| CYTRX CORP Item 1A Risk Factors If any of the following risks actually occur, our business or prospects could be materially adversely affected |
| You should also refer to the other information in this Annual Report, including our financial statements and the related notes |
| We Have Operated at a Loss and Will Likely Continue to Operate at a Loss For the Foreseeable Future We have incurred significant losses over the past five years, including net losses of dlra15dtta1 million, dlra16dtta4 million and dlra17dtta8 million for the years ended December 31, 2005, 2004 and 2003, respectively, and we had an accumulated deficit of approximately dlra121dtta3 million as of December 31, 2005 |
| Our operating losses have been due primarily to our expenditures for research and development on our products and for general and administrative expenses and our lack of significant revenues |
| We are likely to continue to incur operating losses until such time, if ever, that we generate significant recurring revenues |
| We anticipate it will take a minimum of three years (and possibly longer) for us to generate recurring revenues, since we expect that it will take at least that long before the development of any of our licensed or other current potential products is completed, marketing approvals are obtained from the FDA and commercial sales of any of these products can begin |
| We Have No Source of Significant Recurring Revenues, Which Makes Us Dependent on Financing to Sustain Our Operations Our revenues were dlra184cmam000, dlra428cmam000, and dlra94cmam000 during the years ended December 31, 2005, 2004 and 2003, respectively |
| We will not have significant recurring operating revenues until at least one of the following occurs: • We are able to complete the development of and commercialize one or more of the products that we are currently developing, which may require us to first enter into license or other arrangements with third parties |
| • One or more of our currently licensed products is commercialized by our licensees, thereby generating royalty income for us |
| • We are able to acquire products from third parties that are already being marketed or are approved for marketing |
| We expect to incur losses from operations until such time, if ever, as we can generate significant recurring revenues |
| On March 7, 2006, we completed a private placement financing and received net proceeds of approximately dlra12dtta4 million |
| Although we believe that we have adequate financial resources to support our 12 _________________________________________________________________ [57]Table of Contents currently planned level of operations into the third quarter of 2007, we will be dependent on obtaining financing from third parties in order to maintain our operations, including our Phase II clinical program with arimoclomol for ALS, our planned levels of operations for our obesity and type 2 diabetes laboratory, our planned RNAi subsidiary and our ongoing research and development efforts related to our other small molecule drug candidates, and in order to continue to meet our obligations to UMMS We have no commitments from third parties to provide us with any additional debt or equity financing, and may not be able to obtain future financing on favorable terms, or at all |
| A lack of needed financing would force us to reduce the scope of, or terminate, our operations, or to seek to merge with or to be acquired by another company |
| There can be no assurance that we would be able to identify an appropriate company to merge with or be acquired by or that we could consummate such a transaction on terms that would be attractive to our stockholders or at all |
| Most of Our Revenues Have Been Generated by License Fees for TranzFect, Which May Not be a Recurring Source of Revenue for Us License fees paid to us with respect to our TranzFect technology have represented 54prca, 93prca and 81prca of our total revenues for the years ended December 31, 2005, 2004 and 2003, respectively |
| We have already licensed most of the potential applications for this technology, and there can be no assurance that we will be able to generate additional license fee revenues from any new licensees for this technology |
| Our current licensees for TranzFect, Merck, and Vical, may be required to make further milestone payments to us under their licenses based on their future development of products using TranzFect |
| Since TranzFect is to be used as a component in vaccines, we do not need to seek FDA approval, but any vaccine manufacturer will need to seek FDA approval for the final vaccine formulation containing TranzFect |
| Merck has completed a multi-center, blinded, placebo controlled Phase I trial of an HIV vaccine utilizing TranzFect as a component |
| In the Merck trials, although the formulation of the tested vaccine using TranzFect was generally safe, well-tolerated and generated an immune response, the addition of TranzFect to the vaccine did not increase this immune response |
| Moreover, the DNA single-modality vaccine regimen with TranzFect, when tested in humans, yielded immune responses that were inferior to those obtained with the DNA vaccines in macaque monkeys |
| Accordingly, there is likely to be a substantial period of time, if ever, before we receive any further significant payments from Merck or Vical under their TranzFect licenses |
| We Have Changed Our Business Strategy, Which Will Require Us, in Certain Cases, to Find and Rely Upon Third Parties for the Development of Our Products and to Provide Us With Products Following our merger with Global Genomics, we modified our business strategy of internally developing Flocor and the other, then-current, potential products that we had not yet licensed to third parties |
| Instead, we began to seek to enter into strategic alliances, license agreements or other collaborative arrangements with other pharmaceutical companies that would provide for those companies to be responsible for the development and marketing of those products |
| In June 2004, we licensed Flocor, the primary potential product that we held prior to the Global Genomics merger and which we had not already licensed to a third party, to SynthRx, Inc, a recently formed Houston, Texas-based biopharmaceutical company, under a strategic alliance that we entered into with that company in October 2003 |
| Although we intend to internally fund or carry out a significant portion of the research and development related to at least one of our small molecule drug candidates, and the early stage development work for certain product applications based on the RNAi and other technologies that we licensed from UMMS, and we may seek to fund all of the later stage development work for our potential ALS products, the completion of the development, manufacture and marketing of these products is likely to require, in many cases, that we enter into strategic alliances, license agreements or other collaborative arrangements with larger pharmaceutical or biotechnology companies for this purpose |
| There can be no assurance that any of our products will have sufficient potential commercial value to enable us to secure strategic alliances, license agreements or other collaborative arrangements with suitable companies on attractive terms or at all |
| If we are unable to enter into collaborative agreements, we may not have the financial or other resources to continue development of a particular product or the development of any of our products |
| In connection with the recently-completed Phase I clinical trial conducted by UMMS and Advanced BioScience Laboratories on an HIV vaccine candidate that utilizes a technology that we licensed from UMMS, we do not have a 13 _________________________________________________________________ [58]Table of Contents commercial relationship with the company that provided an adjuvant for the vaccine for the trial |
| If we are not able to enter into an agreement with this company on terms favorable to us or at all, we may be unable to use some or all of the results of the clinical trial as part of our clinical data for obtaining FDA approval of this vaccine, which will delay the development of the vaccine |
| If we enter into these collaborative arrangements, we will be dependent upon the timeliness and effectiveness of the development and marketing efforts of our contractual partners |
| If these companies do not allocate sufficient personnel and resources to these efforts or encounter difficulties in complying with applicable regulatory (including FDA) requirements, the timing of receipt or amount of revenues from these arrangements may be materially and adversely affected |
| By entering into these arrangements rather than completing the development and then marketing these products on our own, we may suffer a reduction in the ultimate overall profitability for us of these products |
| In addition, if we are unable to enter into these arrangements for a particular product, we may be required to either sell our rights in the product to a third party or abandon it unless we are able to raise sufficient capital to fund the substantial expenditures necessary for development and marketing of the product |
| We may also seek to acquire products from third parties that already are being marketed or have previously been marketed |
| Even if we do identify such products, it may be difficult for us to acquire them with our limited financial resources and, if we acquire products using our securities as currency, we may incur substantial shareholder dilution |
| We do not have any prior experience in acquiring or marketing products and may need to find third parties to market these products for us |
| We may also seek to acquire products through a merger with one or more companies that own such products |
| In any such merger, the owners of our merger partner could be issued or hold a substantial, or even controlling, amount of stock in our company or, in the event that the other company is the surviving company, in that other company |
| Our Current Financial Resources May Limit Our Ability to Execute Certain Strategic Initiatives In June 2004, we licensed Flocor to SynthRx, which will be responsible for developing potential product applications for Flocor |
| Although we are not doing any further development work on TranzFect or Flocor, should our three principal licensees for those technologies successfully meet the defined milestones, we could receive future milestone payments and, should any of the licensees commercialize products based upon our technology, future royalty payments |
| However, there can be no assurance that our licensees will continue to develop or ever commercialize any products that are based on our Flocor or our TranzFect technology |
| Our strategic alliance with UMMS will require us to make significant expenditures to fund research at UMMS relating to the development of therapeutic products based on UMMS’s technologies that we have licensed and pursuant to our collaboration and invention disclosure agreement with UMMS We estimate that the aggregate amount of these expenditures under our current commitments will be approximately dlra1cmam186cmam000 million for 2006 and approximately dlra450cmam000 for 2007 |
| Our license agreements with UMMS also provide, in certain cases, for milestone payments based on the progress we make in the clinical development and marketing of products utilizing the licensed technologies |
| In the event that we were to successfully develop a product in each of the categories of obesity/type 2 diabetes, ALS, CMV and an HIV vaccine, under our licenses, those milestone payments could aggregate up to dlra16dtta1 million |
| We estimate that the Phase II clinical program with arimoclomol for ALS, including the recently-initiated Phase IIa trial and the Phase IIb trial that we expect to initiate soon after completion of the present Phase IIa trial subject to FDA approval, will require us to expend approximately dlra17dtta8 million over a period of 24 to 30 months |
| In addition, the agreement pursuant to which we acquired the clinical and pharmaceutical assets of Biorex provides for milestone payments based on the occurrence of certain regulatory filings and approvals related to the acquired products |
| In the event that we successfully develop any of the products acquired from Biorex, the milestone payments could aggregate up to dlra4dtta2 million |
| Each of the foregoing milestone payments, however, could vary significantly based upon the milestones we achieve and the number of products we ultimately undertake to develop |
| Under our license for our HIV vaccine candidate, following the completion of the current Phase I trial, we will be responsible for all of the costs for subsequent clinical trials for this vaccine |
| The costs of subsequent trials for 14 _________________________________________________________________ [59]Table of Contents the HIV vaccine will be very substantial |
| Although we are seeking NIH or other governmental funding for these future trials, we do not have, and there can be no assurance that we will be able to secure, such funding for any of these trials |
| The expenditures potentially required under our agreements with UMMS and ABL, together with the operating capital requirements of our obesity and type 2 diabetes laboratory, our planned sponsored research funding for Massachusetts General Hospital, our Phase II clinical program with arimoclomol for ALS and our development of our small molecule drug candidates, substantially exceed our current financial resources |
| Although we raised approximately dlra12dtta4 million in March 2006, net of transaction expenses, those required expenditures will nonetheless require us to raise additional capital or to secure a licensee or strategic partner in order to maintain our operations, including our Phase II clinical program with arimoclomol for ALS, our planned levels of operations for our obesity and type 2 diabetes laboratory, our planned RNAi subsidiary and our ongoing research and development efforts related to our other small molecule drug candidates, and in order to continue to meet our obligations to UMMS If we are unable to meet our various financial obligations under license agreements with UMMS, we could lose all of our rights under those agreements |
| If we were to have inadequate financial resources at that time, we also could be forced to reduce the level of, or discontinue, operations at our laboratory |
| If Our Products Are Not Successfully Developed and Approved by the FDA, We May Be Forced to Reduce or Terminate Our Operations All of our products are at various stages of development and must be approved by the FDA or similar foreign governmental agencies before they can be marketed |
| The process for obtaining FDA approval is both time-consuming and costly, with no certainty of a successful outcome |
| This process typically includes the conduct of extensive pre-clinical and clinical testing, which may take longer or cost more than we or our licensees anticipate, and may prove unsuccessful due to numerous factors |
| Product candidates that may appear to be promising at early stages of development may not successfully reach the market for a number of reasons |
| The results of preclinical and initial clinical testing of these products may not necessarily indicate the results that will be obtained from later or more extensive testing |
| Companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in advanced clinical trials, even after obtaining promising results in earlier trials |
| Numerous factors could affect the timing, cost or outcome of our drug development efforts, including the following: • Difficulty in securing centers to conduct trials |
| • Difficulty in enrolling patients in conformity with required protocols or projected timelines |
| • Unexpected adverse reactions by patients in trials |
| • Difficulty in obtaining clinical supplies of the product |
| • Changes in the FDA’s requirements for our testing during the course of that testing |
| • Inability to generate statistically significant data confirming the efficacy of the product being tested |
| • Modification of the drug during testing |
| • Reallocation of our limited financial and other resources to other clinical programs |
| It is possible that none of the products we develop will obtain the appropriate regulatory approvals necessary for us to begin selling them |
| The time required to obtain FDA and other approvals is unpredictable but often can take years following the commencement of clinical trials, depending upon the complexity of the drug candidate |
| Any analysis we perform of data from clinical activities is subject to confirmation and interpretation by regulatory authorities, which could delay, limit or prevent regulatory approval |
| Any delay or failure in obtaining required 15 _________________________________________________________________ [60]Table of Contents approvals could have a material adverse effect on our ability to generate revenues from the particular drug candidate and we may not have the financial resources to continue to develop our products and may have to terminate our operations |
| The Approach We Are Taking to Discover and Develop Novel Therapeutics Using RNAi is Unproven and May Never Lead to Marketable Products The RNAi technologies that we have acquired from UMMS have not yet been clinically tested by us, nor are we aware of any clinical trials having been completed by third parties involving similar technologies |
| Neither we nor any other company has received regulatory approval to market therapeutics utilizing RNAi |
| The scientific discoveries that form the basis for our efforts to discover and develop new drugs are relatively new |
| The scientific evidence to support the feasibility of developing drugs based on these discoveries is both preliminary and limited |
| Successful development of RNAi-based products will require solving a number of issues, including providing suitable methods of stabilizing the RNAi drug material and delivering it into target cells in the human body |
| We may spend large amounts of money trying to solve these issues, and never succeed in doing so |
| In addition, any compounds that we develop may not demonstrate in patients the chemical and pharmacological properties ascribed to them in laboratory studies, and they may interact with human biological systems in unforeseen, ineffective or harmful ways |
| Our Planned RNAi Subsidiary May Not Be Able to Obtain Sufficient Funding, and We May Not Control a Majority of the Planned Subsidiary if We Obtain Financing We are currently pursuing a plan to transfer all of our RNAi therapeutics assets into a newly-formed subsidiary to accelerate the development and commercialization of drugs based on RNAi technology |
| Although we believe that this structure may facilitate our obtaining additional financing to pursue our RNAi development efforts, we have no commitments or arrangements for any financing, and there is no assurance that we will be able to obtain financing for this purpose |
| Our planned RNAi subsidiary will be only partially owned by us |
| Depending upon the amount and terms of its future financing activities, we may not control the subsidiary, or may share control with other shareholders whose interests may not be directly aligned with ours |
| It also is possible that any products developed by the RNAi subsidiary could eventually compete with our products for some disease indications, such as ALS, type 2 diabetes and obesity |
| The Drug Candidates Acquired from Biorex May Not Obtain Regulatory Marketing Approvals On October 4, 2004, we acquired all of the clinical and pharmaceutical assets and related intellectual property of Biorex, including three drug candidates (arimoclomol, iroxanadine and bimoclomol), and a library of small molecule drug candidates |
| Although each of arimoclomol, iroxanadine and bimoclomol has undergone clinical testing, significant and costly additional testing will be required in order to bring any product to market |
| We may be unable to confirm in our pre-clinical or clinical trials with arimoclomol, iroxanadine or bimoclomol the favorable pre-clinical or clinical data previously generated by European investigators for these drug candidates, which could require us to have to modify our development plans for these compounds |
| In September 2005, we initiated Phase II clinical testing for arimoclomol for ALS There are no assurances that the clinical testing will be successful, or that the FDA will permit us to commence our planned Phase IIb clinical trial upon the completion of our ongoing Phase IIa clinical trial |
| Any additional requirements imposed by the FDA in connection with the ongoing Phase IIa trial, or in connection with our planned Phase IIb trial, could add further time and expense for us to carry out this trial |
| We believe that the FDA may accept the completion of a successful Phase II clinical program as sufficient to enable us to submit a New Drug Application, or NDA; however there are no assurances that the FDA will accept our Phase II program in lieu of a Phase III clinical trial |
| If the FDA requires us to complete a Phase III clinical trial, the cost of development of arimoclomol will increase significantly beyond our estimated costs, and the time to completion of clinical testing would be delayed |
| In addition, the FDA ultimately could require us to achieve an efficacy end point in the clinical trials for arimoclomol that could be more difficult, expensive and time-consuming 16 _________________________________________________________________ [61]Table of Contents than our planned end point |
| Although we anticipate developing arimoclomol for the treatment of ALS, arimoclomol has also shown therapeutic efficacy in a preclinical animal model of diabetes and we may pursue development of arimoclomol for diabetic indications |
| However, such development would require significant and costly additional testing |
| There is no guarantee that arimoclomol would show any efficacy for any other indications |
| Iroxanadine has been tested in two Phase I clinical trials and one Phase II clinical trial which showed improvement in the function of endothelial cells in blood vessels of patients at risk of cardiovascular disease |
| We intend to develop this product to improve endothelial dysfunction in indications such as diabetic retinopathy and wound healing, which will require significant and costly additional testing |
| There is no guarantee that iroxanadine will show any efficacy in the intended uses we are seeking |
| We may also attempt to license iroxanadine to larger pharmaceutical or biotechnology companies for cardiovascular indications; however, there is no guarantee that any such company will be interested in licensing iroxanadine from us or on terms that are favorable to us |
| Bimoclomol has been tested in two Phase II clinical trials where it was shown to be safe, but where it did not show efficacy for diabetic neuropathy, the indication for which it was tested |
| We intend to develop this compound for other therapeutic indications; however there can be no guarantee that this compound will be effective in treating any diseases |
| In addition, the FDA may require us to perform new safety clinical trials, which would be expensive and time consuming and would delay development of bimoclomol |
| There is no guarantee that any additional clinical trials will be successful or that the FDA will approve any of these products and allow us to begin selling them in the United States |
| Our Obesity and Type 2 Diabetes Laboratory May Not Be Able to Develop Products In order to develop new obesity and type 2 diabetes products, we will first need to identify appropriate drug targets and pathways |
| We are using novel RNAi-based techniques to accelerate this process, but there is no assurance that these techniques will accelerate our work or that we will be able to identify highly promising targets or pathways using these techniques or otherwise |
| Even if we are successful in identifying these targets or pathways, we will need to then develop proprietary molecules that are safe and effective against these targets |
| The development process and the clinical testing of our potential products will take a lengthy period of time and involve expenditures substantially in excess of our current financial resources that are available for this purpose |
| We are currently seeking a strategic alliance with a major pharmaceutical or biotechnology company to complete the development, clinical testing and manufacturing and marketing of our potential obesity and type 2 diabetes products, which are at an early stage of development, but we may not be able to secure such a strategic partner on attractive terms or at all |
| Accordingly, we will be heavily dependent on the prior experience and current efforts of Dr |
| Michael P Czech, the Chairman of our Scientific Advisory Board, Dr |
| Mark A Tepper, our Senior Vice President — Drug Discovery, in establishing our scientific goals and strategies |
| We Will Be Reliant Upon SynthRx to Develop and Commercialize Flocor In June 2004, we licensed Flocor and our other co-polymer technologies to SynthRx and acquired a 19dtta9prca equity interest in that newly formed biopharmaceutical company |
| SynthRx has only limited financial resources and will have to either raise significant additional capital or secure a licensee or strategic partner to complete the development and commercialization of Flocor and these other technologies |
| We are not aware that SynthRx has any commitments from third parties to provide the capital that it will require, and there can be no assurance that it will be able to obtain this capital or a licensee or strategic partner on satisfactory terms or at all |
| Our prior Phase III clinical trial of Flocor for the treatment of sickle cell disease patients experiencing an acute vaso-occlusive crisis did not achieve its primary objective |
| However, in this study, for patients 15 years of age or younger, the number of patients achieving a resolution of crisis was higher for Flocor-treated patients at all time periods than for placebo-treated patients, which may indicate that future clinical trials should focus on juvenile patients |
| Generating sufficient data to seek FDA approval for Flocor will require additional clinical studies which have not yet been funded or commenced by SynthRx, and those studies will entail substantial time and expense for 17 _________________________________________________________________ [62]Table of Contents SynthRx |
| The manufacture of Flocor involves obtaining new raw drug substance and a supply of the purified drug from the raw drug substance, which requires specialized equipment |
| Should SynthRx encounter difficulty in obtaining the purified drug substance in sufficient amounts and at acceptable prices, SynthRx may be unable to complete the development or commercialization of Flocor on a timely basis or at all |
| We Are Subject to Intense Competition That Could Materially Impact Our Operating Results We and our strategic partners or licensees may be unable to compete successfully against our current or future competitors |
| The pharmaceutical, biopharmaceutical and biotechnology industry is characterized by intense competition and rapid and significant technological advancements |
| Many companies, research institutions and universities are working in a number of areas similar to our primary fields of interest to develop new products |
| There also is intense competition among companies seeking to acquire products that already are being marketed |
| Many of the companies with which we compete have or are likely to have substantially greater research and product development capabilities and financial, technical, scientific, manufacturing, marketing, distribution and other resources than at least some of our present or future strategic partners or licensees |
| As a result, these competitors may: • Succeed in developing competitive products sooner than us or our strategic partners or licensees |
| • Obtain FDA and other regulatory approvals for their products before approval of any of our products |
| • Obtain patents that block or otherwise inhibit the development and commercialization of our product candidates |
| • Develop products that are safer or more effective than our products |
| • Devote greater resources to marketing or selling their products |
| • Introduce or adapt more quickly to new technologies or scientific advances |
| • Introduce products that render our products obsolete |
| • Withstand price competition more successfully than us or our strategic partners or licensees |
| • Negotiate third-party strategic alliances or licensing arrangements more effectively |
| • Take advantage of other opportunities more readily |
| A number of medical institutions and pharmaceutical companies are seeking to develop products based on gene silencing technologies |
| Companies working in this area include Sirna Therapeutics, Alnylam Pharmaceuticals, Acuity Pharmaceuticals, Nastech Pharmaceutical Company Inc, Nucleonics, Inc, Benitec Ltd |
| and a number of the multinational pharmaceutical companies |
| A number of products currently are being marketed by a variety of the multinational or other pharmaceutical companies for treating type II diabetes, including among others the diabetes drugs Avandia^® by Glaxo SmithKline PLC, Actos^® by Eli Lilly & Co, Glucophage^® by Bristol-Myers Squibb Co, Symlin^® by Amylin Pharmaceuticals, Inc |
| and Starlix^® by Novartis and the obesity drugs Acomplia^® by Sanofi-Aventis SA, Xenical^® by F Hoffman-La Roche Ltd |
| and Meridia^® by Abbott Laboratories |
| Many major pharmaceutical companies are also seeking to develop new therapies for these disease indications |
| Companies developing HIV vaccines that could compete with our HIV vaccine technology include Merck, VaxGen, Inc, AlphaVax, Inc |
| 18 _________________________________________________________________ [63]Table of Contents Currently, Rilutek^®, which was developed by Aventis Pharma AG, is the only drug of which we are aware that has been approved by the FDA for the treatment of ALS Other companies are working to develop pharmaceuticals to treat ALS, including Aeolus Pharmaceuticals, Ono Pharmaceuticals, Trophos SA, FaustPharmaceuticals SA and Oxford BioMedica plc |
| In addition, ALS belongs to a family of diseases called neurodegenerative diseases, which includes Alzheimer’s, Parkinson’s and Huntington’s disease |
| Due to similarities between these diseases, a new treatment for one ailment potentially could be useful for treating others |
| There are many companies that are producing and developing drugs used to treat neurodegenerative diseases other than ALS, including Amgen, Inc, Cephalon, Inc, Ceregene, Inc, Elan Pharmaceuticals, plc, H Lundbeck A/S, Phytopharm plc, and Schwarz Pharma AG Although we do not expect Flocor to have direct competition from other products currently available or that we are aware of that are being developed related to Flocor’s ability to reduce blood viscosity in the cardiovascular area, there are a number of anticoagulant products that Flocor would have to compete against, such as tissue plasminogen activator, or t-PA, and streptokinase (blood clot dissolving enzymes) as well as blood thinners such as heparin and coumatin, even though Flocor acts by a different mechanism to prevent damage due to blood coagulation |
| In the sickle cell disease area, Flocor would compete against companies that are developing or marketing other products to treat sickle cell disease, such as Droxia^® (hydroxyurea) marketed by Bristol-Myers Squibb Co |
| and Dacogen^tm, which is being developed by SuperGen, Inc |
| Our TranzFect technology will compete against a number of companies that have developed adjuvant products, such as the adjuvant QS-21^tm marketed by Antigenics, Inc |
| and adjuvants marketed by Corixa Corp |
| We Do Not Have the Ability to Manufacture Any of Our Products and Will Need to Rely upon Third Parties for the Manufacture of Our Clinical and Commercial Product Supplies We do not currently have the facilities or expertise to manufacture any of the clinical or commercial supplies of any of our products, including the supply of arimoclomol used in our Phase II clinical trials |
| Accordingly, we are and will be dependent upon contract manufacturers or our strategic alliance partners to manufacture these supplies, or we will need to acquire the ability to manufacture these supplies ourselves, which could be very difficult, time-consuming and costly |
| We have a manufacturing supply arrangement in place with respect to the clinical supplies for both the Phase IIa and Phase IIb trials for arimoclomol for ALS We do not otherwise have manufacturing supply arrangements for our other product candidates, including any of the licensed RNAi technology, the other drug candidates acquired from Biorex or, with the exception of the clinical supplies for the current Phase I trial, the HIV vaccine product that utilizes the HIV vaccine technology that we have licensed from UMMS There can be no assurance that we will be able to secure needed manufacturing supply arrangements, or acquire the ability to manufacture the products ourselves, on attractive terms or at all |
| Delays in, or a failure to, secure these arrangements or abilities could have a materially adverse effect on our ability to complete the development of our products or to commercialize them |
| We May Be Unable to Protect Our Intellectual Property Rights, Which Could Adversely Affect the Value of Our Assets We believe that obtaining and maintaining patent and other intellectual property rights for our technologies and potential products is critical to establishing and maintaining the value of our assets and our business |
| Although we believe that we have significant patent coverage for the technologies that we acquired from Biorex and for our TranzFect technologies, there can be no assurance that this coverage will be broad enough to prevent third parties from developing or commercializing similar or identical technologies, that the validity of our patents will be upheld if challenged by third parties or that our technologies will not be deemed to infringe the intellectual property rights of third parties |
| In particular, although we conducted certain due diligence regarding the patents and patent applications acquired from Biorex and received certain representations and warranties from Biorex in connection with the acquisition, the patents and patent applications acquired from Biorex were issued or filed, as applicable, prior to our acquisition and thus there can be no assurance that the validity, enforceability and ownership of those patents and patent applications will be upheld if challenged by third parties |
| We have a nonexclusive license to a patent owned by UMMS and the Carnegie Institution of Washington that claims various aspects of gene silencing, or genetic inhibition by double-stranded RNA, but there can be no assurance that this patent will withstand possible 19 _________________________________________________________________ [64]Table of Contents third-party challenges or otherwise protect our technologies from competition |
| The medical applications of the gene silencing technology and the other technologies that we have licensed from the UMMS also are claimed in a number of pending patent applications, but there can be no assurance that these applications will result in any issued patents or that those patents will withstand third-party challenges or protect our technologies from competition |
| Moreover, we are aware of at least one other issued United States patent claiming broad applications for RNAi, and many patent applications covering different methods and compositions in the field of RNAi therapeutics have been and are expected to be filed, and certain organizations or researchers may hold or seek to obtain patents that could make it more difficult or impossible for us to develop products based on the gene silencing technology that we have licensed |
| We are aware that at least one of our competitors is seeking patent coverage in the RNAi field that could restrict our ability to develop certain RNAi-based therapeutics |
| Any litigation brought by us to protect our intellectual property rights or by third parties asserting intellectual property rights against us, or challenging our patents, could be costly and have a material adverse effect on our operating results or financial condition, make it more difficult for us to enter into strategic alliances with third parties to develop our products, or discourage our existing licensees from continuing their development work on our potential products |
| If our patent coverage is insufficient to prevent third parties from developing or commercializing similar or identical technologies, the value of our assets is likely to be materially and adversely affected |
| We are sponsoring research at UMMS and Massachusetts General Hospital under agreements that give us certain rights to acquire licenses to inventions, if any, that arise from that research, and we may enter into additional research agreements with those institutions, or others, in the future |
| We also have a collaboration and invention disclosure agreement with UMMS under which UMMS has agreed to disclose to us certain inventions it makes and to give us an option to negotiate licenses to the disclosed technologies |
| There can be no assurance, however, that any such inventions will arise, that we will be able to acquire licenses to any inventions under satisfactory terms or at all, or that any licenses will be useful to us commercially |
| We May Incur Substantial Costs from Future Clinical Testing or Product Liability Claims If any of our products are alleged to be defective, they may expose us to claims for personal injury by patients in clinical trials of our products or by patients using our commercially marketed products |
| Even if the commercialization of one or more of our products is approved by the FDA, users may claim that such products caused unintended adverse effects |
| We currently do not carry product liability insurance covering the commercial marketing of these products |
| We have obtained clinical trial insurance for our recently-initiated Phase IIa clinical trial with arimoclomol for the treatment of ALS and will seek to obtain such insurance for any other clinical trials that we conduct, including the planned Phase IIb clinical trial for arimoclomol, as well as liability insurance for any products that we market, although there can be no assurance that we will be able to obtain additional insurance in the amounts we seek or at all |
| We anticipate that our licensees who are developing our products will carry liability insurance covering the clinical testing and marketing of those products |
| However, if someone asserts a claim against us and our insurance or the insurance coverage of our licensees or if their other financial resources are inadequate to cover a successful claim, such successful claim could have a material adverse effect on our financial condition or cause us to discontinue operations |
| Even if claims asserted against us are unsuccessful, they may divert management’s attention from our operations and we may have to incur substantial costs to defend such claims |
| Compliance with Requirements of Section 404 of the Sarbanes-Oxley Act of 2002 Will Increase Our Costs and Require Additional Management Resources, and We May Not Successfully Comply As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the SEC adopted rules requiring public companies to include a report of management on the company’s internal controls over financial reporting in their annual reports on Form 10-K In addition, the independent registered public accounting firm auditing the company’s financial statements must attest to and report on management’s assessment of the effectiveness of the company’s internal controls over financial reporting |
| Although the SEC has postponed the effectiveness of this requirement several times, if the SEC does not postpone or otherwise alter the requirement again, then we expect that it will first apply to our annual report on Form 10-K for our fiscal year ending December 31, 2006 |
| If we are required to comply, we will incur significant legal, accounting, and other expenses and compliance will occupy a substantial 20 _________________________________________________________________ [65]Table of Contents amount of time of our board of directors and management |
| Uncertainty exists regarding our ability to comply with these requirements by the SEC’s current deadlines |
| If we are unable to complete the required assessment as to the adequacy of our internal control reporting or if we conclude that our internal controls over financial reporting are not effective or if our independent registered public accounting firm is unable to provide us with an unqualified report as to the effectiveness of our internal controls over financial reporting as of December 31, 2006 and future year ends, investors could lose confidence in the reliability of our financial reporting |
| In addition, while we plan to expand our staff to assist in complying with the additional requirements when and if they become applicable, we may encounter substantial difficulty attracting qualified staff with requisite experience due to the high level of competition for experienced financial professionals |
| Our Anti-Takeover Provisions May Make It More Difficult to Change Our Management or May Discourage Others From Acquiring Us and Thereby Adversely Affect Stockholder Value We have a stockholder rights plan and provisions in our bylaws that may discourage or prevent a person or group from acquiring us without the approval of our board of directors |
| The intent of the stockholder rights plan and our bylaw provisions is to protect our stockholders’ interests by encouraging anyone seeking control of our company to negotiate with our board of directors |
| We have a classified board of directors, which requires that at least two stockholder meetings, instead of one, will be required to effect a change in the majority control of our board of directors |
| This provision applies to every election of directors, not just an election occurring after a change in control |
| The classification of our board increases the amount of time it takes to change majority control of our board of directors and may cause our potential purchasers to lose interest in the potential purchase of us, regardless of whether our purchase would be beneficial to us or our stockholders |
| The additional time and cost to change a majority of the members of our board of directors makes it more difficult and may discourage our existing stockholders from seeking to change our existing management in order to change the strategic direction or operational performance of our company |
| Our bylaws provide that directors may only be removed for cause by the affirmative vote of the holders of at least a majority of the outstanding shares of our capital stock then entitled to vote at an election of directors |
| This provision prevents stockholders from removing any incumbent director without cause |
| Our bylaws also provide that a stockholder must give us at least 120 days notice of a proposal or director nomination that such stockholder desires to present at any annual meeting or special meeting of stockholders |
| Such provision prevents a stockholder from making a proposal or director nomination at a stockholder meeting without us having advance notice of that proposal or director nomination |
| This could make a change in control more difficult by providing our directors with more time to prepare an opposition to a proposed change in control |
| By making it more difficult to remove or install new directors, the foregoing bylaw provisions may also make our existing management less responsive to the views of our stockholders with respect to our operations and other issues such as management selection and management compensation |
| Our Outstanding Options and Warrants and the Registrations of Our Shares Issued in the Global Genomics Merger and Our Recent Private Financings May Adversely Affect the Trading Price of Our Common Stock As of December 31, 2005, there were outstanding stock options and warrants to purchase approximately 24dtta7 million shares of our common stock at exercise prices ranging from dlra0dtta20 to dlra2dtta73 per share |
| Our outstanding options and warrants could adversely affect our ability to obtain future financing or engage in certain mergers or other transactions, since the holders of options and warrants can be expected to exercise them at a time when we may be able to obtain additional capital through a new offering of securities on terms more favorable to us than the terms of outstanding options and warrants |
| For the life of the options and warrants, the holders have the opportunity to profit from a rise in the market price of our common stock without assuming the risk of ownership |
| To the extent the trading price of our common stock at the time of exercise of any such options or warrants exceeds the exercise price, such exercise will also have a dilutive effect on our stockholders |
| In addition, warrants issued in connection with our financings in 2003 contain anti-dilution provisions that are triggered upon certain events, including any issuance of securities by us below the market price |
| In the event that those anti-dilution provisions are triggered by us in the future, we would be required to reduce the exercise price, and increase the number of shares underlying, 21 _________________________________________________________________ [66]Table of Contents those warrants, which would have a dilutive effect on our stockholders |
| In August 2003, we registered with the SEC for resale by the holders a total of 14cmam408cmam252 shares of our outstanding common stock and an additional 3cmam848cmam870 shares of our common stock issuable upon exercise of outstanding options and warrants, which shares and options and warrants were issued primarily in connection with our merger with Global Genomics and the dlra5dtta4 million private equity financing that we completed in May 2003 |
| In December 2003, we registered a total of 6cmam113cmam448 shares of our common stock, consisting of the 5cmam175cmam611 shares issued, or that are issuable upon exercise of the warrants issued, in connection with the dlra8dtta7 million private equity financing that we completed in September 2003, and an additional 937cmam837 shares of our common stock that we issued, or that are issuable upon the exercise of warrants that we issued, to certain other third parties |
| In November 2004, we registered 4cmam000cmam000 shares of our common stock and an additional 3cmam080cmam000 shares of our common stock issuable upon the exercise of warrants in connection with the dlra4cmam000cmam000 private equity financing that we completed in October 2004, and an additional 1cmam550cmam000 shares of our common stock issued or issuable upon exercise of warrants to other third parties |
| In February 2005, we registered 17cmam334cmam494 shares of our common stock and an additional 9cmam909cmam117 shares of our common stock issuable upon the exercise of warrants in connection with the dlra21dtta3 million private equity financing that we completed in January 2005 |
| In April 2006, we expect to file a registration statement to register 10cmam650cmam794 shares of our common stock and an additional 5cmam325cmam397 shares of our common stock issuable upon the exercise of warrants in connection with the dlra13dtta4 million private equity financing that we completed in March 2006 |
| Both the availability for public resale of these various shares and the actual resale of these shares could adversely affect the trading price of our common stock |
| We May Issue Preferred Stock in the Future, and the Terms of the Preferred Stock May Reduce the Value of Our Common Stock We are authorized to issue up to 5cmam000cmam000 shares of preferred stock in one or more series |
| Our board of directors may determine the terms of future preferred stock offerings without further action by our stockholders |
| If we issue preferred stock, it could affect your rights or reduce the value of our outstanding common stock |
| In particular, specific rights granted to future holders of preferred stock may include voting rights, preferences as to dividends and liquidation, conversion and redemption rights, sinking fund provisions, and restrictions on our ability to merge with or sell our assets to a third party |
| Changes in Stock Option Accounting Rules May Adversely Impact Our Reported Operating Results, Our Stock Price and Our Competitiveness in the Employee Marketplace In December 2004, the Financial Accounting Standards Board published new rules that will require companies in 2005 to record all stock-based employee compensation as an expense |
| The new rules apply to stock options grants, as well as a range of other stock-based compensation arrangements, including restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans |
| We will have to apply the new financial accounting rules beginning in the first quarter of 2006 |
| We have depended in the past upon compensating our officers, directors, employees and consultants with such stock-based compensation awards in order to limit our cash expenditures and to attract and retain officers, directors, employees and consultants |
| Accordingly, if we continue to grant stock options or other stock-based compensation awards to our officers, directors, employees, and consultants after the new rules apply to us, our future earnings, if any, will be reduced (or our future losses will be increased) by the expenses recorded for those grants |
| The expenses we may have to record as a result of future options grants may be significant and may materially negatively affect our reported financial results |
| The adverse effects that the new accounting rules may have on our future financial statements should we continue to rely heavily on stock-based compensation may reduce our stock price and make it more difficult for us to attract new investors |
| In addition, reducing our use of stock plans to reward and incentivize our officers, directors and employees could result in a competitive disadvantage to us in the employee marketplace |
| 22 _________________________________________________________________ [67]Table of Contents We May Experience Volatility in Our Stock Price, Which May Adversely Affect the Trading Price of Our Common Stock The market price of our common stock has experienced significant volatility in the past and may continue to experience significant volatility from time to time |
| Our stock price has ranged from dlra0dtta21 to dlra3dtta74 per share over the past three years |
| Factors such as the following may affect such volatility: • Our quarterly operating results |
| • Announcements of regulatory developments or technological innovations by us or our competitors |
| • Government regulation of drug pricing |
| • Developments in patent or other technology ownership rights |
| Other factors which may affect our stock price are general changes in the economy, financial markets or the pharmaceutical or biotechnology industries |