| CONNETICS CORP Item 1A Risk Factors There are many factors that affect our business and results of operations, some of which are beyond our control |
| We provide the following discussion of risks and uncertainties relevant to our business |
| These factors could cause our actual results to differ materially from expected and historical results |
| Risks Related to Our Business We derive nearly all of our revenue from product sales, and any decrease in our product sales would harm our business |
| We believe that the prescription volume of our products will continue to constitute a significant portion of our total revenues for the foreseeable future |
| Accordingly, any decrease in our product sales would harm our business and cause our financial results to be below expectations |
| All of our products are subject to potential generic competition |
| Any of our products could be rendered obsolete or uneconomical by competitive changes, including generic competition |
| Product sales could also be adversely affected by other factors, including: • manufacturing or supply interruptions, • the development of new competitive pharmaceuticals to treat the conditions addressed by our products, • marketing or pricing actions by our competitors, • changes in the prescribing or procedural practices of dermatologists or pediatricians, • changes in the reimbursement or substitution policies of third-party payors or retail pharmacies, • the outcome of disputes relating to patents, and • changes in state and federal law that adversely affect our ability to market our products to dermatologists, pediatricians, and other healthcare professionals |
| Our operating results may fluctuate |
| This fluctuation could cause our financial results to be below expectations and the market prices of our securities to decline |
| Our operating results may fluctuate from period to period for a number of reasons, some of which are beyond our control |
| Even a relatively small revenue shortfall may cause a period’s results to be below our expectations or projections, which in turn may cause the market price of our securities to drop significantly and the value of your investment to decline |
| If we do not sustain profitability, stockholders may lose their investment |
| Fiscal year 2004 was our first year of operating profitability |
| Our accumulated deficit was dlra77dtta2 million at December 31, 2005 and dlra111dtta2 million at December 31, 2004 |
| We may incur additional losses in the future |
| If we are unable to sustain profitability during any quarterly or annual period, our stock price may decline |
| Our commercial success depends in part on our ability and the ability of our licensors to obtain and maintain patent protection on technologies, to preserve trade secrets, and to operate without infringing the proprietary rights of others |
| We are pursuing several US and international patent applications, although we cannot be sure that any of these patents will ever be issued |
| We also have acquired rights to patents and patent applications from certain of our consultants and officers |
| Any of our patents and patent applications could be subject to 19 _________________________________________________________________ [97]Table of Contents claims of rights by third parties |
| Even if we do have some rights in a patent or application, those rights may not be sufficient for marketing and distributing products covered by the patent or application |
| The patents and applications in which we have an interest may be challenged as to their validity or enforceability |
| Challenges may result in potentially significant harm to our business |
| On October 20, 2005, we filed a patent infringement lawsuit against Agis Industries (1983) Ltd, which has since been renamed Perrigo Israel, a wholly owned subsidiary of Perrigo Company, in response to Agis’s submission to the FDA of an abbreviated new drug application, or ANDA, for a generic version of clobetasol propionate foam, 0dtta05prca |
| We market this drug product under the brand name OLUX^® (clobetasol propionate) Foam 0dtta05prca |
| Our lawsuit, filed in the US District Court for the District of New Jersey, seeks, among other things, a finding that Agis’s proposed generic drug infringes our patent covering corticosteroids delivered in foam, and requests that any approval of the Agis ANDA not be declared effective until after this patent expires on March 2, 2016 |
| The cost of responding to this and other similar challenges that may arise and the inherent costs to defend the validity of our licensed technology and issued patents, including the prosecution of infringements and the related litigation, could be substantial whether or not we are successful |
| Such litigation also could require a substantial commitment of management’s time |
| Our business could suffer materially if any third party were to be awarded a judgment adverse to us in any patent litigation or other proceeding arising in connection with any of our products or patent applications |
| The ownership of a patent or an interest in a patent does not always provide significant protection |
| Others may independently develop similar technologies or design around the patented aspects of our technology |
| We only conduct patent searches to determine whether our products infringe upon any existing patents when we think such searches are appropriate |
| As a result, the products and technologies we currently market, and those we may market in the future, may infringe on patents and other rights owned by others |
| If we are unsuccessful in any challenge to the marketing and sale of our products or technologies, we may be required to license the disputed rights, if the holder of those rights is willing, or to cease marketing the challenged products, or to modify our products to avoid infringing upon those rights |
| Under these circumstances, we may not be able to license the intellectual property on favorable terms, if at all |
| We may not succeed in any attempt to redesign our products or processes to avoid infringement |
| Evoclin Foam represents a new product entry for us into the acne market and we may be unable to achieve desired market acceptance and sales of Evoclin Foam |
| The FDA approved Evoclin Foam in October 2004 for the treatment of acne vulgaris |
| It is our first product entry into the acne market, which is generally believed to be more competitive than the market for other dermatoses |
| We will not be able to achieve the desired market acceptance and sales of Evoclin Foam unless our marketing and sales strategy is effective in competing with existing and well established products in the acne market |
| Additionally, the commercial launch of Evoclin Foam has required and, we anticipate, will continue to require significant expenditures of management time and resources from which we may not realize anticipated returns |
| Our total revenue depends on receiving royalties and contract payments from third parties, and we cannot control the amount or timing of those revenues |
| We generate contract and royalty revenues by licensing our products to third parties for specific territories and indications |
| Our reliance on licensing arrangements with third parties carries several risks, including the possibilities that: • royalties generated from licensing arrangements may be insignificant or may fluctuate from period to period, and • a loss of royalties could have a disproportionately large impact on our operating income in periods where the operating income is a small profit |
| 20 _________________________________________________________________ [98]Table of Contents We rely on our employees and consultants to keep our trade secrets confidential |
| We rely on trade secrets and unpatented proprietary know-how and continuing technological innovation in developing and manufacturing our products |
| We require each of our employees, consultants, manufacturing partners, and advisors to enter into confidentiality agreements prohibiting them from taking our proprietary information and technology or from using or disclosing proprietary information to third parties except in specified circumstances |
| These agreements may not provide meaningful protection of our trade secrets and proprietary know-how that is used or disclosed |
| Despite all of the precautions we may take, people who are not parties to confidentiality agreements may obtain access to our trade secrets or know-how |
| In addition, others may independently develop similar or equivalent trade secrets or know-how |
| The growth of our business depends in part on our ability to identify, acquire on favorable terms, and assimilate technologies, products or businesses |
| Our strategy for the continuing growth of our business includes identifying and acquiring strategic pharmaceutical products, technologies and businesses |
| These acquisitions may involve licensing or purchasing the assets of other pharmaceutical companies |
| We may not be able to identify product or technology candidates suitable for acquisition or licensing or, if we do identify suitable candidates, they may not be available on acceptable terms |
| Even if we are able to identify suitable product or technology candidates, acquiring or licensing them may require us to make considerable cash outlays, issue equity securities, incur debt and contingent liabilities, incur amortization expenses related to intangible assets, and can result in the impairment of goodwill, which could harm our profitability |
| In addition, acquisitions involve a number of risks, including: • difficulties in and costs associated with assimilating the operations, technologies, personnel and products of the acquired companies, • assumption of known or unknown liabilities or other unanticipated events or circumstances, and • risks of entering markets in which we have limited or no experience |
| For example, while the acquisition of the PediaMed sales organization will greatly expand our presence in the pediatric market, we cannot be certain pediatricians will respond favorably to our direct promotional efforts |
| Any of these risks could harm our ability to achieve levels of profitability of acquired operations or to realize other anticipated benefits of an acquisition |
| Our future product revenues could be reduced by imports from countries where our products are available at lower prices |
| We currently sell Soriatane and our other products to a US-based distributor that exports branded pharmaceutical products to select international markets |
| A has exclusive rights to market and sell OLUX in Italy and the UK, and Pierre Fabre Dermatologie has the exclusive commercial rights to OLUX for sale in all other European markets, with marketing rights for certain countries in South America and Africa |
| There have been cases in which pharmaceutical products were sold at steeply discounted prices in markets outside the US and then re-imported to the US and resold at prices higher than the original discounted price, but lower than the prices commercially available in the US If this happens with our products our revenues would be adversely affected |
| In addition, in the European Union, we are required to permit cross-border sales |
| This allows buyers in countries where government-approved prices for our products are relatively high to purchase our products legally from countries where they must be sold at lower prices |
| Such cross-border sales could adversely affect our royalty revenues |
| 21 _________________________________________________________________ [99]Table of Contents Our reported earnings per share may be more volatile because of the conversion provisions of our convertible senior notes or the exercise of outstanding stock options |
| The noteholders may convert the notes into shares of our common stock at any time before the notes mature, at a conversion rate of 46dtta705 shares per dlra1cmam000 principal amount of notes, subject to adjustment in certain circumstances |
| Additionally, in March 2005, we issued dlra200 million principal amount of convertible senior notes due in 2015, which are convertible into cash and, under certain circumstances, shares of our common stock at an initial conversion rate of 28dtta1972 shares per dlra1cmam000 principal amount of notes, subject to adjustment |
| At December 31, 2005 we had approximately 20 million shares reserved for issuance upon exercise of outstanding stock options, sales through our Employee Stock Purchase Plan, and conversion of our convertible senior notes |
| If any noteholders convert the notes, or if our option holders exercise their options, our basic earnings per share would be expected to decrease because underlying shares would be included in the basic earnings per share calculation |
| Our current and future indebtedness and debt service obligations may adversely affect our cash flow |
| In May 2003 we issued dlra90 million of convertible senior notes in a private offering |
| We will pay interest on the notes at a rate of 2dtta25prca per year |
| In both 2004 and 2005, we recorded dlra2 million in interest on the notes |
| In March 2005 we issued dlra200 million principal amount of convertible senior notes maturing on March 30, 2015 |
| On September 30, 2005, we began paying interest on these notes at a rate of 2dtta00prca per year |
| Through December 31, 2005, we recorded interest on the notes in the amount of dlra3dtta1 million |
| Assuming none of these notes are redeemed or converted, we will record interest on the notes in the amount of dlra4 million for years 2006 through 2009, and dlra1 million for 2010 |
| Commencing March 30, 2010, we may be required to make additional interest payments under certain circumstances |
| Whether we are able to make required payments on the existing notes, and any other future debt obligations we may incur in order to continue the growth of our business, will depend on (a) our ability to generate sufficient cash, which will depend on efficiently developing new products with significant market potential, increasing sales of our existing products, collecting receivables, and other factors, including general economic, financial, competitive, legislative and regulatory conditions, some of which are beyond our control; and (b) our future operating performance and our ability to obtain additional debt or equity financing on favorable terms |
| Our use of hazardous materials exposes us to the risk of environmental liabilities, and we may incur substantial additional costs to comply with environmental laws |
| Our research and development activities involve the controlled use of hazardous materials, potent compounds, chemicals and various radioactive materials |
| We are subject to laws and regulations governing the use, storage, handling and disposal of these materials and certain waste products |
| If any of these materials resulted in contamination or injury, we could be liable for any damages that result and any liability could exceed our resources |
| We maintain general liability insurance in the amount of dlra11 million aggregate and workers compensation coverage in the amount of dlra1 million per incident |
| Our insurance may not provide adequate coverage against potential claims or losses related to our use of hazardous materials, however, and we cannot be certain that our current coverage will continue to be available on reasonable terms, if at all |
| 22 _________________________________________________________________ [100]Table of Contents Risks Related to Our Products Because we rely on third-party manufacturers and suppliers, any manufacturing difficulties they encounter could delay future revenues from our product sales |
| We rely exclusively on third party manufacturers to manufacture our products |
| In general, our contract manufacturers purchase principal raw materials and supplies in the open market |
| If our contract manufacturers cannot provide us with our product requirements in a timely and cost-effective manner, or if the product they supply does not meet commercial requirements for shelf life, our sales of marketed products could be reduced |
| Currently, DPT Laboratories, Ltd |
| and KIK Custom Products (formerly Accra Pac Group, Inc |
| ) manufacture commercial supplies of OLUX Foam, Luxiq Foam, and Evoclin Foam |
| Roche is our sole manufacturer for commercial supplies of Soriatane |
| The active ingredient in OLUX Foam is supplied by a single source |
| We have agreements with Roche to fill and finish Soriatane through 2006, and to provide the active pharmaceutical ingredient through 2009 |
| We believe that these agreements will allow us to maintain supplies of Soriatane finished product through 2015 due to the five-year shelf life of the active pharmaceutical ingredient |
| We will continue to buy Soriatane finished product and active pharmaceutical ingredient from Roche, and we expect to qualify alternate sources for Soriatane finished product in 2007 |
| Substantially all other raw materials are available from a number of sources, although delays in the availability of some raw materials could cause delays in our commercial production |
| If we are unable to maintain agreements on favorable terms with any of our contract manufacturers, or if we experience any disruption in the supply of raw materials required for the manufacture of our products, it could impair our ability to deliver our products on a timely basis or cause delays in our clinical trials and applications for regulatory approvals which in turn would harm our business and financial results |
| In addition, any loss of a manufacturer or any difficulties that could arise in the manufacturing process could significantly affect our inventories and supply of products available for sale |
| If we are unable to supply sufficient amounts of our products on a timely basis, our market share could decrease and, correspondingly, our profitability could decrease |
| If our contract manufacturers fail to comply with FDA GMP regulations, we may be unable to meet demand for our products and may lose potential revenue |
| All of our contract manufacturers must comply with the applicable FDA Good Manufacturing Practices, or GMP, regulations, which include quality control and quality assurance requirements as well as maintaining records and documentation |
| If our contract manufacturers do not comply with the applicable GMP regulations and other FDA regulatory requirements, both the availability of marketed products for sale and product for clinical trials could be reduced |
| Our business interruption insurance, which covers the loss of income for up to dlra14dtta1 million at our California and Australia locations, and dlra25dtta7 million for our contract manufacturers, may not completely mitigate the harm to our business from the interruption of the manufacturing of products |
| The loss of a manufacturer could still have a negative effect on our sales, margins and market share, as well as our overall business and financial results |
| If our supply of finished products is interrupted, our ability to maintain our inventory levels could suffer and future revenues may be delayed |
| We try to maintain inventory levels that are no greater than necessary to meet our current projections |
| Any interruption in the supply of finished products could hinder our ability to timely distribute finished products |
| If we are unable to obtain adequate product supplies to satisfy our customers’ orders, we may lose those orders and our customers may cancel other orders and stock and sell competing products |
| This in turn could cause a loss of our market share and negatively affect our revenues |
| Numerous factors could cause interruptions in the supply of our finished products, including shortages in raw material required by our manufacturers, changes in our sources for manufacturing, our failure to timely locate and obtain replacement manufacturers as needed, and conditions affecting the cost and availability of raw materials |
| Significant increases and decreases in orders from our major customers could cause our operating results to vary significantly from quarter to quarter |
| Retail availability of our products is greatly affected by the inventory levels our customers hold |
| We monitor wholesaler inventory of our products using a combination of methods, including information provided by the customers as well as tracking prescriptions filled at the pharmacy level to determine amounts the wholesalers have sold to their customers |
| Pursuant to our distribution service agreements with Cardinal, McKesson and AmerisourceBergen, we receive inventory level reports |
| For other wholesalers, however, our estimates of wholesaler inventories may differ significantly from actual inventory levels |
| Significant differences between actual and estimated inventory levels may result in excessive inventory production, inadequate supplies of products in distribution channels, insufficient or excess product available at the retail level, and unexpected increases or decreases in orders from our major customers |
| These changes may cause our revenues to fluctuate significantly from quarter to quarter, and in some cases may cause our operating results for a particular quarter to be below our expectations or projections |
| If our financial results are below expectations for a particular period, the market price of our securities may drop significantly |
| We cannot sell our current products and product candidates if we do not obtain and maintain governmental approvals |
| Pharmaceutical companies are subject to heavy regulation by a number of national, state and local agencies |
| Of particular importance is the FDA The FDA has jurisdiction over all of our business and administers requirements covering testing, manufacture, safety, effectiveness, labeling, storage, record keeping, approval, advertising and promotion of our products |
| If we fail to comply with applicable regulatory requirements, we could be subject to fines, suspensions of regulatory approvals of products, product recalls, delays in product distribution, marketing and sale, and civil or criminal sanctions |
| The process of obtaining and maintaining regulatory approvals for pharmaceutical products, and obtaining and maintaining regulatory approvals to market these products for new indications, is lengthy, expensive and uncertain |
| The manufacturing and marketing of drugs, including our products, are subject to continuing FDA and foreign regulatory review, and later discovery of previously unknown problems with a product, manufacturing process or facility may result in restrictions, including recall or withdrawal of the product from the market |
| The FDA is permitted to revisit and change its prior determinations and it may change its position with regard to the safety or effectiveness of our products |
| Even before any formal regulatory action, we could voluntarily decide to cease distribution and sale or recall any of our products if concerns about safety or effectiveness develop |
| In its regulation of advertising, the FDA from time to time issues correspondence to pharmaceutical companies alleging that some advertising or promotional practices are false, misleading or deceptive |
| The FDA has the power to impose a wide array of sanctions on companies for such advertising practices, and if we were to receive correspondence from the FDA alleging these practices we might be required to: • change our methods of marketing and selling products, • take FDA-mandated corrective action, which could include placing advertisements or sending letters to physicians rescinding previous advertisements or promotion, • incur substantial expenses, including fines, penalties, legal fees and costs to comply with the FDA’s requirements, • disrupt the distribution of products and stop sales until we are in compliance with the FDA’s position |
| 24 _________________________________________________________________ [102]Table of Contents We may spend a significant amount of money to obtain FDA and other regulatory approvals, which may never be granted |
| Failure to obtain such regulatory approvals could adversely affect our prospects for future revenue growth |
| Successful product development in our industry is highly uncertain, and the process of obtaining FDA and other regulatory approvals is lengthy and expensive |
| Very few research and development projects produce a commercial product |
| Product candidates that appear promising in the early phases of development may fail to reach the market for a number of reasons, including that the product candidate did not demonstrate acceptable clinical trial results in humans even though it demonstrated positive preclinical trial results, or that the product candidate was not effective in treating a specified condition or illness |
| The FDA may also require additional clinical data to support approval |
| The FDA can take between one and two years to review new drug applications, or longer if significant questions arise during the review process |
| Moreover, the costs to obtain approvals could be considerable and the failure to obtain, or delays in obtaining, an approval could have a significant negative effect on our business |
| For example, in November 2004, the FDA notified us that it would not approve our NDA for Extina Foam based on its conclusion that, although Extina Foam demonstrated non-inferiority to the comparator drug currently on the market, it did not demonstrate statistically significant superiority to placebo foam |
| In addition, on June 10, 2005, the FDA issued a non-approvable letter for Velac Gel, citing that “a positive carcinogenicity signal was detected in a Tg |
| AC mouse dermal carcinogenicity study |
| ” We depend on a limited number of customers, and if we lose any of them, our business could be harmed |
| Our customers include the nation’s leading wholesale pharmaceutical distributors, such as Cardinal Health, Inc, McKesson HBOC, Inc |
| During 2005, McKesson, Cardinal, AmerisourceBergen accounted for 36prca, 34prca, and 11prca, respectively, of our net product revenues |
| The distribution network for pharmaceutical products is subject to increasing consolidation, and a few large wholesale distributors control a significant share of the market |
| In addition, the number of independent drug stores and small chains has decreased as retail consolidation has occurred |
| Further consolidation among, or any financial difficulties of, distributors or retailers could result in the combination or elimination of warehouses, which may result in reductions in purchases of our products, returns of our products, or cause a reduction in the inventory levels of distributors and retailers, any of which could have a material adverse impact on our business |
| If we lose any of these customer accounts, or if our relationship with them were to deteriorate, our business could also be materially and adversely affected |
| Our revenues depend on payment and reimbursement from third party payors, and if they reduce or refuse payment or reimbursement, the use and sales of our products will suffer, we may not increase our market share, and our revenues and profitability will suffer |
| Our operating results and business success depend, in part, on whether adequate reimbursement is available for the use of our products by hospitals, clinics, doctors and patients |
| Third-party payors include state and federal programs such as Medicare and Medicaid, managed care organizations, private insurance plans and health maintenance organizations |
| Because of the size of the patient population covered by managed care organizations, it is important to our business that we market our products to them and to the pharmacy benefit managers that serve many of these organizations |
| If only a portion of the cost of our prescription products is paid for or reimbursed, our products could be less attractive, from a net-cost perspective, to patients, suppliers and prescribing physicians |
| Managed care organizations and other third-party payors try to negotiate the pricing of medical services and products to control their costs |
| Managed care organizations and pharmacy benefit managers typically develop formularies to reduce their cost for medications |
| Formularies can be based on the prices and therapeutic benefits of the available products |
| Due to their lower costs, generics are often favored on formularies |
| The breadth of the products covered by formularies varies considerably from one managed care organization to another, and many formularies include alternative and competitive products for treatment of particular medical conditions |
| In some cases, third-party payors will pay or reimburse users or suppliers of a prescription drug product only a portion of the product purchase price |
| Consumers and third- 25 _________________________________________________________________ [103]Table of Contents party payors may not view our marketed products as cost-effective, and consumers may not be able to get reimbursement or reimbursement may be so low that we cannot market our products on a competitive basis |
| If a product is excluded from a formulary, its usage may be sharply reduced 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 products, our market share and gross margins could be negatively affected, as could our overall business and financial condition |
| We take reserves for the estimated amounts of rebates we will pay to managed care organizations each quarter |
| Any increase in returns and any increased usage of our products through Medicaid or managed care programs will affect the amount of rebates that we owe |
| Our continued growth depends on our ability to develop new products, and if we are unable to develop new products, our expenses may exceed our revenues without any return on the investment |
| We currently have a variety of new products in various stages of research and development and are working on possible improvements, extensions and reformulations of some existing products |
| These research and development activities, as well as the clinical testing and regulatory approval process, will require significant commitments of personnel and financial resources |
| Delays in the research, development, testing or approval processes will cause a corresponding delay in the commencement of revenue generation from those products |
| We re-evaluate our research and development efforts regularly to assess whether our efforts to develop a particular product or technology are progressing at a rate that justifies our continued expenditures |
| On the basis of these re-evaluations, we have abandoned in the past, and may abandon in the future, our efforts on a particular product or technology |
| Products we are researching or developing may never be successfully released to the market and, regardless of whether we ever release them to the market, we will already have incurred the expense of such processes |
| If we do not successfully integrate new products into our business, we may not be able to sustain revenue growth and we may not be able to compete effectively |
| When we acquire or develop new products and product lines, we must be able to integrate those products and product lines into our systems for marketing, sales and distribution |
| If we do not integrate these products or product lines successfully, the potential for growth is limited |
| The new products we acquire or develop could have channels of distribution, competition, price limitations or marketing acceptance different from our current products |
| As a result, we do not know whether we will be able to compete effectively or obtain market acceptance in any new product categories |
| A new product may require us to significantly increase our sales force and incur additional marketing, distribution and other operational expenses |
| These additional expenses could negatively affect our gross margins and operating results |
| In addition, we could incur many of these expenses before the actual distribution of new products |
| Because of this timing, if the market does not accept the new products, or if they are not competitive with similar products distributed by others, the ultimate success of the acquisition or development could be substantially diminished |
| We rely on third parties to conduct clinical trials for our product candidates, and those third parties may not perform satisfactorily |
| If those third parties do not perform satisfactorily, it may significantly delay commercialization of our products, increase expenditures and negatively affect our prospects for future revenue growth |
| We rely on third parties to independently conduct clinical studies for our product candidates |
| If these third parties do not perform satisfactorily, we may not be able to locate acceptable replacements or enter into favorable agreements with them |
| If we are unable to rely on clinical data collected by others, we 26 _________________________________________________________________ [104]Table of Contents could be required to repeat, extend the duration of, or increase the size of, clinical trials, which could significantly delay required regulatory approvals and require significantly greater expenditures |
| We rely on the services of a single company to distribute our products to our customers |
| A delay or interruption in the distribution of our products could negatively impact our business |
| SPS handles all of our product distribution activities |
| SPS stores and distributes our products from a warehouse in Tennessee |
| Any delay or interruption in the process or in payment could result in a delay delivering product to our customers, which could have a significant negative impact on our business |
| Risks Related to Our Industry We face intense competition, which may limit our commercial opportunities and limit our ability to generate revenues |
| The specialty pharmaceutical industry is highly competitive |
| Competition in our industry occurs on many fronts, including developing and bringing new products to market before others, developing new technologies to improve existing products, developing new products to provide the same benefits as existing products at less cost, developing new products to provide benefits superior to those of existing products, and acquiring or licensing complementary or novel technologies from other pharmaceutical companies or individuals |
| Most of our competitors are large, well-established companies in the fields of pharmaceuticals and health care |
| Many of these companies have substantially greater financial, technical and human resources than we have to devote to marketing, sales, research and development and acquisitions |
| Our competitors may develop or acquire new or improved products to treat the same conditions as our products treat, or may make technological advances that reduce their cost of production so that they may engage in price competition through aggressive pricing policies to secure a greater market share to our detriment |
| Our commercial opportunities will be reduced or eliminated if our competitors develop or acquire and market products that are more effective, have fewer or less severe adverse side effects, or are less expensive than our products |
| Competitors also may develop or acquire products that make our current or future products obsolete |
| Any of these events could have a significant negative impact on our business and financial results, including reductions in our market share and gross margins |
| Luxiq Foam, OLUX Foam and Evoclin Foam compete with generic pharmaceuticals, which claim to offer equivalent benefit at a lower cost |
| In some cases, insurers and other health care payment organizations encourage the use of these less expensive generic brands 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 our prescription brand product |
| Aggressive pricing policies by our generic product competitors and the prescription benefits policies of insurers could cause us to lose market share or force us to reduce our margins in response |
| The growth of managed care organizations and other third-party reimbursement policies and state regulatory agencies may have an adverse effect on our pricing policies and our margins |
| Federal and state regulations govern or influence the reimbursement to health care providers of fees in connection with medical treatment of certain patients |
| In the US, there have been, and we expect there will continue to be, a number of state and federal proposals that could limit the amount that state or federal governments will pay to reimburse the cost of drugs |
| Continued significant changes in the health care system could have a significant negative impact on our business |
| We believe the increasing emphasis on managed care in the US will continue to put pressure on the price and usage of our products, which may in turn adversely impact product sales |
| Changes in reimbursement policies or health care cost containment initiatives that limit or restrict reimbursement for our products may cause our revenues to decline |
| 27 _________________________________________________________________ [105]Table of Contents In recent years, various legislative proposals have been offered in Congress and in some state legislatures that include major changes in the health care system |
| These proposals have included price or patient reimbursement constraints on medicines and restrictions on access to certain products |
| We cannot predict the outcome of such initiatives, and it is difficult to predict the future impact to us of the broad and expanding legislative and regulatory requirements that may apply to us |
| Our industry is subject to extensive governmental regulation |
| The FDA must approve a drug before it can be sold in the US In addition, the Federal Food, Drug and Cosmetic Act, the Federal Trade Commission, Office of the Inspector General and other federal and state agencies, statutes, and regulations govern the safety, effectiveness, testing, manufacture, labeling, storage, record keeping, approval, sampling, advertising and promotion of pharmaceutical products |
| Complying with the mandates of these agencies, statutes and regulations is expensive and time consuming, and adds significantly to the cost of developing, manufacturing and marketing our products |
| In addition, failure to comply with applicable agency, statutory and regulatory requirements could, among other things, result in: • fines or other civil or criminal sanctions, • delays in product development, distribution, marketing and sale, • denials or suspensions of regulatory approvals of our products, and • recalls of our products |
| If product liability lawsuits are brought against us, we may incur substantial costs |
| Our industry faces an inherent risk of product liability claims from allegations that our products resulted in adverse effects to patients or others |
| These risks exist even with respect to those products that are approved for commercial sale by the FDA and manufactured in facilities licensed and regulated by the FDA In March 2004, we acquired exclusive US rights to Soriatane, which is a product known to cause serious birth defects and other serious side effects |
| We maintain product liability insurance in the amount of dlra15 million aggregate, which may not provide adequate coverage against potential product liability claims or losses |
| Insurers have been less willing to extend product liability insurance for Soriatane, and that insurance is only available at higher premiums and with higher deductibles than our other products require |
| We also cannot be certain that our current coverage will continue to be available in the future on reasonable terms, if at all |
| If we were found liable for any product liability claims in excess of our coverage or outside of our coverage, the cost and expense of such liability could severely damage our business, financial condition and profitability |
| The market prices for securities of specialty pharmaceutical companies like ours have been and are likely to continue to be highly volatile |
| As a result, investors in these companies often buy at very high prices only to see the price drop substantially a short time later, resulting in an extreme drop in value in the holdings of these investors |
| Factors such as announcements of fluctuations in our or our competitors’ operating results, changes in our prospects and general market conditions for pharmaceutical biotechnology stocks could have a significant impact on the future trading prices of our common stock and the notes |
| In particular, the trading price of the common stock of many pharmaceutical and biotechnology companies, including us, has experienced extreme price and volume fluctuations, which have at times been unrelated to the operating performance of the companies whose stocks were affected |
| Some of the factors that may cause volatility in the price of our securities include: • clinical trial results and regulatory developments, • quarterly variations in results, 28 _________________________________________________________________ [106]Table of Contents • the timing of new product introductions, • competition, including both branded and generic, • business and product market cycles, • fluctuations in customer requirements, • the availability and utilization of manufacturing capacity, • our ability to develop and implement new technologies, • the timing and amounts of royalties paid to us by third parties, and • issues with the safety or effectiveness of our products |
| The price of our common stock may also be adversely affected by the estimates and projections of the investment community, general economic and market conditions, and the cost of operations in our product markets |
| These factors, either individually or in the aggregate, could result in significant variations in the trading prices of our common stock |
| Volatility in the trading prices of our common stock could result in securities class action litigation |
| Any litigation would likely result in substantial costs, and divert our management’s attention and resources |
| The following table sets forth the high and low closing sale prices of our common stock on the Nasdaq National Market for 2005 and 2004: Period High Low 2005 $ 28dtta99 $ 12dtta00 2004 $ 29dtta92 $ 17dtta69 |