| ALFACELL CORP Item 1A Risk Factors 18 Item 1A RISK FACTORS An investment in our common stock is speculative and involves a high degree of risk |
| You should carefully consider the risks and uncertainties described below and the other information in this Form 10-K and our other SEC filings before deciding whether to purchase shares of our common stock |
| If any of the following risks actually occur, our business and operating results could be harmed |
| This could cause the trading price of our common stock to decline, and you may lose all or part of your investment |
| We have incurred losses since inception and anticipate that we will incur continued losses for the foreseeable future |
| We do not have a current source of product revenue and may never be profitable |
| We are a development stage company and since our inception one of the principal sources of our working capital has been private sales of our common stock |
| We incurred net losses of approximately dlra7cmam810cmam000, dlra6cmam462cmam000 and dlra5cmam070cmam000 for the fiscal years ended July 31, 2006, 2005 and 2004, respectively |
| We may never achieve revenue sufficient for us to attain profitability |
| Our profitability will depend on our ability to develop, obtain regulatory approvals for, and effectively market ONCONASE(R) as well as entering into strategic alliances for the development of new drug candidates from the out-licensing of our proprietary RNase technology |
| The commercialization of our pharmaceutical products involves a number of significant challenges |
| In particular our ability to commercialize ONCONASE(R) depends on the success of our clinical development programs, our efforts to obtain regulatory approval and our sales and marketing efforts or those of our marketing partners, if any, directed at physicians, patients and third-party payors |
| A number of factors could affect these efforts including: o Our ability to demonstrate clinically that our products have utility and are safe; o Delays or refusals by regulatory authorities in granting marketing approvals; o Our limited financial resources relative to our competitors; o Our ability to obtain an appropriate marketing partner; o The availability and level of reimbursement for our products by third party payors; o Incidents of adverse reactions to our products; o Misuse of our products and unfavorable publicity that could result; and o The occurrence of manufacturing or distribution disruptions |
| 18 We will seek to generate revenue through licensing, marketing and development arrangements prior to receiving revenue from the sale of our products |
| To date we have not consummated any licensing or marketing arrangements and we may not be able to successfully consummate any such arrangements |
| We have entered into several development arrangements, which have resulted in limited revenues for us |
| However, we cannot ensure that these arrangements or future arrangements, if any, will result in significant amounts of revenue for us |
| We, therefore, are unable to predict the extent of any future losses or the time required to achieve profitability, if at all |
| We may need additional financing to continue operations, which may not be available on acceptable terms, if it is available at all |
| We may need additional financing in order to continue operations, including completion of our current clinical trials and filing marketing registrations for ONCONASE(R) with the FDA in the United States, with the EMEA in Europe and with the TGA in Australia |
| If the results from our current clinical trial do not demonstrate the efficacy and safety of ONCONASE(R) for malignant mesothelioma, our ability to raise additional capital will be adversely affected |
| Even if regulatory applications for marketing approvals are filed and approved, we may need additional financing to continue operations if we are unable to generate sufficient cash flow to support our operations prior to the time our current cash reserves are depleted |
| During the fiscal year ended July 31, 2006, we received approximately dlra12dtta3 million in net proceeds as a result of private placements of common stock and warrants, and exercises of stock options and warrants |
| We expect that such net proceeds together with our cash reserves, will be sufficient to fund our operations through July 31, 2008 based on our expected level of expenditures |
| However, to assure our ability to continue our operations beyond this date, we may continue to seek additional financing through equity or debt financings but we cannot be sure that we will be able to raise capital on favorable terms or at all |
| We may also obtain additional capital through the exercise of outstanding options and warrants, although we cannot provide any assurance of such exercises or estimate the amount of capital we will receive, if any |
| If we are required to raise additional capital to fund further operations and are unable to do so, our operations will be severely curtailed and our business and financial condition will be materially adversely affected |
| We cannot predict how long it will take us nor how much it will cost us to complete part two of our Phase III trial because it is a survival study |
| We currently have ongoing a two-part Phase III trial of ONCONASE(R) as a treatment for malignant mesothelioma |
| The first part of the clinical trial has been completed and the second confirmatory part is still ongoing for which we have exceeded the full enrollment target of 316 patients |
| The first interim analysis results based on the 105 events (deaths) showed a two-month survival advantage of ONCONASE(R) + doxorubicin (12 months) vs |
| These results were consistent with the results from the first part of the trial and were the basis for our decision to continue the trial |
| The primary endpoint of the Phase III clinical trial is survival, which tracks the length of time patients enrolled in the study live |
| According to the protocol, a sufficient number of patient deaths must occur in order to perform the required statistical analyses to determine the efficacy of ONCONASE(R) in patients with unresectable (inoperable) malignant mesothelioma |
| Since it is impossible to predict with certainty when these patient deaths in the Phase III trial will occur, we do not have the capability of reasonably determining when a sufficient number of deaths will occur, nor when we will be able to file for marketing registrations with the FDA, EMEA and TGA In addition, clinical trials are very costly and time consuming |
| The length of time required to complete a clinical trial depends on several factors including the size of the patient population, the ability of patients to get to the site of the clinical study, and the criteria for determining which patients are eligible to join the study |
| Although we believe we could modify some of our expenditures to reduce our cash outlays in relation to our clinical trials and other NDA related expenditures, we cannot quantify the amount by which such expenditures might be modified |
| Hence, a delay in the commercial sale of ONCONASE(R) would increase the time frame of our cash expenditure outflows and may require us to seek additional financing |
| Such capital financing may not be available on favorable terms or at all |
| 19 If we fail to obtain the necessary regulatory approvals, we will not be allowed to commercialize our drugs and will not generate product revenue |
| The FDA and comparable regulatory agencies in foreign countries impose substantial pre-market approval requirements on the introduction of pharmaceutical products |
| These requirements involve lengthy and detailed pre-clinical and clinical testing and other costly and time consuming procedures |
| Satisfaction of these requirements typically takes several years depending on the level of complexity and novelty of the product |
| We cannot apply for FDA, EMEA or TGA approval to market ONCONASE(R) until the clinical trials and all other registration requirements have been met |
| Drugs in late stages of clinical development may fail to show the desired safety and efficacy results despite having progressed through initial clinical testing |
| While limited trials with our product have produced certain favorable results, we cannot be certain that we will successfully complete Phase I, Phase II or Phase III testing of any compound within any specific time period, if at all |
| Furthermore, the FDA or the company may suspend clinical trials at any time on various grounds, including a finding that the subjects or patients are being exposed to an unacceptable health risk |
| In addition, we cannot apply for FDA, EMEA or TGA approval to market ONCONASE(R) until pre-clinical and clinical trials have been completed |
| Several factors could prevent the successful completion or cause significant delays of these trials including an inability to enroll the required number of patients or failure to demonstrate that the product is safe and effective in humans |
| Also if safety concerns develop, the FDA, EMEA and TGA could stop our trials before completion |
| All statutes and regulations governing the conduct of clinical trials are subject to change by various regulatory agencies, including the FDA, in the future, which could affect the cost and duration of our clinical trials |
| Any unanticipated costs or delays in our clinical studies would delay our ability to generate product revenues and to raise additional capital and could cause us to be unable to fund the completion of the studies |
| We may not market or sell any product for which we have not obtained regulatory approval |
| We cannot assure you that the FDA or other regulatory agencies will ever approve the use of our products that are under development |
| Further, even after approval, discovery of previously unknown problems could result in additional restrictions, including withdrawal of our products from the market |
| If we fail to obtain the necessary regulatory approvals, we cannot market or sell our products in the United States, or in other countries and our long-term viability would be threatened |
| If we fail to achieve regulatory approval or foreign marketing authorizations for ONCONASE(R) we will not have a saleable product or product revenues for quite some time, if at all, and may not be able to continue operations |
| We are and will be dependent upon third parties for manufacturing our products |
| If these third parties do not devote sufficient time and resources to our products our revenues and profits may be adversely affected |
| We do not have the required manufacturing facilities to manufacture our product |
| We presently rely on third parties to perform certain of the manufacturing processes for the production of ONCONASE(R) for use in clinical trials |
| Currently, we contract with Scientific Protein Laboratories, LLC for the manufacturing of ranpirnase (protein drug substance) from the oocytes, or the unfertilized eggs, of the Rana pipiens frog, which is found in the Northwest United States and is commonly called the leopard frog |
| We contract with Ben Venue Corporation for the manufacturing of ONCONASE(R) and with Cardinal Health and Apptuit for the labeling, storage and shipping of ONCONASE(R) for clinical trial use |
| We utilize the services of these third party manufacturers solely on an as needed basis with terms and prices customary for our industry |
| We use FDA GMP licensed manufacturers for ranpirnase and ONCONASE(R) |
| We have identified several alternative service providers for the manufacturing services for which we may contract |
| In order to replace an existing service provider we must amend our IND to notify the FDA of the new manufacturer |
| Although the FDA generally will not suspend or delay a clinical trial as a result of replacing an existing manufacturer, the FDA has the authority to suspend or delay a clinical trial if, among other grounds, human subjects are or would be exposed to an unreasonable and significant risk of illness or injury as a result of the replacement manufacturer |
| 20 We intend to rely on third parties to manufacture our products if they are approved for sale by the appropriate regulatory agencies and are commercialized |
| Third party manufacturers may not be able to meet our needs with respect to the timing, quantity or quality of our products or to supply products on acceptable terms |
| Because we do not have marketing, sales or distribution capabilities, we expect to contract with third parties for these functions and we will therefore be dependent upon such third parties to market, sell and distribute our products in order for us to generate revenues |
| We currently have no sales, marketing or distribution capabilities |
| In order to commercialize any product candidates for which we receive FDA or non US approval, we expect to rely on established third party strategic partners to perform these functions |
| To date, we have not entered into any marketing or licensing agreements for ONCONASE(R) |
| We cannot assure you we will be able to establish or maintain relationships with one or more biopharmaceutical or other marketing companies with existing distribution systems and direct sales forces to market any or all of our product candidates, on acceptable terms, if at all |
| In addition, we expect to begin to incur significant expenses in determining our commercialization strategy with respect to one or more of our product candidates |
| The determination of our commercialization strategy with respect to a product candidate will depend on a number of factors, including: o the extent to which we are successful in securing collaborative partners to offset some or all of the funding obligations with respect to product candidates; o the extent to which our agreement with our collaborators permits us to exercise marketing or promotion rights with respect to the product candidate; o how our product candidates compare to competitive products with respect to labeling, pricing, therapeutic effect, and method of delivery; and o whether we are able to establish agreements with third party collaborators, including large biopharmaceutical or other marketing companies, with respect to any of our product candidates on terms that are acceptable A number of these factors are outside of our control and will be difficult to determine |
| Our product candidates may not be accepted by the market |
| Even if approved by the FDA and other regulatory authorities, our product candidates may not achieve market acceptance, which means we would not receive significant revenues from these products |
| Approval by the FDA does not necessarily mean that the medical community will be convinced of the relative safety, efficacy and cost-effectiveness of our products as compared to other products |
| In addition, third party reimbursers such as insurance companies and HMOs may be reluctant to reimburse expenses relating to our products |
| We depend upon Kuslima Shogen and our other key personnel and may not be able to retain these employees or recruit qualified replacement or additional personnel, which would have a material adverse affect on our business |
| We are highly dependent upon our founder, Chairman and Chief Executive Officer, Kuslima Shogen |
| Kuslima Shogenapstas talents, efforts, personality, vision and leadership have been, and continue to be, critical to our success |
| The diminution or loss of the services of Kuslima Shogen, and any negative market or industry perception arising from that diminution or loss, would have a material adverse effect on our business |
| Because of the specialized scientific nature of our business, our continued success also is dependent upon our ability to attract and retain qualified management and scientific personnel |
| There is intense competition for qualified personnel in the pharmaceutical field |
| As our company grows our inability to attract qualified management and scientific personnel could materially adversely affect our research and development programs, the commercialization of our products and the potential revenue from product sales |
| 21 We do not have employment contracts with Kuslima Shogen or any of our other management and scientific personnel |
| Our proprietary technology and patents may offer only limited protection against infringement and the development by our competitors of competitive products |
| We own two patents jointly with the United States government |
| We also own ten United States patents with expiration dates ranging from 2006 to 2019, four European patents with expiration dates ranging from 2009 to 2016 and three Japanese patents with expiration dates ranging from 2010 to 2016 |
| We also own patent applications that are pending in the United States, Europe, Japan, and other foreign countries |
| The scope of protection afforded by patents for biotechnological inventions is uncertain, and such uncertainty applies to our patents as well |
| Therefore, our patents may not give us competitive advantages or afford us adequate protection from competing products |
| Furthermore, others may independently develop products that are similar to our products, and may design around the claims of our patents |
| Patent litigation and intellectual property litigation are expensive and our resources are limited |
| If we were to become involved in litigation, we might not have the funds or other resources necessary to conduct the litigation effectively |
| This might prevent us from protecting our patents, from defending against claims of infringement, or both |
| To date, we have not received any threats of litigation regarding patent issues |
| Developments by competitors may render our products obsolete or non-competitive |
| In February 2004, the Food and Drug Administration granted Eli Lilly & Company approval to sell its Alimta(R) medication as an orphan drug to treat patients with pleural mesothelioma |
| Alimta is a multi-targeted antifolate that is based upon a different mechanism of action than ONCONASE(R) |
| To our knowledge, no other company is developing a product with the same mechanism of action as ONCONASE(R) |
| However, there may be other companies, universities, research teams or scientists who are developing products to treat the same medical conditions our products are intended to treat |
| Eli Lilly is, and some of these other companies, universities, research teams or scientists are more experienced and have greater clinical, marketing and regulatory capabilities and managerial and financial resources than we do |
| This may enable them to develop products to treat the same medical conditions our products are intended to treat before we are able to complete the development of our competing product |
| Our business is very competitive and involves rapid changes in the technologies involved in developing new drugs |
| If others experience rapid technological development, our products may become obsolete before we are able to recover expenses incurred in developing our products |
| We will probably face new competitors as new technologies develop |
| Our success depends on our ability to remain competitive in the development of new drugs or we may not be able to compete successfully |
| We may be sued for product liability |
| Our business exposes us to potential product liability that may have a negative effect on our financial performance and our business generally |
| The administration of drugs to humans, whether in clinical trials or commercially, exposes us to potential product and professional liability risks which are inherent in the testing, production, marketing and sale of new drugs for humans |
| Product liability claims can be expensive to defend and may result in large judgments or settlements against us, which could have a negative effect on our financial performance and materially adversely affect our business |
| We maintain product liability insurance to protect our products and product candidates in amounts customary for companies in businesses that are similarly situated, but our insurance coverage may not be sufficient to cover claims |
| Furthermore, liability insurance coverage is becoming increasingly expensive and we cannot be certain that we will always be able to maintain or increase our insurance coverage at an affordable price or in sufficient amounts to protect against potential losses |
| A product liability claim, product recall or other claim, as well as any claim for uninsured liabilities or claim in excess of insured liabilities, may significantly harm our business and results of operations |
| Even if a product liability claim is not successful, adverse publicity and time and expense of defending such a claim may significantly interfere with our business |
| 22 As of July 31, 2006, we had a material weakness in our internal control over financial reporting |
| If we fail to maintain an effective system of internal control, we may not be able to provide timely and accurate financial statements |
| As more fully described in Item 9A, the Companyapstas management assessed the effectiveness of the Companyapstas internal control over financial reporting as of July 31, 2006 |
| In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework |
| As a result of managementapstas assessment, management has concluded that, as of July 31, 2006, the Company did not maintain effective internal control over financial reporting |
| The Public Company Accounting Oversight Board has defined a material weakness as a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected |
| Accordingly, a material weakness increases the risk that the financial information we report contains material errors |
| Management, with oversight by our Audit Committee, is in the process of implementing changes to the Companyapstas internal control systems and procedures which are described in detail in Item 9A The steps we are taking to address the material weakness may not be effective, however |
| If we are unable to implement these changes effectively or if other material weaknesses develop and we are unable to effectively address these matters, there could be a material adverse effect on our business, financial condition and results of operations |
| If we are unable to obtain favorable reimbursement for our product candidates, their commercial success may be severely hindered |
| Our ability to sell our future products may depend in large part on the extent to which reimbursement for the costs of our products is available from government entities, private health insurers, managed care organizations and others |
| Third-party payors are increasingly attempting to contain their costs |
| We cannot predict actions third-party payors may take, or whether they will limit the coverage and level of reimbursement for our products or refuse to provide any coverage at all |
| Reduced or partial reimbursement coverage could make our products less attractive to patients, suppliers and prescribing physicians and may not be adequate for us to maintain price levels sufficient to realize an appropriate return on our investment in our product candidates or compete on price |
| In some cases, insurers and other healthcare payment organizations try to encourage the use of less expensive generic brands and over-the-counter, or OTC, products through their prescription benefits coverage and reimbursement policies |
| These organizations may make the generic alternative more attractive to the patient by providing different amounts of reimbursement so that the net cost of the generic product to the patient is less than the net cost of a prescription brand product |
| Aggressive pricing policies by our generic product competitors and the prescription benefits policies of insurers could have a negative effect on our product revenues and profitability |
| Many managed care organizations negotiate the price of medical services and products and develop formularies for that purpose |
| Exclusion of a product from a formulary can lead to its sharply reduced usage in the managed care organization patient population |
| If our products are not included within an adequate number of formularies or adequate reimbursement levels are not provided, or if those policies increasingly favor generic or OTC products, our market share and gross margins could be negatively affected, as could our overall business and financial condition |
| The competition among pharmaceutical companies to have their products approved for reimbursement may also result in downward pricing pressure in the industry or in the markets where our products will compete |
| We may not be successful in any efforts we take to mitigate the effect of a decline in average selling prices for our products |
| Any decline in our average selling prices would also reduce our gross margins |
| In addition, managed care initiatives to control costs may influence primary care physicians to refer fewer patients to oncologists and other specialists |
| Reductions in these referrals could have a material adverse effect on the size of our potential market and increase costs to effectively promote our products |
| 23 We are subject to new legislation, regulatory proposals and managed care initiatives that may increase our costs of compliance and adversely affect our ability to market our products, obtain collaborators and raise capital |
| There have been a number of legislative and regulatory proposals aimed at changing the healthcare system and pharmaceutical industry, including reductions in the cost of prescription products and changes in the levels at which consumers and healthcare providers are reimbursed for purchases of pharmaceutical products |
| For example, the Prescription Drug and Medicare Improvement Act of 2003 provides a Medicare prescription drug benefit that began in 2006 and mandates other reforms |
| Although we cannot predict the full effects on our business of the implementation of this new legislation, it is possible that the new benefit, which will be managed by private health insurers, pharmacy benefit managers and other managed care organizations, will result in decreased reimbursement for prescription drugs, which may further exacerbate industry-wide pressure to reduce the prices charged for prescription drugs |
| This could harm our ability to market our products and generate revenues |
| As a result of the new Medicare prescription drug benefit or any other proposals, we may determine to change our current manner of operation, provide additional benefits or change our contract arrangements, any of which could harm our ability to operate our business efficiently, obtain collaborators and raise capital |
| Risks related to our common stock |
| We were relisted on the Nasdaq Capital Market after being delisted in 1999; our stock is thinly traded and you may not be able to sell our stock when you want to do so |
| From April 1999, when we were delisted from Nasdaq, until September 9, 2004, when we were relisted on the Nasdaq Capital Market, there was no established trading market for our common stock |
| There is no assurance that we will be able to comply with all of the listing requirements necessary to remain listed on the Nasdaq Capital Market |
| In addition, our stock remains thinly traded and you may be unable to sell our common stock during times when the trading market is limited |
| The price of our common stock has been, and may continue to be, volatile |
| The market price of our common stock, like that of the securities of many other development stage biotechnology companies, has fluctuated over a wide range and it is likely that the price of our common stock will fluctuate in the future |
| Over the past three years, the sale price for our common stock, as reported by Nasdaq and the OTC Bulletin Board has fluctuated from a low of dlra1dtta25 to a high of dlra10dtta07 |
| The market price of our common stock could be impacted by a variety of factors, including: o announcements of technological innovations or new commercial products by us or our competitors, o disclosure of the results of pre-clinical testing and clinical trials by us or our competitors, o disclosure of the results of regulatory proceedings, o changes in government regulation, o developments in the patents or other proprietary rights owned or licensed by us or our competitors, o public concern as to the safety and efficacy of products developed by us or others, o litigation, and o general market conditions in our industry |
| In addition, the stock market continues to experience extreme price and volume fluctuations |
| These fluctuations have especially affected the market price of many biotechnology companies |
| Such fluctuations have often been unrelated to the operating performance of these companies |
| Nonetheless, these broad market fluctuations may negatively affect the market price of our common stock |
| Sales of substantial amounts of our common stock in the open market, or the availability of such shares for sale, could adversely affect the price of our common stock |
| We had 44cmam289cmam161 shares of common stock outstanding 24 as of July 31, 2006 |
| The following securities that may be exercised into shares of our common stock were issued and outstanding as of July 31, 2006: o Options |
| Stock options to purchase 3cmam830cmam350 shares of our common stock at a weighted average exercise price of approximately dlra3dtta10 per share |
| Warrants to purchase 18cmam119cmam598 shares of our common stock at a weighted average exercise price of approximately dlra1dtta91 per share |
| The shares of our common stock that may be issued under the options and warrants are currently registered with the SEC or are eligible for sale without any volume limitations pursuant to Rule 144(k) under the Securities Act |
| Our incorporation documents may delay or prevent (i) the removal of our current management or (ii) a change of control that a stockholder may consider favorable |
| We are currently authorized to issue 1cmam000cmam000 shares of preferred stock |
| Our Board of Directors is authorized, without any approval of the stockholders, to issue the preferred stock and determine the terms of the preferred stock |
| This provision allows the board of directors to affect the rights of stockholders, since the board of directors can make it more difficult for common stockholders to replace members of the board |
| Because the board of directors is responsible for appointing the members of our management, these provisions could in turn affect any attempt to replace current management by the common stockholders |
| Furthermore, the existence of authorized shares of preferred stock might have the effect of discouraging any attempt by a person, through the acquisition of a substantial number of shares of common stock, to acquire control of our company |
| Accordingly, the accomplishment of a tender offer may be more difficult |
| This may be beneficial to management in a hostile tender offer, but have an adverse impact on stockholders who may want to participate in the tender offer or inhibit a stockholderapstas ability to receive an acquisition premium for his or her shares |
| The ability of our stockholders to recover against Armus Harrison & Co, or AHC, may be limited because we have not been able to obtain the reissued reports of AHC with respect to the financial statements included in our Form 10-K, nor have we been able to obtain AHCapstas consent to the use of such report herein |
| Section 18 of the Securities Exchange Act of 1934 (the "e Exchange Act "e ) provides that any person acquiring or selling a security in reliance upon statements set forth in a Form 10-K may assert a claim against every accountant who has with its consent been named as having prepared or certified any part of the Form 10-K, or as having prepared or certified any report or valuation that is used in connection with the Form 10-K, if that part of the Form 10-K at the time it is filed contains a false or misleading statement of a material fact, or omits a material fact required to be stated therein or necessary to make the statements therein not misleading (unless it is proved that at the time of such acquisition such acquiring person knew of such untruth or omission) |
| In June 1996, AHC dissolved and ceased all operations |
| Therefore, we have not been able to obtain the reissued reports of AHC with respect to the financial statements included in the Form 10-K for the fiscal year ended July 31, 2006 nor have we been able to obtain AHCapstas consent to the use of such report herein |
| As a result, in the event any persons seek to assert a claim against AHC under Section 18 of the Exchange Act for any untrue statement of a material fact contained in these financial statements or any omissions to state a material fact required to be stated therein, such persons will be barred |
| Accordingly, you may be unable to assert a claim against AHC under Section 18 of the Exchange Act for any purchases of the Companyapstas Common Stock made in reliance upon statements set forth in the Form 10-K for the fiscal year ended July 31, 2006 |
| In addition, the ability of AHC to satisfy any claims properly brought against it may be limited as a practical matter due to AHCapstas dissolution in 1996 |