| AP PHARMA INC /DE/ ITEM 1A Risk Factors Item 1A Risk Factors RISK FACTORS - ------------ Our business is subject to various risks, including those described below |
| You should carefully consider these risk factors, together with all of the other information included in this Form 10-K Any of these risks could materially adversely affect our business, operating results and financial condition |
| OUR BIOERODIBLE DRUG DELIVERY SYSTEM BUSINESS IS AT AN EARLY STAGE OF DEVELOPMENT Our bioerodible drug delivery system business is at an early stage of development |
| Our ability to produce bioerodible drug delivery systems that progress to and through clinical trials is subject to, among other things: - success with our research and development efforts; - selection of appropriate therapeutic compounds for delivery; - the required regulatory approval |
| Successful development of delivery systems will require significant preclinical and clinical testing prior to regulatory approval in the United States and elsewhere |
| In addition, we will need to determine whether any potential products can be manufactured in commercial quantities at an acceptable cost |
| Our efforts may not result in a product that can be marketed |
| Because of the significant scientific, regulatory and commercial milestones that must be reached for any of our research programs to be successful, any program may be abandoned, even after significant resources have been expended |
| WE WILL NEED ADDITIONAL CAPITAL TO CONDUCT OUR OPERATIONS AND TO DEVELOP OUR PRODUCTS AND OUR ABILITY TO OBTAIN THE NECESSARY FUNDING ON FAVORABLE TERMS IN THE FUTURE IS UNCERTAIN We will require additional capital resources in order to conduct our operations and develop our products |
| While we estimate that our existing capital resources and interest income will be sufficient to fund our current level of operations for at least the next year based on current business plans, we cannot guarantee that this will be the case |
| The timing and degree of any future capital requirements will depend on many factors, including: - scientific progress in our research and development programs; - the magnitude and scope of our research and development programs; - our ability to establish and maintain strategic collaborations or partnerships for research, development, clinical testing, manufacturing and marketing; - our progress with preclinical and clinical trials; - the time and costs involved in obtaining regulatory approvals; - the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims |
| We intend to acquire additional funding through strategic collaborations, in the form of license fees, research and development fees and milestone payments |
| In the event that additional funds are obtained through arrangements with collaborative partners, these arrangements may require us to relinquish rights to some of our technologies, product candidates or products that we would otherwise seek to develop and commercialize ourselves |
| If sufficient funding is not available, we may be required to delay, reduce the scope of or eliminate one or more of our research or development programs, each of which could have a material adverse effect on our business |
| IF WE ARE UNABLE TO RECRUIT AND RETAIN SKILLED EMPLOYEES, WE MAY NOT BE ABLE TO ACHIEVE OUR OBJECTIVES Retaining our current employees and recruiting qualified scientific personnel to perform future research and development work will be critical to our success |
| Competition is intense for experienced scientists, and we may not be able to recruit or retain sufficient skilled personnel to allow us to pursue collaborations and develop our products and core technologies to the extent otherwise possible |
| WE ARE RELIANT ON SINGLE SOURCE THIRD PARTY CONTRACTORS FOR THE MANUFACTURE AND PRODUCTION OF RAW MATERIALS AND PRODUCT CANDIDATES We currently, and for the foreseeable future will, rely upon outside contractors to manufacture, supply and package for us key intermediates, active pharmaceutical ingredients and formulated drug product for our product candidates |
| Our current dependence upon others for the manufacture of our raw materials and product candidates and our anticipated dependence upon others for the manufacture of any products that we may develop, may adversely affect our ability to develop our product candidates in a timely manner and may adversely affect future profit margins and our ability to commercialize any products that we may develop on a timely and competitive basis |
| ENTRY INTO CLINICAL TRIALS WITH ONE OR MORE PRODUCTS MAY NOT RESULT IN ANY COMMERCIALLY VIABLE PRODUCTS We do not expect to generate any significant revenues from product sales for a period of several years |
| We may never generate revenues from product sales or become profitable because of a variety of risks inherent in our business, including risks that: - we may be unsuccessful in finding partners willing to fund some or all of our clinical trial expenditures; - clinical trials may not demonstrate the safety and efficacy of our products; - completion of clinical trials may be delayed, or costs of clinical trials may exceed anticipated amounts; - we may not be able to obtain regulatory approval of our products, or may experience delays in obtaining such approvals; - we and our licensees may not be able to successfully market our products |
| BECAUSE WE OR OUR COLLABORATORS MUST OBTAIN REGULATORY APPROVAL TO MARKET OUR PRODUCTS IN THE UNITED STATES AND FOREIGN JURISDICTIONS, WE CANNOT PREDICT WHETHER OR WHEN WE WILL BE PERMITTED TO COMMERCIALIZE OUR PRODUCTS Federal, state and local governments in the United States and governments in other countries have significant regulations in place that govern many of our activities |
| The preclinical testing and clinical trials of the products that we develop ourselves or that our collaborators develop are subject to government regulation and may prevent us from creating commercially viable products from our discoveries |
| In addition, the sale by us or our collaborators of any commercially viable product will be subject to government regulation from several standpoints, including the processes of: - manufacturing; - - labeling; - distributing; - advertising and promoting; and - selling and marketing |
| We may not obtain regulatory approval for the products we develop and our collaborators may not obtain regulatory approval for the products they develop |
| Regulatory approval may also entail limitations on the indicated uses of a proposed product |
| The regulatory process, particularly for biopharmaceutical products like ours, is uncertain, can take many years and requires the expenditure of substantial resources |
| Any product that we or our collaborative partners develop must receive all relevant regulatory agency approvals or clearances, if any, before it may be marketed in the United States or other countries |
| In particular, human pharmaceutical therapeutic products are subject to rigorous preclinical and clinical testing and other requirements by the Food and Drug Administration in the United States and similar health authorities in foreign countries |
| The regulatory process, which includes extensive preclinical testing and clinical trials of each product in order to establish its safety and efficacy, is uncertain, can take many years and requires the expenditure of substantial resources |
| Data obtained from preclinical and clinical activities is susceptible to varying interpretations that could delay, limit or prevent regulatory agency approvals or clearances |
| In addition, delays or rejections may be encountered as a result of changes in regulatory agency policy during the period of product development and/or the period of review of any application for regulatory agency approval or clearance for a product |
| Delays in obtaining regulatory agency approvals or clearances could: - significantly harm the marketing of any products that we or our collaborators develop; - impose costly procedures upon our activities or the activities of our collaborators; - diminish any competitive advantages that we or our collaborative partners may attain; or - adversely affect our ability to receive royalties and generate revenues and profits |
| In addition, the marketing and manufacturing of drugs and biological products are subject to continuing FDA review, and later discovery of previously unknown problems with a product, its manufacture or its marketing may result in the FDA requiring further clinical research or restrictions on the product or the manufacturer, including withdrawal of the product from the market |
| WE DEPEND ON OUR COLLABORATORS TO HELP US COMPLETE THE PROCESS OF DEVELOPING AND TESTING OUR PRODUCTS AND OUR ABILITY TO DEVELOP AND COMMERCIALIZE PRODUCTS MAY BE IMPAIRED OR DELAYED IF OUR COLLABORATIVE PARTNERSHIPS ARE UNSUCCESSFUL Our strategy for the development, clinical testing and commercialization of our products requires entering into collaborations with corporate partners, licensors, licensees and others |
| We are dependent upon the subsequent success of these other parties in performing their respective responsibilities and the cooperation of our partners |
| Our collaborators may not cooperate with us or perform their obligations under our agreements with them |
| We cannot control the amount and timing of our collaborators &apos resources that will be devoted to our research activities related to our collaborative agreements with them |
| Our collaborators may choose to pursue existing or alternative technologies in preference to those being developed in collaboration with us |
| Under agreements with collaborators, we may rely significantly on them, among other activities, to: - fund research and development activities with us; - pay us fees upon the achievement of milestones; and - market with us any commercial products that result from our collaborations |
| OUR RELIANCE ON THE RESEARCH ACTIVITIES OF OUR NON-EMPLOYEE SCIENTIFIC ADVISORS AND OTHER RESEARCH INSTITUTIONS, WHOSE ACTIVITIES ARE NOT WHOLLY WITHIN OUR CONTROL, MAY LEAD TO DELAYS IN TECHNOLOGICAL DEVELOPMENTS We have relationships with scientific advisors at academic and other institutions, some of whom conduct research at our request |
| These scientific advisors are not our employees and may have commitments to, or consulting or advisory contracts with, other entities that may limit their availability to us |
| We have limited control over the activities of these advisors and, except as otherwise required by our collaboration and consulting agreements, can expect only limited amounts of their time to be dedicated to our activities |
| If our scientific advisors are unable or refuse to contribute to the development of any of our potential discoveries, our ability to generate significant advances in our technologies will be significantly harmed |
| THE LOSS OF KEY PERSONNEL COULD SLOW OUR ABILITY TO CONDUCT RESEARCH AND DEVELOP PRODUCTS Our future success depends to a significant extent on the skills, experience and efforts of our executive officers and key members of our scientific staff |
| We may be unable to retain our current personnel or attract or assimilate other highly qualified management and scientific personnel in the future |
| The loss of any or all of these individuals could harm our business and might significantly delay or prevent the achievement of research, development or business objectives |
| WE FACE INTENSE COMPETITION FROM OTHER COMPANIES Most or all of the products we could develop or commercialize will face competition from different therapeutic agents intended for treatment of the same indications or from other products incorporating drug delivery technologies |
| The competition potentially includes all of the pharmaceutical and drug delivery companies in the world |
| Many of these pharmaceutical companies have more financial resources, technical staff and manufacturing and marketing capabilities than we do |
| To the extent that we develop or market products incorporating drugs that are off-patent, or are being developed by multiple companies, we will face competition from other companies developing and marketing similar products |
| Pharmaceutical companies are increasingly using advertising, including direct-to-consumer advertising, in marketing their products |
| The costs of such advertising are very high and are increasing |
| It may be difficult for our Company to compete with larger companies investing greater resources in these marketing activities |
| Other pharmaceutical companies are aggressively seeking to obtain new products by licensing products or technology from other companies |
| We will be competing to license or acquire products or technology with companies with far greater financial and other resources |
| INABILITY TO OBTAIN SPECIAL MATERIALS COULD SLOW DOWN OUR RESEARCH AND DEVELOPMENT PROCESS Some of the critical materials and components used in our developed products are sourced from a single supplier |
| An interruption in supply of a key material could significantly delay our research and development process |
| Special materials must often be manufactured for the first time for use in drug delivery systems, or materials may be used in the systems in a manner different from their customary commercial uses |
| The quality of materials can be critical to the performance of a drug delivery system, so a reliable source of a consistent supply of materials is important |
| Materials or components needed for our drug delivery systems may be difficult to obtain on commercially reasonable terms, particularly when relatively small quantities are required, or if the materials traditionally have not been used in pharmaceutical products |
| PATENTS AND OTHER INTELLECTUAL PROPERTY PROTECTION MAY BE DIFFICULT TO OBTAIN OR INEFFECTIVE Patent protection generally has been important in the pharmaceutical industry |
| Our existing patents may not cover future products, additional patents may not be issued, and current patents or patents issued in the future may not provide meaningful protection or prove to be of commercial benefit |
| In the United States, patents are granted for specified periods of time |
| Other companies may successfully challenge our patents in the future |
| Others may also challenge the validity or enforceability of our patents in litigation |
| In addition, if other companies are able to obtain patents that cover any of our technologies or products, we may be subject to liability for damages and our activities could be blocked by legal action unless we can obtain licenses to those patents |
| In addition, we utilize significant unpatented proprietary technology and rely on unpatented trade secrets and proprietary know-how to protect certain aspects of our products and technologies and the methods used to manufacture them |
| Other companies have or may develop similar technology which will compete with our technology |
| IF WE FAIL TO CONTINUE TO MEET THE NASDAQ NATIONAL MARKET &apos S REQUIREMENTS FOR CONTINUED LISTING, THE NASDAQ NATIONAL MARKET MAY DELIST OUR COMMON STOCK, WHICH WOULD NEGATIVELY IMPACT THE PRICE OF OUR COMMON STOCK AND OUR ABILITY TO SELL OUR COMMON STOCK Our common stock is listed on the Nasdaq National Market |
| The rules of the Nasdaq National Market provide that issuers with stockholders &apos equity of less than dlra10 million may be delisted from the Nasdaq National Market |
| As of the end of the third fiscal quarter of 2005, we failed to meet that requirement, though we regained compliance with the requirement in January 2006 |
| In the event that we fail to comply with all listing standards applicable to issuers listed on the Nasdaq Stock Market, our common stock may be delisted from the Nasdaq National Market |
| In that event, we may be required to list our common stock on the Nasdaq Capital Market provided we meet the listing requirements for the Nasdaq Capital Market |
| If we are delisted or required to list our common stock on a market or exchange less liquid than the Nasdaq National Market, it would be far more difficult for our stockholders to trade in our securities and it may be more difficult to obtain accurate, current information concerning market prices for our securities |
| The possibility that our securities may be delisted may also adversely affect our ability to raise additional financing |