| CURIS INC ITEM 1A RISK FACTORS Factors That May Affect Results RISKS RELATING TO OUR FINANCIAL RESULTS AND NEED FOR FINANCING We have recently determined that certain accounting errors in our financial statements had a material impact on our previously reported financial information |
| As a result of this determination, we have restated our financial results for 2003, 2004 and for the quarters ended March 31, 2005, June 30, 2005 and September 30, 2005 |
| The restatement could cause our stock price to decline and could subject us to securities litigation |
| As discussed in Note 2 of the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, we have recently concluded that we made accounting errors in prior periods primarily relating to our revenue recognition accounting for dlra7cmam509cmam000 in license and maintenance fee payments paid by Genentech as part of our June 2003 Hedgehog antagonist collaboration with Genentech |
| We had been recognizing revenue in connection with the dlra7cmam509cmam000 in payments over an eight-year period based on our estimate that our participation on the steering committees would become inconsequential after the first product was approved in each of the two programs covered under this collaboration, and would therefore no longer represent a performance obligation |
| Accordingly, from fiscal year 2003 through the third quarter of 2005, we had recognized dlra2cmam239cmam000 in license fee revenue related to these payments |
| Following discussions with the SEC, we determined we should not have recognized any of this revenue in 2005, 2004 or 2003 |
| Instead, we will defer the dlra7cmam509cmam000 in payments and recognize this amount as revenue only when we can reasonably estimate when our contractual steering committee obligations will cease or after we no longer have contractual steering committee obligations under this agreement with Genentech |
| The contractual term of our steering committee obligations extends for as long as Hedgehog antagonist products subject to this collaboration are being developed or commercialized by either of the parties |
| Accordingly, the contractual term of our steering committee obligations is indefinite and we expect that we will not record any revenue related to these payments for at least several years |
| We are also restating previously reported research and development expenses associated with dlra410cmam000 in license fee payments that were payable to university licensors in connection with the June 2003 Hedgehog antagonist collaboration with Genentech |
| We had previously capitalized this amount as “Prepaid expenses and other current assets” and “Deposits and other assets” in our consolidated balance sheets and amortized this amount to research and development expense as the related license fee was recognized |
| We have determined that we should have instead recognized the entire dlra410cmam000 immediately as research and development expense in June 2003 |
| In connection with the restatement, we have also corrected other previously identified immaterial errors which had previously been corrected through a cumulative adjustment to the consolidated financial statements in our Quarterly Report on Form 10-Q for the quarter ended September 30, 2005 |
| The restatement allocates the adjustment among the correct periods |
| The restatement could result in a decline in our stock price and securities class action litigation |
| In the past, securities class action litigation has often been brought in connection with restatements of financial statements |
| Defending against such potential litigation relating to a restatement of our financial statements will be expensive and will require significant attention and resources of our management |
| Moreover, our insurance to cover our obligations with respect to the ultimate resolution of any such litigation may be inadequate |
| As a result of these factors, any such potential litigation could have a material adverse effect on our business, results of operations and financial condition |
| 20 ______________________________________________________________________ [45]Table of Contents We have incurred substantial losses, we expect to continue to incur substantial losses and we may never achieve profitability |
| We expect to incur substantial operating losses for the foreseeable future, and we have no current sources of material ongoing revenue |
| As of December 31, 2005, we had an accumulated deficit of approximately dlra680cmam054cmam000 |
| If we are not able to commercialize any products, whether alone or with a collaborator, we will not achieve profitability |
| Other than OP-1, which we and Stryker discovered under a former collaboration and Stryker has subsequently commercialized, we have not commercialized any products to date, either alone or with a third-party collaborator |
| All of our product candidates are in early stages of development |
| As a result, for the foreseeable future, we will need to spend significant capital on our research and development programs in order to produce products which we can commercialize |
| Even if our collaboration agreements provide funding for a portion of our research and development expenses, we will need to generate significant revenues in order to fund our operation and achieve profitability |
| We cannot be certain whether or when this will occur because of the significant uncertainties that affect our business, including the various risks described in this section “Factors That May Affect Results” |
| Our failure to become and remain profitable may depress the market price of our common stock and could impair our ability to raise capital, expand our business, diversify our product offerings or continue our operations |
| We will require additional financing, which may be difficult to obtain and may dilute our existing shareholder ownership interest in us |
| We will require substantial funds to continue our research and development programs and to fulfill our planned operating goals |
| In particular, our currently planned operating and capital requirements primarily include the need for working capital to: • fund our portion of the US development costs for a basal cell carcinoma drug candidate pursuant to our equal cost-sharing co-development arrangement with Genentech; • support our research and development activities for our internal programs, including our program in cardiovascular disease and any unfunded portion of our small molecule discovery screening programs; • expand our infrastructure; and • fund our general and administrative costs and expenses |
| We believe that our existing cash and working capital should be sufficient to fund our operations until mid-2007; however, our future capital requirements may vary from what we expect |
| There are factors that may affect our planned future capital requirements and accelerate our need for additional financing |
| These factors, many of which are outside our control, include the following: • continued progress in our research and development programs, as well as the magnitude of these programs; • the time and cost, including unplanned cost, involved in advancing clinical trials for the basal cell carcinoma drug candidate being co-developed with Genentech; • the cost of additional facilities requirements; • our ability to establish and maintain collaborative arrangements; • the timing, receipt and amount of research funding and milestone, license, royalty, profit-sharing and other payments, if any, from collaborators; • the timing, payment and amount of research funding and milestone, license, royalty and other payments due to licensors of patent rights and technology used to make, use and sell our product candidates; • the timing, receipt and amount of sales revenues and associated royalties, if any, that we receive from our product candidates in the market; and • the costs of preparing, filing, prosecuting, maintaining and enforcing patent claims and other patent-related costs, including litigation costs and technology license fees |
| 21 ______________________________________________________________________ [46]Table of Contents We expect to seek additional funding through public or private financings of debt or equity and may seek additional funding from additional strategic collaborators or additional foundations, such as the funding that we were awarded under our Spinal Muscular Atrophy Foundation research grant |
| However, the market for biotechnology stock in general, and the market for our common stock in particular, is highly volatile |
| Due to various factors, including market conditions and the status of our development pipeline, additional funding may not be available to us on acceptable terms, if at all |
| If we fail to obtain such additional financing on a timely basis, our ability to continue all of our research and development activities will be adversely affected |
| If we raise additional funds by issuing equity securities, dilution to our stockholders will result |
| In addition, the terms of such a financing may adversely affect other rights of our stockholders |
| We also could elect to seek funds through arrangements with collaborators or others that may require us to relinquish rights to certain technologies, product candidates or products |
| If the estimates we make and the assumptions on which we rely in preparing our financial statements prove inaccurate, our actual results may vary significantly |
| Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States |
| The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, revenues and expenses, the amounts of charges taken by us and related disclosure |
| Such estimates and judgments include the carrying value of our property, equipment and intangible assets, revenue recognition and the value of certain liabilities |
| We base our estimates and judgments on historical experience and on various other assumptions that we believe to be reasonable under the circumstances |
| However, these estimates and judgments, or the assumptions underlying them, may change over time |
| Accordingly, our actual financial results may vary significantly from the estimates contained in our financial statements |
| For example, as discussed in Note 2 of the notes to consolidated financial statements included elsewhere in this annual report on Form 10-K, we have recently determined to restate our consolidated financial statements for 2004 and 2003 and for the quarters ended March 31, 2005, June 30, 2005 and September 30, 2005 to correct errors in prior periods including the following: • we prematurely recorded accounts receivable within the assets section of our consolidated Balance Sheets as well as an offsetting amount to our deferred revenues within the liabilities section of our consolidated Balance Sheets in connection with a collaboration agreement executed in 2003; • we used the contractually negotiated price rather than the closing market price to calculate the value of common shares sold in connection with two of our collaboration agreements; and • we treated certain annual maintenance payments under a collaboration as accounts receivable in our consolidated balance sheets prior to the date such cash payments were received |
| For a further discussion of the estimates and judgments that we make and the critical accounting policies that affect these estimates and judgments, see “Critical Accounting Policies and Estimates” below |
| RISKS RELATING TO OUR COLLABORATIONS We are dependent on collaborators for the development and commercialization of many of our product candidates and for a significant portion of our revenue |
| If we lose any of these collaborators, of if they fail or delay in developing or commercializing our product candidates, our anticipated product pipeline and operating results would suffer |
| The success of our strategy for development and commercialization of product candidates depends upon our ability to form and maintain productive strategic collaborations |
| We currently have strategic collaborations with Genentech, Wyeth, Procter & Gamble, Centocor, and Ortho Biotech Products |
| During the years ended December 31, 2005 and 2004, dlra9dtta6 million and dlra3dtta1 million, or 85prca and 74prca, respectively, of our gross revenue was derived from licensing and research and development payments received from these collaborators |
| We hope 22 ______________________________________________________________________ [47]Table of Contents to enter into additional collaborations in the future |
| Our existing and any future collaborations may not be scientifically or commercially successful |
| The risks that we face in connection with these collaborations include the following: • Each of our collaborators has significant discretion in determining the efforts and resources that they will apply to the collaboration |
| The timing and amount of any future royalty, profit-sharing and milestone revenue that we may receive under such collaborative arrangements will depend on, among other things, such collaborator’s efforts and allocation of resources |
| • All of our strategic collaboration agreements are for fixed terms and are subject to termination under various circumstances, including in some cases, on short notice without cause |
| If any collaborator were to terminate an agreement, we may not have the funds available to independently undertake product development, manufacturing and commercialization and we may not have the funds or capability to do this, which could result in a discontinuation of such program |
| • Our strategic collaboration agreements permit our collaborators wide discretion in terms of deciding which product candidates to advance through the clinical trial process |
| It is possible for product candidates to be rejected by a collaborator, at any point in the clinical trial process, without triggering a termination of the collaboration agreement with us |
| In the event of such decisions, we may be adversely affected due to our inability to progress product candidates ourselves |
| • Our collaborators may develop and commercialize, either alone or with others, products and services that are similar to or competitive with the products and services that are the subject of the collaboration with us |
| • Our collaborators may change the focus of their development and commercialization efforts or pursue higher-priority programs |
| The ability of certain of our product candidates to be successfully commercialized could be limited if our collaborators decrease or fail to increase spending related to such product candidates |
| We may not be successful in establishing additional strategic collaborations, which could adversely affect our ability to develop and commercialize products |
| As an integral part of our ongoing research and development efforts, we periodically review opportunities to establish new strategic collaborations for the development and commercialization of products in our development pipeline |
| We face significant competition in seeking appropriate collaborators and the negotiation process is time-consuming and complex |
| We may not be successful in our efforts to establish additional strategic collaborations or other alternative arrangements |
| Our research and development pipeline may be insufficient or our programs may be deemed too early for collaborative effort |
| Even if we are successful in our efforts to establish new collaborations, the terms that we agree upon may not be favorable to us |
| Finally, any such strategic alliances or other arrangements may not result in the successful development and commercialization of products and associated revenue |
| RISKS RELATED TO OUR BUSINESS, INDUSTRY, STRATEGY AND OPERATIONS We face substantial competition, which may result in our competitors discovering, developing or commercializing products before or more successfully than we do |
| Our product candidates face competition from existing and new technologies and products being developed by biotechnology, medical device and pharmaceutical companies, as well as universities and other research institutions |
| For example, research in the fields of regulatory signaling pathways and functional genomics, which includes our work with Genentech in the field of cancer, with Wyeth in the field of neurology, with Procter & Gamble in the field of hair growth regulation, is highly competitive |
| A number of entities are seeking to identify and patent randomly sequenced genes and gene fragments, typically without specific knowledge of the function 23 ______________________________________________________________________ [48]Table of Contents that such genes or gene fragments perform |
| Our competitors may discover, characterize and develop important inducing molecules or genes before we do |
| We also face competition from these and other entities in gaining access to DNA samples used in our research and development projects |
| Many of our competitors have substantially greater capital resources, research and development staffs and facilities than we have |
| Efforts by other biotechnology, medical device and pharmaceutical companies could render our programs or products uneconomical or result in therapies superior to those that we develop alone or with a collaborator |
| For those programs that we have selected for internal development, we face competition from companies that are more experienced in product development and commercialization, obtaining regulatory approvals and product manufacturing |
| As a result, they may be more successful in commercialization and/or may develop competing products more rapidly and at a lower cost |
| For those programs that are subject to a collaboration agreement, competitors may discover, develop and commercialize products which render our products non-competitive or obsolete |
| We expect competition to intensify in genomics research and regulatory signaling pathways as technical advances in the field are made and become more widely known |
| While many of our technologies are subject to collaborations, our remaining technologies that are available for internal programs have several potential applications |
| We have limited resources and are pursuing a strategy of undertaking foundation-funded research for orphan disease indications |
| The limited markets that are associated with such indications as well as conditions of funding arrangements may result in our failure to capitalize on other potentially profitable applications of our technologies |
| We have limited financial and managerial resources to devote to new internal programs |
| These limitations have led us to adopt a strategy where we have undertaken funded research for certain orphan disease indications and to forego the exploration of other product opportunities |
| While our new technologies may permit us to work in multiple areas, resource commitments may require trade-offs resulting in delays in the development of certain programs or research areas, which may place us at a competitive disadvantage |
| In addition, our funded research includes screening of compounds that are not proprietary to us and may result in identification of a drug candidate that would not result in a commercially viable product and/or may divert resources away from other market opportunities, which ultimately prove to be more profitable |
| If we or any of our collaborators fail to achieve market acceptance for our products under development, our future revenue and ability to achieve profitability may be adversely affected |
| Our future products, if any are successfully developed, may not gain commercial acceptance among physicians, patients and third-party payors, even if necessary marketing approvals have been obtained |
| We believe that recommendations and endorsements by physicians will be essential for market acceptance of any products we successfully develop |
| If we are not able to obtain market acceptance for such products, our expected revenues from sales of these products would be adversely affected |
| We could be exposed to significant monetary damages and business harm if we are unable to obtain or maintain adequate product liability insurance at acceptable costs or otherwise protect ourselves against potential product liability claims |
| Product liability claims, inherent in the process of researching and developing human health care products, could expose us to significant liabilities and prevent or interfere with the development or commercialization of our product candidates |
| Product liability claims would require us to spend significant time, money and other resources to defend such claims and could ultimately lead to our having to pay a significant damage award |
| Product liability insurance is expensive to procure for biopharmaceutical companies such as ours |
| Although we 24 ______________________________________________________________________ [49]Table of Contents maintain product liability insurance coverage for the clinical trials of our products under development, it is possible that we will not be able to obtain additional product liability insurance on acceptable terms, if at all, and that our product liability insurance coverage will not prove to be adequate to protect us from all potential claims |
| If we are not able to attract and retain key management and scientific personnel and advisors, we may not successfully develop our product candidates or achieve our other business objectives |
| We highly depend upon our senior management and scientific staff |
| The loss of the service of any of the key members of our senior management may significantly delay or prevent the achievement of product development and other business objectives |
| Key members of our senior management team include Daniel R Passeri, our president and Chief Executive Officer and Dr |
| Lee L Rubin, our Executive Vice President and Chief Scientific Officer |
| Our executive officers, including these individuals, can terminate their employment with us at any time |
| The loss of the services of any of our executive officers may significantly delay or prevent the achievement of product research and development and other business objectives |
| We are not aware of any present intention of any of these individuals to leave our company |
| Replacing key employees may be difficult and may take an extended period of time because of the limited number of individuals in our industry with the breadth of skills and experience required to research, develop and successfully commercialize products in our areas of core competency |
| We do not maintain key man life insurance on any of these executive officers |
| Our ability to operate successfully will depend on our ability to attract and retain qualified personnel, consultants and advisors |
| We face intense competition for qualified individuals from numerous pharmaceutical and biotechnology companies, universities, governmental entities and other research institutions |
| We may be unable to attract and retain these individuals, and our failure to do so would have an adverse effect on our business |
| If we make any acquisitions, we will incur a variety of costs and may never successfully integrate the acquired business into ours |
| We may attempt to acquire businesses, technologies, services or products that we believe are a strategic complement to our business model |
| We may encounter operating difficulties and expenditures relating to integrating an acquired business, technology, service or product |
| These acquisitions may also absorb significant management attention that would otherwise be available for ongoing development of our business |
| Moreover, we may never realize the anticipated benefits of any acquisition |
| We may also make dilutive issuances of equity securities, incur debt, experience a decrease in the cash available for our operations, or incur contingent liabilities in connection with any future acquisitions |
| RISKS RELATING TO INTELLECTUAL PROPERTY If we or any of our licensees and assignees breach any of the agreements under which we license or transfer intellectual property to others, we could be deprived of important intellectual property rights and future revenue |
| We are a party to intellectual property out-licenses, collaborations and agreements that are important to our business and expect to enter into similar agreements with third parties in the future |
| Under these agreements, we license or transfer intellectual property to third parties and impose various research, development, commercialization, sublicensing, royalty, indemnification, insurance, and other obligations on them |
| If a third party fails to comply with these requirements, we generally retain the right to terminate the agreement, and to bring a legal action in court or in arbitration |
| In the event of breach, we may need to enforce our rights under these agreements by resorting to arbitration or litigation |
| During the period of arbitration or litigation, we may be unable to effectively use, assign or license the relevant intellectual property rights and may be deprived of current or future revenues that are associated with such intellectual property |
| 25 ______________________________________________________________________ [50]Table of Contents We may not be able to obtain patent protection for our technologies and the patent protection we do obtain may not be sufficient to stop our competitors from using similar technology |
| The patent positions of pharmaceutical and biotechnology companies, including ours, are generally uncertain and involve complex legal, scientific and factual questions |
| The standards which the United States Patent and Trademark Office uses to grant patents, and the standards which courts use to interpret patents, are not always applied predictably or uniformly and can change, particularly as new technologies develop |
| Consequently, the level of protection, if any, that will be provided by our patents if we attempt to enforce them, and they are challenged, is uncertain |
| The long-term success of our enterprise depends in significant part on our ability to: • obtain patents to protect our technologies and discoveries; • protect trade secrets from disclosure to third-party competitors; • operate without infringing upon the proprietary rights of others; and • prevent others from infringing on our proprietary rights |
| Patents may not issue from any of the patent applications that we own or license |
| If patents do issue, the type and extent of patent claims issued to us may not be sufficiently broad to protect our technology from exploitation by our competitors |
| In addition, issued patents that we own or license may be challenged, invalidated or circumvented |
| Our patents also may not afford us protection against competitors with similar technology |
| Because patent applications in the United States are maintained in secrecy until 18 months after filing, it is possible that third parties have filed or maintained patent applications for technology used by us or covered by our pending patent applications without our knowledge |
| We may not have rights under patents which may cover one or more of our product candidates |
| In some cases, these patents may be owned or controlled by third party competitors and may impair our ability to exploit our technology |
| As a result, we or our collaborative partners may be required to obtain licenses under third-party patents to develop and commercialize some of our product candidates |
| If we are unable to secure licenses to such patented technology on acceptable terms, we or our collaborative partners will not be able to develop and commercialize the affected product candidate or candidates |
| We may become involved in expensive and unpredictable patent litigation or other intellectual property proceedings which could result in liability for damages or stop our development and commercialization efforts |
| There have been substantial litigation and other proceedings regarding patent and other intellectual property rights in the pharmaceutical and biotechnology industries |
| We may become a party to patent litigation or other proceedings regarding intellectual property rights |
| Situations which may give rise to patent litigation or other disputes over the use of our intellectual property include: • initiation of litigation or other proceedings against third parties to enforce our patent rights; • initiation of litigation or other proceedings against third parties to seek to invalidate the patents held by these third parties or to obtain a judgment that our product candidates do not infringe the third parties’ patents; • participation in interference or opposition proceedings to determine the priority of invention if our competitors file patent applications that claim technology also claimed by us; • initiation of litigation by third parties claiming that our processes or product candidates or the intended use of our product candidates infringe their patent or other intellectual property rights; and • initiation of litigation by us or third parties seeking to enforce contract rights relating to intellectual property which may be important to our business |
| 26 ______________________________________________________________________ [51]Table of Contents The costs associated with any patent litigation or other proceeding, even if resolved favorably, will likely be substantial |
| Some of our competitors may be able to sustain the cost of such litigation or other proceedings more effectively than we can because of their substantially greater financial resources |
| If a patent litigation or other intellectual property proceeding is resolved unfavorably, we or our collaborative partners may be enjoined from manufacturing or selling our products and services without a license from the other party and be held liable for significant damages |
| Moreover, we may not be able to obtain required licenses on commercially acceptable terms or any terms at all |
| In addition, we could be held liable for lost profits if we are found to have infringed a valid patent, or liable for treble damages if we are found to have willfully infringed a valid patent |
| Litigation results are highly unpredictable and we or our collaborative partners may not prevail in any patent litigation or other proceeding in which we may become involved |
| Any changes in, or unexpected interpretations of, the patent laws may adversely affect our ability to enforce our patent position |
| Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could damage our ability to compete in the marketplace |
| Patent litigation and other proceedings may also absorb significant management time and expense |
| If we are unable to keep our trade secrets confidential, our technology and proprietary information may be used by others to compete against us |
| We rely significantly upon proprietary technology, information, processes and know-how that are not subject to patent protection |
| We seek to protect this information through confidentiality agreements with our employees, consultants and other third-party contractors as well as through other security measures |
| These confidentiality agreements and security measures may be breached, and we may not have adequate remedies for any such breach |
| In addition, our trade secrets may otherwise become known or be independently developed by competitors |
| RISKS RELATING TO CLINICAL AND REGULATORY MATTERS We expect to rely heavily on third parties for the conduct of clinical trials of our product candidates as well as certain preclinical testing |
| If clinical trials are not successful, or if our collaborators decide to terminate development efforts for a particular compound, or if we or our collaborators are not able to obtain required regulatory approvals, we will not be able to commercialize our product candidates |
| In order to obtain regulatory approval for the commercial sale of our product candidates, we and our collaborators will be required to complete extensive preclinical studies as well as clinical trials in humans to demonstrate to the FDA and foreign regulatory authorities that our product candidates are safe and effective |
| We have limited experience in conducting clinical trials and expect to rely primarily on collaborative partners and contract research organizations for their performance and management of clinical trials of our product candidates |
| Clinical development, including preclinical testing, is a long, expensive and uncertain process |
| Accordingly, preclinical testing and clinical trials, if any, of our product candidates under development may not be successful |
| We and our collaborators could experience delays in preclinical or clinical trials of any of our product candidates which obtain unfavorable results in a development program, or fail to obtain regulatory approval for the commercialization of a product |
| Preclinical studies or clinical trials may produce negative, inconsistent or inconclusive results, and we or our collaborators may decide, or regulators may require us, to conduct additional preclinical studies or clinical trials or terminate testing for a particular product candidate |
| The results from early clinical trials may not be statistically significant or predictive of results that will be obtained from expanded, advanced clinical trials |
| Furthermore, the timing and completion of clinical trials, if any, of our product candidates depend on, among other factors, the number of patients we will be required to enroll in the clinical trials and the rate at which those patients are enrolled |
| Any increase in the required number of patients, decrease in recruitment rates or difficulties retaining study participants may result in increased costs, program delays or program termination |
| Also, our products under 27 ______________________________________________________________________ [52]Table of Contents development may not be effective in treating any of our targeted disorders or may prove to have undesirable or unintended side effects, toxicities or other characteristics that may prevent or limit their commercial use |
| Institutional review boards or regulators, including the FDA, or our collaborators may hold, suspend or terminate our clinical research or the clinical trials of our product candidates for various reasons, including failure to achieve established success criteria, noncompliance with regulatory requirements or if, in their opinion, the participating subjects are being exposed to unacceptable health risks |
| Additionally, the failure of third parties conducting or overseeing the operation of the clinical trials to perform their contractual or regulatory obligations in a timely fashion could delay the clinical trials |
| Any of these events would adversely affect our ability to market a product candidate |
| The development process necessary to obtain regulatory approval is lengthy, complex and expensive |
| If we and our collaborative partners do not obtain necessary regulatory approvals, then our business will be unsuccessful and the market price of our common stock will substantially decline |
| To the extent that we, or our collaborative partners, are able to successfully advance a product candidate through the clinic, we, or such partner, will be required to obtain regulatory approval prior to marketing and selling such product |
| The process of obtaining FDA and other required regulatory approvals is expensive |
| The time required for FDA and other approvals is uncertain and typically takes a number of years, depending on the complexity and novelty of the product |
| The process of obtaining FDA and other required regulatory approvals for many of our products under development is further complicated because some of these products use non-traditional or novel materials in non-traditional or novel ways, and the regulatory officials have little precedent to follow |
| With respect to internal programs to date, we have limited experience in filing and prosecuting applications to obtain marketing approval |
| Any regulatory approval to market a product may be subject to limitations on the indicated uses for which we, or our collaborative partners, may market the product |
| These limitations may restrict the size of the market for the product and affect reimbursement by third-party payors |
| In addition, regulatory agencies may not grant approvals on a timely basis or may revoke or significantly modify previously granted approvals |
| We, or our collaborative partners, also are subject to numerous foreign regulatory requirements governing the manufacturing and marketing of our potential future products outside of the United States |
| The approval procedure varies among countries, additional testing may be required in some jurisdictions, and the time required to obtain foreign approvals often differs from that required to obtain FDA approvals |
| Moreover, approval by the FDA does not ensure approval by regulatory authorities in other countries, and vice versa |
| As a result of these factors, we or our collaborators may not successfully begin or complete clinical trials and/or obtain regulatory approval to market and sell our product candidates in the time periods estimated, if at all |
| Moreover, if we or our collaborators incur costs and delays in development programs or fail to successfully develop and commercialize products based upon our technologies, we may not become profitable and our stock price could decline |
| Even if marketing approval is obtained, any products we or our collaborators develop will be subject to ongoing regulatory oversight which may affect the successful commercialization of such products |
| Even if regulatory approval of a product candidate is obtained by us or our collaborators, the approval may be subject to limitations on the indicated uses for which the product is marketed or require costly post-marketing follow-up studies |
| After marketing approval for any product is obtained, the manufacturer and the manufacturing facilities for that product will be subject to continual review and periodic inspections by the FDA and other 28 ______________________________________________________________________ [53]Table of Contents regulatory agencies |
| The subsequent discovery of previously unknown problems with the product, or with the manufacturer or facility, may result in restrictions on the product or manufacturer, including withdrawal of the product from the market |
| If there is a failure to comply with applicable regulatory requirements, we or our collaborator may be subject to fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions, and criminal prosecution |
| We and our collaborators are subject to governmental regulations other than those imposed by the FDA We and our collaborators may not be able to comply with these regulations, which could subject us, or such collaborators, to penalties and otherwise result in the limitation of our or such collaborators’ operations |
| In addition to regulations imposed by the FDA, we and our collaborators are subject to regulation under the Occupational Safety and Health Act, the Environmental Protection Act, the Toxic Substances Control Act, the Research Conservation and Recovery Act, as well as regulations administered by the Nuclear Regulatory Commission, national restrictions on technology transfer, import, export and customs regulations and certain other local, state or federal regulations |
| From time to time, other federal agencies and congressional committees have indicated an interest in implementing further regulation of biotechnology applications |
| We are not able to predict whether any such regulations will be adopted or whether, if adopted, such regulations will apply to our business, or whether we or our collaborators would be able to comply with any applicable regulations |
| Our research and development activities involve the controlled use of hazardous materials and chemicals |
| Although we believe that our safety procedures for handling and disposing of such materials comply with all applicable laws and regulations, we cannot completely eliminate the risk of accidental contamination or injury caused by these materials |
| RISKS RELATING TO PRODUCT MANUFACTURING AND SALES We will depend on our collaborators and third-party manufacturers to produce most, if not all, of our products under development, and if these third parties do not successfully manufacture these products our business will be harmed |
| We have no manufacturing experience or manufacturing capabilities |
| In order to continue to develop products, apply for regulatory approvals, and commercialize our products, we or our collaborators must be able to manufacture products in adequate clinical and commercial quantities, in compliance with regulatory requirements, at acceptable quality and cost and in a timely manner |
| The manufacture of our product candidates may be complex, difficult to accomplish and difficult to scale-up when large-scale production is required |
| Manufacture may be subject to delays, inefficiencies and poor or low yields of quality products |
| The cost of manufacturing some of our products may make them prohibitively expensive |
| If supplies of any of our product candidates or related materials become unavailable on a timely basis or at all or are contaminated or otherwise lost, clinical trials by us and our collaborators could be seriously delayed |
| This is due to the fact that such materials are time-consuming to manufacture and cannot be readily obtained from third-party sources |
| To the extent that we or our collaborators seek to enter into manufacturing arrangements with third parties, we and such collaborators will depend upon these third parties to perform their obligations in a timely and effective manner and in accordance with government regulations |
| Contract manufacturers may breach their manufacturing agreements because of factors beyond our control or may terminate or fail to renew a manufacturing agreement based on their own business priorities at a time that is costly or inconvenient for us |
| Any contract manufacturers that we enter into manufacturing arrangements with will be subject to ongoing periodic, unannounced inspection by the FDA and corresponding state and foreign agencies or their designees to 29 ______________________________________________________________________ [54]Table of Contents ensure strict compliance with current good manufacturing practices and other governmental regulations and corresponding foreign standards |
| Failure of contract manufacturers or our collaborators or us to comply with applicable regulations could result in sanctions being imposed, including fines, injunctions, civil penalties, failure of regulatory authorities to grant marketing approval of our product candidates, delays, suspension or withdrawal of approvals, seizures or recalls of product candidates, operating restrictions and criminal prosecutions, any of which could significantly and adversely affect our business |
| If we need to change manufacturers, the FDA and corresponding foreign regulatory agencies must approve these manufacturers in advance |
| This would involve testing and pre-approval inspections to ensure compliance with FDA and foreign regulations and standards |
| If third-party manufacturers fail to perform their obligations, our competitive position and ability to generate revenue may be adversely affected in a number of ways, including; • we and our collaborators may not be able to initiate or continue clinical trials of products that are under development; • we and our collaborators may be delayed in submitting applications for regulatory approvals for our product candidates; and • we and our collaborators may not be able to meet commercial demands for any approved products |
| We have no sales or marketing experience and, as such, will depend significantly on third parties who may not successfully sell our products |
| We have no sales, marketing or product distribution experience |
| If we receive required regulatory approvals, we plan to rely primarily on sales, marketing and distribution arrangements with third parties, including our collaborative partners |
| For example, as part of our agreements with Genentech, Wyeth, Procter & Gamble and Ortho Biotech Products, we have granted our collaborators exclusive rights to distribute certain products resulting from such collaborations, if any are ever successfully developed |
| We may have to enter into additional marketing arrangements in the future and we may not be able to enter into these additional arrangements on terms which are favorable to us, if at all |
| In addition, we may have limited or no control over the sales, marketing and distribution activities of these third parties and sales through these third parties could be less profitable to us than direct sales |
| These third parties could sell competing products and may devote insufficient sales efforts to our products |
| Our future revenues will be materially dependent upon the success of the efforts of these third parties |
| We may seek to independently market products that are not already subject to marketing agreements with other parties |
| If we determine to perform sales, marketing and distribution functions ourselves, we could face a number of additional risks, including: • we may not be able to attract and build a significant and skilled marketing staff or sales force; • the cost of establishing a marketing staff or sales force may not be justifiable in light of the revenues generated by any particular product; and • our direct sales and marketing efforts may not be successful |
| RISKS RELATED TO OUR COMMON STOCK Our stock price will fluctuate significantly and the market price of our common stock could drop below the price paid |
| The trading price of our common stock has been volatile and may continue to be volatile in the future |
| For example, our stock has traded as high as dlra6dtta59 and as low as dlra2dtta46 per share for the period January 1, 2004 through December 31, 2005 |
| The stock market, particularly in recent years, has experienced significant volatility 30 ______________________________________________________________________ [55]Table of Contents with respect to pharmaceutical- and biotechnology-based company stocks |
| Prices for our stock will be determined in the marketplace and may be influenced by many factors, including: • announcements regarding new technologies by us or our competitors; • market conditions in the biotechnology and pharmaceutical sectors; • rumors relating to us or our competitors; • litigation or public concern about the safety of our potential products; • actual or anticipated variations in our quarterly operating results; • the market’s reaction to our announcement regarding our determination to restate our 2004 and 2003 consolidated financial statements; • actual or anticipated changes to our research and development plans; • deviations in our operating results from the estimates of securities analysts; • adverse results or delays in clinical trials being conducted by us or our collaborators; • any intellectual property lawsuits involving us; • sales of large blocks of our common stock; • sales of our common stock by our executive officers, directors or significant stockholders; • the loss of any of our key scientific or management personnel; • FDA or international regulatory actions; and • general market conditions |
| While we cannot predict the individual effect that these factors may have on the price of our common stock, these factors, either individually or in the aggregate, could result in significant variations in price during any given period of time |
| Moreover, in the past, securities class action litigation has often been instituted against companies following periods of volatility in their stock price |
| This type of litigation could result in substantial costs and divert our management’s attention and resources |
| Substantially all of our outstanding common stock may be sold into the market at any time |
| This could cause the market price of our common stock to drop significantly |
| Sales of a substantial number of shares of our common stock in the public market could occur at any time |
| These sales, or the perception in the market that the holders of a large number of shares intend to sell such shares, could reduce the market price of our common stock |
| As of December 31, 2005, we had outstanding approximately 48dtta3 million shares of common stock |
| Substantially all of these shares may also be resold in the public market at any time |
| In addition, we have a significant number of shares that are subject to outstanding options and warrants |
| The exercise of these options and warrants and the subsequent sale of the underlying common stock could cause a further decline in our stock price |
| These sales also might make it difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate |
| We have anti-takeover defenses that could delay or prevent an acquisition that our stockholders may consider favorable and the market price of our common stock may be lower as a result |
| Provisions of our certificate of incorporation, our bylaws and Delaware law may have the effect of deterring unsolicited takeovers or delaying or preventing changes in control of our management, including transactions in which our stockholders might otherwise receive a premium for their shares over then current market prices |
| In addition, these provisions may limit the ability of stockholders to approve transactions that they may deem to be in their best interest |
| For example, we have divided our board of directors into three classes that serve staggered 31 ______________________________________________________________________ [56]Table of Contents three-year terms, we may issue shares of our authorized “blank check” preferred stock and our stockholders are limited in their ability to call special stockholder meetings |
| In addition, we are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which prohibits a publicly-held Delaware corporation from engaging in a business combination with an interested stockholder, generally a person which together with its affiliates owns, or within the last three years has owned, 15prca of our voting stock, for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner |
| These provisions could discourage, delay or prevent a change in control transaction |