phases of clinical trials that are conducted in the U.S. and may, at its discretion, reevaluate, alter, suspend or terminate the testing based upon the data accumulated to that point and the FDAs assessment of the
risk/benefit ratio to the patient. A clinical program is designed after assessing the causes of the disease, the mechanism of action of the active pharmaceutical ingredient of the drug and all clinical and pre-clinical data of previous trials
performed. Typically, the trial design protocols and efficacy endpoints are established in consultation with the FDA. Upon request through a special protocol assessment, the FDA can also provide specific guidance on the acceptability of protocol
design for clinical trials. The FDA, we or our partners may suspend or terminate clinical trials at any time for various reasons, including a finding that the subjects or patients are being exposed to an unacceptable health risk. The FDA can also
request additional clinical trials be conducted as a condition to drug approval. During all clinical trials, physicians monitor the patients to determine effectiveness and to observe and report any reactions or other safety risks that may result
from use of the drug.
Assuming successful completion of the required clinical trials, drug developers submit the results of
pre-clinical studies and clinical trials, together with other detailed information including information on the manufacture and composition of the drug, to the FDA, in the form of an NDA, requesting approval to market the drug for one or more
indications. In most cases, the NDA must be accompanied by a substantial user fee. The FDA reviews an NDA to determine, among other things, whether a drug is safe and effective for its intended use.
Before approving an NDA, the FDA will inspect the facility or facilities where the drug is manufactured. The FDA will not approve the
application unless cGMP compliance is satisfactory. The FDA will issue an approval letter if it determines that the application, manufacturing process and manufacturing facilities are acceptable. If the FDA determines that the NDA, manufacturing
process or manufacturing facilities are not acceptable, it will issue a complete response letter (CRL), in which it will outline the deficiencies in the submission and will often request additional testing or information. Notwithstanding the
submission of any requested additional information, the FDA may ultimately decide that the NDA does not satisfy the regulatory criteria for approval and refuse to approve the NDA.
The testing and approval process requires substantial time, effort and financial resources, and each may take several years to complete.
The FDA may not grant approval on a timely basis, or at all. We or our partners may encounter difficulties or unanticipated costs in our efforts to secure necessary governmental approvals, which could delay or preclude us or our partners from
marketing our products. Furthermore, the FDA may prevent a drug developer from marketing a drug under a label for its desired indications or place other conditions on distribution as a condition of any approvals, which may impair commercialization
of the drug. After approval, some types of changes to the approved drug, such as adding new indications, manufacturing changes and additional labeling claims, are subject to further FDA review and approval. Similar regulatory procedures must also be
complied within countries outside the U.S.
If the FDA approves the NDA, the drug becomes available for physicians to prescribe
in the U.S. After approval of our products, we have to comply with a number of post-approval requirements, including delivering periodic reports to the FDA, submitting descriptions of any adverse reactions reported, and complying with drug sampling
and distribution requirements. We and our partners also are required to provide updated safety and efficacy information and to comply with requirements concerning advertising and promotional labeling. Also, our quality control and manufacturing
procedures must continue to conform to cGMP after approval. Drug manufacturers and their subcontractors are required to register their facilities and are subject to periodic
11
unannounced inspections by the FDA to assess compliance with cGMP which imposes certain procedural and documentation requirements relating to quality assurance and quality control. Accordingly,
manufacturers must continue to expend time, money and effort in the area of production and quality control to maintain compliance with cGMP and other aspects of regulatory compliance. The FDA may require post market testing and surveillance to
monitor the drugs safety or efficacy, including additional studies, known as Phase IV trials, to evaluate long-term effects.
In addition to studies requested by the FDA after approval, we or our partners may have to conduct other trials and studies to explore use of the approved product for treatment of new indications, which
require FDA approval. The purpose of these trials and studies is to broaden the application and use of the product and its acceptance in the medical community.
We use, and will continue to use, third-party manufacturers to produce our products in clinical and commercial quantities. Future FDA inspections may identify compliance issues at our facilities or at the
facilities of our contract manufacturers that may disrupt production or distribution, or require substantial resources to correct. In addition, discovery of problems with a product or the failure to comply with requirements may result in
restrictions on a product, manufacturer or holder of an approved NDA, including withdrawal or recall of the product from the market or other voluntary or FDA-initiated action that could delay further marketing. Newly discovered or developed safety
or effectiveness data may require changes to a products approved labeling, including the addition of new warnings and contraindications.
In September 2007, the Food and Drug Administration Amendments Act (FDAAA), was enacted into law, amending both the FDC Act and the Public Health Service Act. The FDAAA made a number of substantive and
incremental changes to the review and approval processes in ways that could make it more difficult or costly to obtain approval for new pharmaceutical products, or to produce, market and distribute existing pharmaceutical products. Most
significantly, the law changed the FDAs handling of postmarked drug product safety issues by giving the FDA authority to require post approval studies or clinical trials, to request that safety information be provided in labeling, or to
require an NDA applicant to submit and execute a Risk Evaluation and Mitigation Strategy (REMS).
The FDAAA made certain
changes to the user fee provisions to permit the use of user fee revenue to fund the FDAs drug product safety activities and the review of Direct-to-Consumer advertisements. The Food and Drug Administration Safety and Innovation Act of 2012,
which became effective in October 2012, reauthorized the authority of the FDA to collect user fees to fund the FDAs review activities.
In addition, new government requirements may be established that could delay or prevent regulatory approval of our products under development.
The Hatch-Waxman Act
In seeking approval for a drug through an NDA, applicants are required to list with the FDA each patent with claims that cover the applicants drug. Upon approval of a drug, each of the patents
listed in the application for the drug is then published in the FDAs Approved Drug Products with Therapeutic Equivalence Evaluations, commonly known as the Orange Book. Drugs listed in the Orange Book can, in turn be cited by potential
competitors in support of approval of an abbreviated new drug application (ANDA). An ANDA provides for marketing of a drug that has the same active ingredients in the same strengths and dosage form as the listed drug and has been shown through
bioequivalence testing to be therapeutically equivalent to the listed drug. ANDA applicants are not required to conduct or submit results of pre-clinical or clinical tests to prove the safety or effectiveness of their drug, other than the
requirement for bioequivalence testing. Drugs approved in this way are commonly referred to as generic equivalents to the listed drug, and can often be substituted by pharmacists under prescriptions written for the original listed drug.
The ANDA applicant is required to certify to the FDA concerning any patents listed for the approved drug in the FDAs
Orange Book. Specifically, the applicant must certify that: (i) the required patent information has not been filed; (ii) the listed patent has expired; (iii) the listed patent has not expired, but will expire on a particular date and
approval is sought after patent expiration; or (iv) the listed patent is invalid or will not be infringed by the new drug. A certification that the new drug will not infringe the already approved drugs listed
12
patents or that such patents are invalid is called a Paragraph IV certification. If the applicant does not challenge the listed patents, the ANDA application will not be approved until all the
listed patents claiming the referenced drug have expired.
If the ANDA applicant has provided a Paragraph IV certification to
the FDA, the applicant must also send notice of the Paragraph IV certification to the NDA and patent holders once the ANDA has been accepted for filing by the FDA. The NDA and patent holders may then initiate a patent infringement lawsuit in
response to the notice of the Paragraph IV certification. The filing of a patent infringement lawsuit within 45 days of the receipt of a Paragraph IV certification automatically prevents the FDA from approving the ANDA until the earlier of 30
months, expiration of the patent, settlement of the lawsuit or a decision in the infringement case that is favorable to the ANDA applicant.
The ANDA application also will not be approved until any non-patent exclusivity, such as exclusivity for obtaining approval of a new chemical entity, listed in the Orange Book for the referenced drug has
expired. Federal law provides a period of five years following approval of a drug containing no previously approved active ingredients, during which ANDAs for generic versions of those drugs cannot be submitted unless the submission contains a
Paragraph IV challenge to a listed patent, in which case the submission may be made four years following the original drug approval. Federal law provides for a period of three years of exclusivity following approval of a listed drug that contains
previously approved active ingredients but is approved in a new dosage form, route of administration or combination, or for a new use, the approval of which was required to be supported by new clinical trials conducted by or for the sponsor, during
which FDA cannot grant effective approval of an ANDA based on that listed drug.
Foreign regulation
Whether or not we or our partners obtain FDA approval for a product, we must obtain approval by the comparable regulatory authorities of
foreign countries before we can commence clinical trials or marketing of the product in those countries. The approval process varies from country to country, and the time may be longer or shorter than that required for FDA approval. The requirements
governing the conduct of clinical trials, product licensing, pricing and reimbursement also vary greatly from country to country. Although governed by the applicable country, clinical trials conducted outside of the U.S. typically are administered
with the three-Phase sequential process that is discussed above under United States government regulation. However, the foreign equivalent of an IND is not a prerequisite to performing pilot studies or Phase I clinical trials.
Under European Union regulatory systems, we may submit MAAs either under a centralized or decentralized procedure. The
centralized procedure, which is available for drugs produced by biotechnology or which are highly innovative, provides for the grant of a single marketing authorization that is valid for all European Union member states. This authorization is a
marketing authorization approval. The decentralized procedure provides for mutual recognition of national approval decisions. Under this procedure, the holder of a national marketing authorization may submit an application to the remaining member
states. Within 90 days of receiving the applications and assessment report, each member state must decide whether to recognize approval. This procedure is referred to as the mutual recognition procedure.
In addition, regulatory approval of prices is required in most countries other than the U.S. We face the risk that the resulting prices
would be insufficient to generate an acceptable return to us or our partners.
Patents and proprietary rights; Hatch-Waxman protection
We and our partners will be able to protect our products from unauthorized use by third parties only to the extent that
our products are covered by valid and enforceable patents, either licensed in from third parties or generated internally, that give us or our partners sufficient proprietary rights. Accordingly, patents and other proprietary rights are essential
elements of our business.
HETLIOZ, Fanapt
®
and VLY-686 are covered by new chemical entity and other patents. These patents cover the active pharmaceutical ingredient and provide patent protection for all
formulations containing these active pharmaceutical ingredients. For more on these license and sublicense arrangements, please see License agreements above. In addition, we have generated our own intellectual property, and filed patent
applications covering this intellectual property, for HETLIOZ and Fanapt
®
.
13
Fanapt
®
The new chemical entity
patent for Fanapt
®
is owned by Sanofi, and other patents and patent applications relating to Fanapt
®
are owned by Novartis. We originally obtained exclusive worldwide rights to develop and commercialize the products
covered by these patents through license and sublicense arrangements. However, pursuant to the amended and restated sublicense agreement with Novartis, Novartis now retains exclusive commercialization rights to all formulations of Fanapt
®
in the U.S. and Canada.
The new chemical entity patent covering Fanapt
®
was set to expire normally in 2011 in the U.S. and expired in 2010 in major markets outside of the U.S. However, in the U.S., Fanapt
®
has qualified for a full five-year patent term extension and so the term of the new chemical entity patent in the
U.S. has been extended until November 2016 (see
Subsequent Events
footnote for further information). In Europe, statutes provide for ten years of data exclusivity, with the potential for an additional year if the company develops the drug for
a significant new indication. No generic versions of Fanapt
®
would be permitted to be marketed or sold during
this 10-year (or 11-year) period in most European countries. Consequently, assuming we receive regulatory approval in Europe, we expect that Novartis rights to commercialize Fanapt
®
will be exclusive until November 2016 in the U.S. and our rights in Europe would be exclusive for at least 10 years from approval in Europe. Data exclusivity periods
in other countries vary from country to country. Several other patent applications covering metabolites, uses, formulations and genetic markers relating to Fanapt
®
extend beyond 2020.
HETLIOZ
TM
The new chemical entity patent for HETLIOZ, which is owned by BMS, expires in 2017 in the U.S. and most European markets. We expect the patent to receive a five-year patent term extension under the
Hatch-Waxman Act, which would extend new chemical entity patent protection for HETLIOZ
TM
to 2022. In addition, we have applied for our own patents directed to methods of using HETLIOZ
TM
, which, if granted, could extend the period of effective patent protection for the product in the U.S. and other major
markets. It is also possible that the term of the new chemical entity patent could be extended in Europe and other major markets outside the U.S. We expect the product to be protected by data exclusivity outside the U.S., the terms of which vary by
country.
VLY-686
The new chemical entity patent covering VLY-686, which is owned by Lilly, expires in April 2023, except in the U.S., where it expires in June 2024. We believe a five-year patent term extension may be
available for VLY-686 in the U.S. and possibly elsewhere. Lilly owns additional patent applications, which are licensed to us, directed to polymorphic forms of, and methods of making VLY-686.
Aside from the new chemical entity patents and other in-licensed patents relating to Fanapt
®
, HETLIOZ and VLY-686, as of December 31, 2013 we had 27 patent and patent application families, most of
which have been filed in key markets including the U.S., relating to HETLIOZ and Fanapt
®
. In addition, we
had five other patent applications relating to products not presently in clinical studies. The claims in these various patents and patent applications are directed to compositions of matter, including claims covering other products, pharmaceutical
compositions and methods of use.
For proprietary know-how that is not appropriate for patent protection, processes for which
patents are difficult to enforce and any other elements of our discovery process that involve proprietary know-how and technology that are not covered by patent applications, we generally rely on trade secret protection and confidentiality
agreements to protect our interests. We require all of our employees, consultants and advisors to enter into confidentiality agreements. Where it is necessary to share our proprietary information or data with outside parties, our policy is to make
available only that information and data required to accomplish the desired purpose and only pursuant to a duty of confidentiality on the part of those parties.
Third-party reimbursement and pricing controls
The Patient Protection and
Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act of 2010, collectively referred to as the ACA, is expected to significantly change the way healthcare is financed by both governmental and private
insurers. The provisions of the ACA became
14
effective over various periods from 2010 through 2014. While we cannot predict what impact on federal reimbursement policies this law will have in general or specifically on any product we
commercialize, the ACA may result in downward pressure on pharmaceutical reimbursement, which could negatively affect market acceptance of new products. The rebates, discounts, taxes and other costs resulting from the ACA may have a significant
effect on our profitability in the future. In addition, potential reductions of the per capita rate of growth in Medicare spending under the ACA, could potentially limit access to certain treatments or mandate price controls for our products.
Moreover, although the United States Supreme Court has upheld the constitutionality of most of the ACA, some states have indicated that they intend not to implement certain sections of the ACA, and some members of the U.S. Congress are still working
to repeal the ACA. We cannot predict whether these challenges will continue or other proposals will be made or adopted, or what impact these efforts may have on us or our partners.
In the U.S. and elsewhere, sales of pharmaceutical products depend in significant part on the availability of reimbursement to the
consumer from third-party payors, such as government and private insurance plans. 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 us or our partners to sell our compounds
on a competitive and profitable basis. The passage of the Medicare Prescription Drug and Modernization Act of 2003 imposes additional requirements for the distribution and pricing of prescription drugs which may affect the marketing of our products.
In many foreign markets, including the countries in the European Union and Japan, pricing of pharmaceutical products is
subject to governmental control. In the U.S., there have been, and we expect that there will continue to be, a number of federal and state proposals to implement similar governmental pricing control. While we cannot predict whether such legislative
or regulatory proposals will be adopted, the adoption of such proposals could have a material adverse effect on our business, financial condition and profitability.
Marketing and sales
In January 2014, HETLIOZ was approved in the
U.S. for the treatment of Non- 24. We currently anticipate commercially launching HETLIOZ in the U.S. in the second quarter of 2014.
We are preparing to file a MAA for HETLIOZ
TM
for the treatment of Non-24 with the EMA during 2014. Given the range of potential indications for HETLIOZ, we may pursue one or more partnerships for the development and commercialization of
HETLIOZ worldwide.
In October 2009, we entered into an amended and restated sublicense agreement
with Novartis pursuant to which Novartis has exclusive commercialization rights to all formulations of Fanapt
®
in the U.S. and Canada. Novartis began selling Fanapt
®
in the U.S. during the first quarter of 2010. We do not
expect Novartis to commercialize Fanapt
®
in Canada.
We continue to explore the regulatory path and commercial opportunity for Fanapt
®
oral formulation outside of the U.S. and Canada. We have entered into agreements with the following partners for the
commercialization of Fanapt
®
in the countries set forth below:
|
|
|
Country
|
|
Partner
|
Mexico
|
|
Probiomed S.A. de C.V.
|
Israel
|
|
Megapharm Ltd.
|
In August 2012, the Israeli Ministry of Health granted market approval for Fanapt
®
for the treatment of schizophrenia. In November 2012, we were notified that Fanapt
®
had been granted market approval in Argentina for the treatment of schizophrenia. In October 2013, the Mexican
Federal Commission for Protection Against Sanitary Risks (COFEPRIS) granted market approval for Fanapt
®
for the
treatment of schizophrenia.
15
Manufacturing
We currently utilize a virtual supply manufacturing and distribution chain in which we do not have our own facilities to manufacture commercial or clinical trial supplies of drugs and we do not have our
own distribution facilities. Additionally, we do not intend to develop such facilities for any product in the near future. Instead, we contract with third parties for the manufacture, warehousing, order management, billing and collection and
distribution of our products and product candidates.
We expect to continue to rely solely on third-party manufacturers to
manufacture drug substance and final drug products for both clinical development and commercial sale. However, there are numerous factors that could cause interruptions in the supply of our products, including regulatory reviews; changes in our
sources for manufacturing; disputes with a manufacturer; or financial instability of manufacturers, which could negatively impact our operation.
In January 2014, we entered into a manufacturing agreement with Patheon Pharmaceuticals Inc. for the manufacture of commercial supplies of HETLIOZ 20 mg capsules at Patheons Cincinnati, Ohio
manufacturing site. Under the agreement, we are responsible for supplying the active pharmaceutical ingredient for HETLIOZ to Patheon and have agreed to certain minimum yearly order requirements. Patheon is responsible for manufacturing the
HETLIOZ 20 mg capsules, conducting quality control and stability testing, and packaging the HETLIOZ capsules. The agreement has an initial term of five years and will automatically renew after the initial term for successive terms of one
year each, unless either party gives notice of its intention to terminate the agreement at least twelve months prior to the end of the then current term. Either party may terminate the agreement under certain circumstances upon specified written
notice to the other party.
Research and Development
We have built a research and development organization that includes extensive expertise in the scientific disciplines of pharmacogenetics and pharmacogenomics. We operate cross-functionally and are led by
an experienced research and development management team. We use rigorous project management techniques to assist us in making disciplined strategic research and development program decisions and to help limit the risk profile of our product
pipeline. We also access relevant market information and key opinion leaders in creating target product profiles and, when appropriate, as we advance our programs towards commercialization. We engage third parties to conduct portions of our
preclinical research. In addition, we utilize multiple clinical sites to conduct our clinical trials; however we are not substantially dependent upon any one of these sites for our clinical trials nor do any of them conduct a major portion of our
clinical trials.
We incurred $28.2 million, $45.4 million and $29.0 million in research and development expenses in the years
ended December 31, 2013, 2012 and 2011, respectively.
Competition
The pharmaceutical industry and the central nervous system segment of that industry, in particular, is highly competitive and includes a
number of established large and mid-sized companies with greater financial, technical and personnel resources than we have and significantly greater commercial infrastructures than we have. Our market segment also includes several smaller emerging
companies whose activities are directly focused on our target markets and areas of expertise. Our products, once approved for commercial use, will compete with numerous therapeutic treatments offered by these competitors. While we believe that our
products will have certain favorable features, existing and new treatments may also possess advantages. Additionally, the development of other drug technologies and methods of disease prevention are occurring at a rapid pace. These developments may
render our products or technologies obsolete or noncompetitive.
We believe the primary competitors for
HETLIOZ
TM
and Fanapt
®
are as follows:
|
|
|
For
HETLIOZ
TM
in the treatment of CRSDs, there are no approved
direct competitors. Insomnia treatments include, Rozerem
®
(ramelteon) by Takeda Pharmaceuticals Company Limited,
hypnotics such as Ambien
®
(zolpidem) by Sanofi (including Ambien CR
®
), Lunesta
®
(eszopiclone) by Sunovion Pharmaceuticals Inc., Sonata
®
(zaleplon) by Pfizer Inc.,
Silenor
®
(doxepin) by Pernix Therapeutics,
|
16
|
generic compounds 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.
|
|
|
|
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 Merck & Co. Inc.,
Latuda
®
(lurasidone) by Sunovion Pharmaceuticals Inc., and generic clozapine, as well as the typical
antipsychotics haloperidol, chlorpromazine, thioridazine, and sulpiride (all of which are generic).
|
Our
ability to compete successfully will depend in part on our ability to utilize our pharmacogenetics and pharmacogenomics and drug development expertise to identify, develop, secure rights to and obtain regulatory approvals for promising
pharmaceutical products before others are able to develop competitive products. Our ability to compete successfully will also depend on our ability to attract and retain skilled and experienced personnel. Additionally, our ability to compete may be
affected because insurers and other third-party payors in some cases seek to encourage the use of cheaper, generic products, which could make our products less attractive.
Employees
As of December 31, 2013, we had 53 full-time employees. Of
these employees, 25 were primarily engaged in research and development activities. None of our employees are represented by a labor union. We have not experienced any work stoppages and consider our employee relations to be good.
Corporate Information
We were incorporated in Delaware in 2002. Our principal executive offices are located at 2200 Pennsylvania Avenue NW, Suite 300E,
Washington D.C. 20037, and our telephone number is (202) 734-3400. Our website address is www.vandapharma.com and the information contained in, or that can be accessed through, our website is not part of this annual report and should not be
considered part of this annual report.
Available Information
We file annual, quarterly, and current reports, proxy statements, and other documents with the Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934 (the Exchange Act). The
public may read and copy any materials that we file with the SEC at the SECs Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC
at 1-800-SEC-0330. Also, the SEC maintains an internet website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers, including us, that file electronically with the SEC.
We also make available free of charge on our Internet website at www.vandapharma.com our annual reports on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with,
or furnish it to, the SEC.
Our code of ethics, other corporate policies and procedures, and the charters of our Audit
Committee, Compensation Committee and Nominating/Corporate Governance Committee are available through our Internet website at www.vandapharma.com.
17
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 annual report on Form 10-K including the consolidated financial statements and the related notes appearing herein, 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 could 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. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our operations and results.
Risks related to our business and industry
HETLIOZ may not be
commercially successful.
Market acceptance of and demand for HETLIOZ will depend on many factors, including, but
not limited to:
|
|
|
pricing and availability of alternative products;
|
|
|
|
the cost and success of our Non-24 awareness campaign;
|
|
|
|
our ability to obtain third-party coverage or reimbursement for HETLIOZ;
|
|
|
|
perceived efficacy relative to other available therapies;
|
|
|
|
shifts in the medical community to new treatment paradigms or standards of care;
|
|
|
|
relative convenience and ease of administration; and
|
|
|
|
prevalence and severity of adverse side effects associated with treatment.
|
Because we have not yet initiated the commercialization of HETLIOZ, we have limited information with regard to the market acceptance
of HETLIOZ in the U.S. or elsewhere. As a result, we may have to revise our estimates regarding the acceptance of HETLIOZ under our anticipated pricing structure and reevaluate and/or change the anticipated pricing for HETLIOZ.
In addition, we have incurred and expect to continue to incur significant expenses and to utilize a substantial portion of our
cash resources as we prepare for the commercial launch of HETLIOZ in the U.S., continue our Non-24 awareness campaign and continue to grow our operational capabilities. This represents a significant investment in the commercial success of
HETLIOZ, which is uncertain.
We are heavily dependent on the commercial success of
HETLIOZ
, which only recently received marketing authorization in the U.S., and on the regulatory approval of HETLIOZ
for the treatment of Non-24 in other countries, which may never occur.
Our future success is currently dependent upon the commercial success of HETLIOZ for the
treatment of Non-24 in the U.S. In January 2014, the FDA approved our NDA for HETLIOZ for the treatment of Non-24. Our future success is dependent upon successfully obtaining regulatory approval from foreign regulatory bodies to market
HETLIOZ for the treatment of Non-24 in other jurisdictions, and if approved, successfully commercializing HETLIOZ in such jurisdictions. We are preparing to file a Marketing Authorization Application (MAA) for HETLIOZ
TM
for the treatment of Non-24 with the European Medicines Agency (EMA)
during 2014.
If we do not successfully commercialize HETLIOZ in other countries in which HETLIOZ may be approved
for sale, our ability to generate revenue may be jeopardized and, consequently, our business may be seriously harmed. We may not receive regulatory approval in other jurisdictions for HETLIOZ; and if we do receive regulatory approval in such
other jurisdictions for HETLIOZ, we may not be able to commercialize HETLIOZ successfully, all of which would have a material adverse effect on our business and prospects.
18
In addition, we have incurred and expect to continue to incur significant expenses and to
utilize a substantial portion of our cash resources as we prepare for the approval of HETLIOZ in other jurisdictions. This represents a significant investment in the regulatory success of HETLIOZ, which is uncertain.
As a company, 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 as a company 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 HETLIOZ, 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 HETLIOZ, 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 partners. 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:
|
|
|
our inability to recruit and retain adequate numbers of effective sales and marketing personnel;
|
|
|
|
the inability of sales personnel to obtain access to or persuade adequate numbers of physicians to prescribe our products;
|
|
|
|
the lack of complementary products to be offered by our sales personnel, which may put us at a competitive disadvantage with respect to companies with
broader product lines; and
|
|
|
|
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.
|
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.
We rely and will continue to rely
on outsourcing arrangements for many of our activities, including clinical development and supply of HETLIOZ and our other products.
As of December 31, 2013 we had 53 full-time employees and, as a result, we rely, and expect to continue to rely, on outsourcing arrangements for a significant portion of our activities, including
clinical research, data collection and analysis, manufacturing, financial reporting and accounting and human resources, as well as for certain functions as a public company. We may have limited control over these third parties and we cannot
guarantee that they will perform their obligations in an effective and timely manner.
Disruptions to our
HETLIOZ
supply chain could materially reduce our future earnings and prospects.
A loss or
disruption with any one of our manufacturers or suppliers could disrupt supply of HETLIOZ, possibly for a significant time period, and we may not have sufficient inventories to maintain supply before the manufacturer or supplier could be
replaced or the disruption is resolved. In addition, marketed drugs and their contract manufacturing organizations are subject to continual review, including review and approval of their manufacturing facilities and the manufacturing processes,
which can result in delays in the regulatory approval process and/or commercialization. Introducing a replacement or backup manufacturer or supplier for HETLIOZ requires a lengthy regulatory and commercial process and there can be no guarantee
that we could
19
obtain necessary regulatory approvals in a timely fashion or at all. In addition, it is difficult to identify and select qualified suppliers and manufacturers with the necessary technical
capabilities, and establishing new supply and manufacturing sources involves a lengthy and technical engineering process.
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.
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:
|
|
|
a product may not be shown to be safe or effective;
|
|
|
|
the FDA may interpret data from pre-clinical and clinical trials in different ways than we or our partners do;
|
|
|
|
the FDA may not approve our or our partners manufacturing processes or facilities;
|
|
|
|
a product may not be approved for all the indications we or our partners request;
|
|
|
|
the FDA may change its approval policies or adopt new regulations;
|
|
|
|
the FDA may not meet, or may extend, the Prescription Drug User Fee Act (PDUFA-V) date with respect to a particular NDA; and
|
|
|
|
the FDA may not agree with our or our partners regulatory approval strategies or components of the regulatory filings, such as clinical trial
designs.
|
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:
|
|
|
recall or seizure of products;
|
|
|
|
total or partial suspension of production;
|
|
|
|
refusal of the government to grant future approvals;
|
|
|
|
withdrawal of approvals; and
|
20
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 HETLIOZ in the U.S. and Fanapt
®
in the U.S., Mexico, 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.
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.
21
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 2014 and beyond. It is uncertain whether our existing funds
will be sufficient to meet our operating needs. As of December 31, 2013, our total cash and cash equivalents and marketable securities were $130.4 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 $48.5 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:
|
|
|
our ability to commercialize HETLIOZ
TM
globally;
|
|
|
|
costs of developing and maintaining sales, marketing and distribution channels and our ability to sell our products;
|
|
|
|
costs involved in establishing manufacturing capabilities for commercial quantities of our products;
|
|
|
|
the amount of royalty and milestone payments received from our commercial partners;
|
|
|
|
our ability to commercialize Fanapt
®
outside the U.S. and Canada;
|
|
|
|
the number of potential formulations and products in development;
|
|
|
|
progress with pre-clinical studies and clinical trials;
|
|
|
|
time and costs involved in obtaining regulatory (including FDA) approval;
|
|
|
|
costs involved in preparing, filing, prosecuting, maintaining and enforcing patent, trademark and other intellectual property claims;
|
|
|
|
competing technological and market developments;
|
|
|
|
market acceptance of our products;
|
|
|
|
costs for recruiting and retaining employees and consultants;
|
|
|
|
costs for training physicians; and
|
|
|
|
legal, accounting, insurance and other professional and business related costs.
|
We expect to continue to receive royalty payments in connection with our amended and restated sublicense agreement
with Novartis. Based on the current sales performance of Fanapt
®
in the U.S., we expect that some or all of
these commercial and development milestones will not be achieved by Novartis. Over time, Novartis has reduced the size of the
Fanapt
®
sales organization and this could have a negative impact on the success of the product in the U.S.. We
do not expect Novartis to commercialize Fanapt
®
in Canada. We do not expect to receive revenue from
HETLIOZ
TM
sales in the U.S. until the second quarter of
2014, at the earliest. 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.
22
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:
|
|
|
undertaking pre-clinical testing and clinical trials;
|
|
|
|
obtaining FDA and other regulatory approvals of products; and
|
|
|
|
manufacturing, marketing and selling products.
|
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 HETLIOZ, 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 HETLIOZ and Fanapt
®
are as follows:
|
|
|
For HETLIOZ 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 (including Ambien CR
®
), Lunesta
®
(eszopiclone) by
Sunovion Pharmaceuticals Inc., Sonata
®
(zaleplon) by Pfizer Inc., Silenor
®
(doxepin) by Pernix Therapeutics, 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.
|
|
|
|
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 Merck & Co. Inc.,
Latuda
®
(lurasidone) by Sunovion Pharmaceuticals Inc., and generic clozapine, as well as the typical
antipsychotics haloperidol, chlorpromazine, thioridazine, and sulpiride (all of which are generic).
|
Additionally, we may 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 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 (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.
23
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 meaningful product revenue from Fanapt
®
will depend on the success of this product in the marketplace.
Our ability to generate product revenue from Fanapt
®
will depend on
the success of Fanapt
®
and the sales of this product by Novartis in the U.S. The ability of Fanapt
®
to generate meaningful product revenue will depend on many factors, including the following:
|
|
|
the extent and effectiveness of the development, sales and marketing and distribution support Fanapt
®
receives;
|
|
|
|
the amount of resources and efforts utilized by Novartis in relation to the commercialization of
Fanapt
®
;
|
|
|
|
the ability of patients to be able to afford Fanapt
®
or obtain health care coverage that covers
Fanapt
®
;
|
|
|
|
acceptance of, and ongoing satisfaction, with Fanapt
®
by the medical community, patients receiving therapy and third party payers;
|
|
|
|
a satisfactory efficacy and safety profile as demonstrated in a broad patient population;
|
|
|
|
the size of the market for
Fanapt
®
;
|
|
|
|
successfully expanding and sustaining manufacturing capacity to meet demand;
|
|
|
|
cost and availability of raw materials;
|
|
|
|
safety concerns in the marketplace for schizophrenia therapies;
|
|
|
|
regulatory developments relating to the manufacture or continued use of Fanapt
®
;
|
|
|
|
decisions as to the timing of product launches, pricing and discounts;
|
|
|
|
the competitive landscape for approved and developing therapies that will compete with Fanapt
®
;
|
|
|
|
our or our partners ability to obtain regulatory approval for Fanapt
®
in countries outside the U.S. and Canada;
|
|
|
|
our ability to successfully develop and commercialize Fanapt
®
outside of the U.S. and Canada; and
|
|
|
|
the unfavorable outcome or other negative effects of any potential litigation relating to Fanapt
®
.
|
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 meaningful product revenue from Fanapt
®
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., 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, 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, we
will receive limited revenues from them. Over time, Novartis has reduced the size of the Fanapt
®
sales
organization and this could have a negative impact on the success of the product in the United States. 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.
24
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 HETLIOZ in January 2014 and the NDA for Fanapt
®
in May 2009, and the
positive results of our completed trials for HETLIOZ 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:
|
|
|
the inability to manufacture or obtain from third parties materials sufficient for use in pre-clinical studies and clinical trials;
|
|
|
|
delays in beginning a clinical trial;
|
|
|
|
delays in patient enrollment and variability in the number and types of patients available for clinical trials;
|
|
|
|
difficulty in maintaining contact with patients after treatment, resulting in incomplete data;
|
|
|
|
poor effectiveness of our products during clinical trials;
|
|
|
|
unforeseen safety issues or side effects; and
|
|
|
|
governmental or regulatory delays and changes in regulatory requirements and guidelines.
|
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.
25
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:
|
|
|
regulatory authorities may require the addition of labeling statements, such as a black box warning or a contraindication;
|
|
|
|
regulatory authorities may withdraw their approval of the product;
|
|
|
|
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
|
|
|
|
our, our partners or the products reputation may suffer.
|
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. The commercial launch for
HETLIOZ will require substantial additional expenditures.
As of December 31, 2013, we had an
accumulated deficit of $311.4 million, and we cannot estimate with precision the extent of our future losses. Our ability to generate meaningful product revenue prior to the commercialization of HETLIOZ 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. We do not expect Novartis to commercialize Fanapt
®
in Canada. 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. and we may not succeed in commercializing Fanapt
®
outside of the U.S. and Canada. The commercial launch for HETLIOZ and our continuing Non-24 awareness campaign will require substantial additional expenditures.
In addition, we may not succeed in commercializing HETLIOZ or any other products. 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.
There can be no assurance that we will achieve sustained profitability. Our ability to achieve sustained
profitability in the future depends, in part, upon:
|
|
|
our and our partners ability to obtain and maintain regulatory approval for our products, particularly HETLIOZ for the treatment of Non-24,
both in the U.S. and in foreign countries;
|
26
|
|
|
our ability to successfully commercialize HETLIOZ in the U.S. and other jurisdictions in which HETLIOZ may receive regulatory approval, if
any;
|
|
|
|
our ability to successfully raise awareness regarding Non-24 in the medical and patient communities;
|
|
|
|
Novartis ability to successfully market and sell Fanapt
®
in the U.S.;
|
|
|
|
our and our partners ability to successfully commercialize Fanapt
®
outside the U.S. and Canada;
|
|
|
|
our ability to enter into and maintain agreements to develop and commercialize our products;
|
|
|
|
our and our partners ability to develop, have manufactured and market our products;
|
|
|
|
our and our partners ability to obtain adequate reimbursement coverage for our products from insurance companies, government programs and other
third party payors; and
|
|
|
|
our ability to obtain additional research and development funding from collaborative partners or funding for our products.
|
In addition, the amount we spend will impact our profitability. Our spending will depend, in part, upon:
|
|
|
the costs of our marketing or awareness campaigns;
|
|
|
|
the progress of our research and development programs for our products, including clinical trials;
|
|
|
|
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;
|
|
|
|
the time and expense required to prosecute, enforce and/or challenge patent and other intellectual property rights;
|
|
|
|
the cost of operating and maintaining development and research facilities;
|
|
|
|
the cost of third party manufacturers;
|
|
|
|
the number of additional products we pursue;
|
|
|
|
how competing technological and market developments affect our products;
|
|
|
|
the cost of possible acquisitions of technologies, products, product rights or companies;
|
|
|
|
the cost of obtaining licenses to use technology owned by others for proprietary products and otherwise;
|
|
|
|
the costs and effects of potential litigation; and
|
|
|
|
the costs associated with recruiting and compensating a highly skilled workforce in an environment where competition for such employees may be intense.
|
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.
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.
27
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, 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.
In January 2014, we entered into a manufacturing agreement with Patheon Pharmaceuticals Inc.
(Patheon) for the manufacture of commercial supplies of HETLIOZ 20 mg capsules. This agreement has an initial term of five years. If Patheon is unable to perform its duties under the manufacturing agreement, it could adversely
affect sales of our HETLIOZ products, delay clinical trials and prevent us from developing our HETLIOZ products in a cost-effective manner or on a timely basis. We do not have exclusive long-term agreements with any other third party
manufacturers. If any of our third party manufacturers, including Patheon, 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,
28
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:
|
|
|
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
|
|
|
|
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.
|
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.
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.
29
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.
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
30
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.
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:
|
|
|
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;
|
31
|
|
|
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;
|
|
|
|
new laws, regulations and judicial decisions affecting pricing or marketing; and
|
|
|
|
changes in the tax laws relating to our operations.
|
In addition, the Food and Drug Administration Amendments Act of 2007 ( 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).
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.
32
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:
|
|
|
licensing agreements; and
|
|
|
|
co-promotion and similar agreements.
|
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 operating results may fluctuate significantly.
Our operating results will continue to be subject to fluctuations. The revenues we generate, if any, and our operating results will be affected by numerous factors, including:
|
|
|
our addition or termination of development programs;
|
|
|
|
variations in the level of expenses related to our products or future development programs;
|
|
|
|
our execution of collaborative, licensing or other arrangements, and the timing of payments we may make or receive under these arrangements;
|
|
|
|
the timing and amount of royalties or milestone payments;
|
|
|
|
regulatory developments affecting our products or those of our competitors;
|
|
|
|
marketing and other expenses;
|
|
|
|
manufacturing or supply issues;
|
|
|
|
any intellectual property infringement or other lawsuit in which we may become involved; and
|
|
|
|
the timing and recognition of stock-based compensation expense.
|
33
If our operating results fall below the expectations of investors or securities analysts,
the price of our common stock could decline substantially. Furthermore, any fluctuations in our operating results may, in turn, cause the price of our stock to fluctuate substantially. We believe that 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.
HETLIOZ 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 HETLIOZ in the license agreement. Either party may terminate the
license agreement under certain circumstances, including a material breach of the agreement by the other. In the event we terminate our license, or if BMS terminates our license due to our breach, all rights to HETLIOZ (including any
intellectual property we develop with respect to HETLIOZ) licensed and developed by us under this agreement will revert or otherwise be licensed back to BMS on an exclusive basis. Any termination or reversion of our rights to develop or
commercialize HETLIOZ, 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 and Novartis. Titan Pharmaceuticals, Inc. (Titan) holds an exclusive license from Sanofi to the intellectual property owned by Sanofi, 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. 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 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 December 31, 2013, excluding in-licensed
patents and patent applications, we had 27 patent and
34
patent application families, most of which have been filed in key markets including the U.S., relating to HETLIOZ and Fanapt
®
. In addition, we had five 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 HETLIOZ, and that we continue to have rights under our license agreement with respect to this product, we would have exclusive
rights to HETLIOZs 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 Sanofis new chemical entity patent relating to
Fanapt
®
to November 2016. 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.
35
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 December 31, 2013, the high and low sales prices of our common stock as reported on The NASDAQ Global Market varied between $3.57 and $15.65 per share. 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.
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:
|
|
|
publicity regarding actual or potential testing or trial results relating to products under development by us or our competitors;
|
|
|
|
the outcome of regulatory review relating to products under development by us or our competitors;
|
|
|
|
regulatory developments in the U.S. and foreign countries;
|
|
|
|
developments concerning any collaboration or other strategic transaction we may undertake;
|
|
|
|
announcements of patent issuances or denials, technological innovations or new commercial products by us or our competitors;
|
|
|
|
termination or delay of development or commercialization program(s) by our partners;
|
|
|
|
safety issues with our products or those of our competitors;
|
|
|
|
our or our partners ability to successfully commercialize our products;
|
|
|
|
our ability to successfully execute our commercialization strategies;
|
|
|
|
announcements of technological innovations or new therapeutic products or methods by us or others;
|
|
|
|
actual or anticipated variations in our quarterly operating results;
|
|
|
|
changes in estimates of our financial results or recommendations by securities analysts or failure to meet such financial expectations;
|
|
|
|
changes in government regulations or policies;
|
|
|
|
changes in patent legislation or patent decisions or adverse changes to patent law;
|
|
|
|
additions or departures of key personnel or members of our board of directors;
|
|
|
|
the publication of negative research or articles about our company, our business or our products by industry analysts or others;
|
|
|
|
publicity regarding actual or potential transactions involving us; and
|
|
|
|
economic, political and other external factors beyond our control.
|
36
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.
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 December 31, 2013, there were a total of 6,417,308 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.
37
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.
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:
|
|
|
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;
|
|
|
|
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
|
|
|
|
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.
|
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:
|
|
|
authorize the issuance of blank check preferred stock that could be issued by our board of directors to thwart a takeover attempt;
|
|
|
|
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;
|
|
|
|
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;
|
|
|
|
require that directors only be removed from office for cause;
|
|
|
|
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;
|
|
|
|
limit who may call special meetings of stockholders;
|
|
|
|
prohibit stockholder action by written consent, requiring all actions to be taken at a meeting of the stockholders; and
|
|
|
|
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.
|
38
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.