| DISCOVERY LABORATORIES INC /DE/ ITEM 1A RISK FACTORS The following risks, among others, could cause our actual results, performance, achievements or industry results to differ materially from those expressed in our forward-looking statements contained herein and presented elsewhere by management from time to time |
| We may not successfully develop and market our products, and even if we do, we may not become profitable |
| We currently have no products approved for marketing and sale and are conducting research and development on our product candidates |
| As a result, we have not begun to market or generate revenues from the commercialization of any of our products |
| Our long-term viability will be impaired if we are unable to obtain regulatory approval for, or successfully market, our product candidates |
| To date, we have only generated revenues from investments, research grants and collaborative research and development agreements |
| We will need to engage in significant, time-consuming and costly research, development, pre-clinical studies, clinical testing and regulatory approval for our products under development prior to their commercialization |
| In addition, pre-clinical or clinical studies may show that our products are not effective or safe for one or more of their intended uses |
| We may fail in the development and commercialization of our products |
| As of December 31, 2005, we have an accumulated deficit of approximately dlra202dtta0 million and we expect to continue to incur significant increasing operating losses over the next several years |
| If we succeed in the development of our products, we still may not generate sufficient or sustainable revenues or we may not be profitable |
| Our technology platform is based solely on our proprietary precision-engineered surfactant technology |
| Our precision-engineered surfactant technology platform is based on the scientific rationale of using SRT to treat life-threatening respiratory disorders and as the foundation for the development of novel respiratory therapies and products |
| Our business is dependent upon the successful development and approval of our product candidates based on this technology platform |
| Any material problems with our technology platform could have a material adverse effect on our business |
| The regulatory approval process for our products is expensive and time-consuming, and the outcome is uncertain |
| We may not obtain required regulatory approvals for the commercialization of our products |
| In order to sell Surfaxin or any of our other products under development, we must receive regulatory approvals for each product |
| The FDA and foreign regulators extensively and rigorously regulate the testing, manufacture, distribution, advertising, pricing and marketing of drug products like our products |
| This approval process includes preclinical studies and clinical trials of each pharmaceutical compound to establish the safety and effectiveness of each product and the confirmation by the FDA and foreign regulators that the manufacturer of the product maintains good laboratory and manufacturing practices during testing and manufacturing |
| Even if favorable testing data is generated by clinical trials of drug products, the FDA or EMEA may not accept or approve an NDA or MAA filed by a pharmaceutical or biotechnology company for such drug product |
| To market our products outside the United States, we also need to comply with foreign regulatory requirements governing human clinical trials and marketing approval for pharmaceutical products |
| We have filed an NDA with the FDA for Surfaxin for the prevention of RDS in premature infants |
| As part of the review of the Surfaxin NDA, the FDA, in January 2005, issued a Form 483 to our then contract manufacturer, Laureate Pharma, Inc |
| citing inspectional observations related to basic quality controls, process assurances and documentation requirements that support the commercial production process necessary to comply with current good manufacturing practices (cGMPs) |
| The FDA issued an Approvable Letter to us in February 2005 regarding our NDA To address the Form 483 inspectional observations, we and Laureate implemented improved quality systems and documentation controls believed to support the FDA’s regulatory requirements for the approval of Surfaxin |
| In October 2005, the FDA accepted our responses to the Approvable Letter as a complete response thereby establishing April 2006 as its target to complete its review of our NDA Assuming that the corrective actions made to the Surfaxin manufacturing operation in Totowa, NJ are adequate, we anticipate that our NDA will be approved in April 2006 and that the US commercial launch of Surfaxin will occur late in the second quarter of 2006 |
| The FDA, however, might still delay its approval of our NDA or reject our NDA, which would have a material adverse effect on our business |
| In February 2006, we received the Day 180 List of Outstanding Issues from the Committee for Medicinal Products for Human Use (CHMP) in relation to our MAA We plan to submit a written response to all of the CHMP’s outstanding issues in early April 2006 with a possible Oral Explanation before the CHMP in late June 2006 |
| According to standard CHMP procedures, the Committee is expected to make a recommendation on whether to grant a Marketing Authorization for Surfaxin and issue a formal Opinion in late July 2006 |
| ” If the FDA and foreign regulators do not approve our products, we will not be able to market our products |
| The FDA and foreign regulators have not yet approved any of our products under development for marketing in the United States or elsewhere |
| The FDA or a foreign regulator could withdraw any approvals we obtain, if any |
| Further, if there is a later discovery of unknown problems or if we fail to comply with other applicable regulatory requirements at any stage in the regulatory process, the FDA or a foreign regulator may restrict or delay our marketing of a product or force us to make product recalls |
| In addition, the FDA could impose other sanctions such as fines, injunctions, civil penalties or criminal prosecutions |
| Our pending NDA for Surfaxin for the prevention of RDS in premature infants may not be approved by the FDA in a timely manner or at all, which would adversely impact our ability to commercialize this product |
| We submitted an NDA to the FDA for Surfaxin for the prevention of RDS in premature infants |
| Under the Prescription Drug User Fee Act of 1992, or PDUFA, guidelines, we expect that the FDA will complete its review or otherwise respond to this NDA on or about April 6, 2006 |
| In connection with its review, the FDA may request additional information from us, including data from additional clinical trials |
| Ultimately, the FDA may not approve Surfaxin for RDS in premature infants |
| Any failure to obtain FDA approval or further delay associated with the FDA’s review process would adversely impact our ability to commercialize our lead product |
| Even though some of our drug candidates have qualified for expedited review, the FDA may not approve them at all or any sooner than other drug candidates that do not qualify for expedited review |
| The FDA has notified us that two of our intended indications for our precision-engineered SRT, BPD in premature infants and ARDS in adults, have been granted designation as Fast Track products under provisions of the Food and Drug Administration Modernization Act of 1997 |
| Designation as a Fast Track product means that the FDA has determined that the drug is intended for the treatment of a serious or life-threatening condition and demonstrates the potential to address unmet medical needs for such a condition, and that the FDA will facilitate and expedite the development and review of the application for the approval of the product |
| The FDA generally will review an NDA for a drug granted Fast Track designation within six months instead of the typical one to three years |
| Fast Track designation does not accelerate clinical trials nor does it mean that the regulatory requirements are less stringent |
| Our products may cease to qualify for expedited review and our other drug candidates may fail to qualify for Fast Track designation or expedited review |
| Our ongoing clinical trials may be delayed, or fail, which will harm our business |
| Clinical trials generally take two to five years or more to complete |
| Our first product is not expected to be commercially available in the United States until the second quarter of 2006 at the earliest, and our other product candidates will take longer to commercialize |
| Like many biotechnology companies, we may suffer significant setbacks in advanced clinical trials, even after obtaining promising results in earlier trials or in preliminary findings for such clinical trials |
| Data obtained from clinical trials are susceptible to varying interpretations which may delay, limit or prevent regulatory approval |
| In addition, we may be unable to enroll patients quickly enough to meet our expectations for completing any or all of these trials |
| The timing and completion of current and planned clinical trials of our product candidates depend on, among other factors, the rate at which patients are enrolled, which is a function of many factors, including: 15 _________________________________________________________________ · the number of clinical sites; · the size of the patient population; · the proximity of patients to the clinical sites; · the eligibility and enrollment criteria for the study; · the existence of competing clinical trials; · the existence of alternative available products; and · geographical and geopolitical considerations |
| Delays in patient enrollment in clinical trials may occur, which would likely result in increased costs, program delays or both |
| Patients may also suffer adverse medical events or side effects that are common to those administered with the surfactant class of drugs such as a decrease in the oxygen level of the blood upon administration |
| It is also possible that the FDA or foreign regulators could interrupt, delay or halt any one or more of our clinical trials for any of our product candidates |
| If we or any regulator believe that trial participants face unacceptable health risks, any one or more of our trials could be suspended or terminated |
| We also may not reach agreement with the FDA or a foreign regulator on the design of any one or more of the clinical studies necessary for approval |
| Conditions imposed by the FDA and foreign regulators on our clinical trials could significantly increase the time required for completion of such clinical trials and the costs of conducting the clinical trials |
| In addition to our efforts to commercialize Surfaxin for the prevention of RDS in premature infants, we are currently conducting two clinical trials: a Phase 2 clinical trial to determine the safety and tolerability of administering Surfaxin as a therapeutic approach for the prevention and treatment of BPD in premature infants and a Phase 2 clinical trial to address ARDS in adults |
| We are preparing to conduct multiple Phase 2 pilot studies with Aerosurf for the potential treatment of premature infants in the NICU suffering from neonatal respiratory failure |
| ” The manufacture of our products is a highly exacting and complex process, and if we or one of our materials suppliers encounter problems manufacturing our products, our business could suffer |
| The FDA and foreign regulators require manufacturers to register manufacturing facilities |
| The FDA and foreign regulators also inspect these facilities to confirm compliance with cGMP or similar requirements that the FDA or foreign regulators establish |
| We or our materials suppliers may face manufacturing or quality control problems causing product production and shipment delays or a situation where we or the supplier may not be able to maintain compliance with the FDA’s cGMP requirements, or those of foreign regulators, necessary to continue manufacturing our drug substance |
| Manufacturing or quality control problems have already and may again occur at our Totowa facility or our materials suppliers |
| Any failure to comply with cGMP requirements or other FDA or foreign regulatory requirements could adversely affect our clinical research activities and our ability to market and develop our products |
| In December 2005, we acquired Laureate’s clinical manufacturing facility in Totowa, New Jersey |
| The facility has been qualified to produce appropriate clinical grade material of our drug product for use in our ongoing clinical studies |
| With this acquisition, we now maintain a complete manufacturing facility and we will be manufacturing our products |
| We currently own certain specialized manufacturing equipment, employ certain manufacturing managerial personnel, and we expect to invest in additional manufacturing equipment |
| We may be unable to produce Surfaxin and our other SRT drug candidates to appropriate standards for use in clinical studies |
| If we do not successfully develop our manufacturing capabilities, it will adversely affect the sales of our products |
| 16 _________________________________________________________________ If the parties we depend on for supplying our drug substance raw materials and certain manufacturing-related services do not timely supply these products and services, it may delay or impair our ability to develop, manufacture and market our products |
| We rely on suppliers for our drug substance raw materials and third parties for certain manufacturing-related services in order to produce material that meets appropriate standards for commercial distribution and use in clinical trials of our products |
| To succeed, clinical trials require adequate supplies of drug substance and drug product, which may be difficult or uneconomical to procure or manufacture |
| We and our suppliers and vendors may not be able to (i) produce our drug substance or drug product to appropriate standards for use in clinical studies, (ii) perform under any definitive manufacturing, supply or service agreements with us or (iii) remain in business for a sufficient time to successfully produce and market our product candidates |
| If we do not maintain important manufacturing and service relationships, we may fail to find a replacement supplier or required vendor or develop our own manufacturing capabilities which could delay or impair our ability to obtain regulatory approval for our products and substantially increase our costs or deplete profit margins, if any |
| If we do find replacement manufacturers and vendors, we may not be able to enter into agreements with them on terms and conditions favorable to us and, there could be a substantial delay before a new facility could be qualified and registered with the FDA and foreign regulatory authorities |
| We will need additional capital and our ability to continue all of our existing planned research and development activities is uncertain |
| Any additional financing could result in equity dilution |
| We will need substantial additional funding to conduct our presently planned research and product development activities |
| Based on our current operating plan, we believe that our currently available working capital will be adequate to satisfy our capital needs into the second half of 2006 |
| Our future capital requirements will depend on a number of factors that are uncertain, including the results of our research and development activities, clinical studies and trials, competitive and technological advances and the regulatory process, among others |
| We will likely need to raise substantial additional funds through collaborative ventures with potential corporate partners and through additional debt or equity financings |
| We may in some cases elect to develop products on our own instead of entering into collaboration arrangements |
| This would increase our cash requirements for research and development |
| We have not entered into arrangements to obtain any additional financing, except for the CEFF with Kingsbridge, our revolving credit facility with PharmaBio and our capital equipment lease financing arrangement with GECC Any additional financing could include unattractive terms or result in significant dilution of stockholders’ interests and share prices may decline |
| If we fail to enter into collaborative ventures or to receive additional funding, we may have to delay, scale back or discontinue certain of our research and development operations, and consider licensing the development and commercialization of products that we consider valuable and which we otherwise would have developed ourselves |
| If we are unable to raise required capital, we may be forced to limit many, if not all, of our research and development programs and related operations, curtail commercialization of our product candidates and, ultimately, cease operations |
| See also Item 1A: “Risk Factors - Our Committed Equity Financing Facility may have a dilutive impact on our stockholders |
| ” Furthermore, if the market price of our common stock declines as a result of the dilutive aspects of such potential financings, we could cease to meet the financial requirements to maintain the listing of our securities on The NASDAQ National Market |
| See Item 1A: “Risk Factors The market price of our stock may be adversely affected by market volatility |
| ” Our Committed Equity Financing Facility may have a dilutive impact on our stockholders |
| There are 10cmam962cmam651 shares of our common stock that are reserved for issuance under the CEFF arrangement with Kingsbridge, 375cmam000 of which are issuable under the warrant we granted to Kingsbridge |
| The issuance of shares of our common stock under the CEFF and upon exercise of the warrant will have a dilutive impact on our other stockholders and the issuance or even potential issuance of such shares could have a negative effect on the market price of our common stock |
| In addition, if we access the CEFF, we will issue shares of our common stock to Kingsbridge at a discount of between 6prca and 10prca of the daily volume weighted average price of our common stock during a specified period of trading days after we access the CEFF Issuing shares at a discount will further dilute the interests of other stockholders |
| In 2005, dlra20dtta2 million was successfully raised under the CEFF in two separate financings over 15 day periods in September and November, respectively |
| We anticipate using additional portions of the available CEFF during 2006 to support manufacturing, development and commercialization activities associated with our potential US commercial launch of Surfaxin late in the second quarter of 2006 |
| 17 _________________________________________________________________ To the extent that Kingsbridge sells shares of our common stock issued under the CEFF to third parties, our stock price may decrease due to the additional selling pressure in the market |
| The perceived risk of dilution from sales of stock to or by Kingsbridge may cause holders of our common stock to sell their shares, or it may encourage short sales of our common stock or other similar transactions |
| This could contribute to a decline in the stock price of our common stock |
| We may not be able to meet the conditions we are required to meet under CEFF and we may not be able to access any portion of the remaining dlra47dtta6 million available under the CEFF In addition, we are dependent upon the financial ability of Kingsbridge to fund the CEFF Any failure by Kingsbridge to perform its obligations under the CEFF could have a material adverse effect upon us |
| Our strategy, in many cases, is to enter into collaboration agreements with third parties with respect to our products and we may require additional collaboration agreements |
| If we fail to enter into these agreements or if we or the third parties do not perform under such agreements, it could impair our ability to commercialize our products |
| Our strategy for the completion of the required development and clinical testing of our products and for the marketing and commercialization of our products, in many cases, depends upon entering into collaboration arrangements with pharmaceutical companies to market, commercialize and distribute our products |
| Our collaboration arrangement with Esteve for Surfaxin and certain other of our product candidates is focused on key Southern European markets |
| Within these countries, Esteve will be responsible for the development and marketing of Surfaxin for a broader portfolio of indications, including the prevention of RDS in premature infants and ALI/ARDS in adults |
| Esteve will also be responsible for the sponsorship of certain clinical trial costs related to obtaining EMEA approval for commercialization of Surfaxin in Europe for several indications |
| We will be responsible for the remainder of the regulatory activities relating to Surfaxin, including with respect to EMEA filings |
| If we or Esteve breach or terminate the agreements that make up such collaboration arrangements or Esteve otherwise fails to conduct their Surfaxin-related activities in a timely manner or if there is a dispute about their obligations, we may need to seek other partners or we may have to develop our own internal sales and marketing capability for the indications of Surfaxin |
| Accordingly, we may need to enter into additional collaboration agreements and our success, particularly outside of the United States, may depend upon obtaining additional collaboration partners |
| In addition, we may depend on our collaborators’ expertise and dedication of sufficient resources to develop and commercialize our proposed products |
| In December, 2005, we entered into a Strategic Alliance Agreement with Chrysalis to develop and commercialize aerosolized SRT to address a broad range of serious respiratory conditions |
| Under the agreement, we have exclusive rights to Chrysalis’ proprietary aerosolization technology for use with pulmonary surfactants for all respiratory diseases and conditions in hospital and ambulatory settings |
| Chrysalis will assist with the development of certain combination drug-device surfactant products, and provide certain additional consultative services to us in connection with combination drug-device surfactant products, provided that certain terms and conditions are satisfied |
| Additionally, Chrysalis is responsible for developing the design for the aerosol device platform, patient interface and disposable dose packets |
| We are responsible for aerosolized SRT drug formulations, clinical and regulatory activities, and the manufacturing and commercialization of the drug-device products |
| We may, in the future, grant to collaboration partners rights to license and commercialize pharmaceutical products developed under collaboration agreements |
| Under these arrangements, our collaboration partners may control key decisions relating to the development of the products |
| The rights of our collaboration partners would limit our flexibility in considering alternatives for the commercialization of our products |
| If we fail to successfully develop these relationships or if our collaboration partners fail to successfully develop or commercialize any of our products, it may delay or prevent us from developing or commercializing our products in a competitive and timely manner and would have a material adverse effect on the commercialization of Surfaxin |
| See Item 1A: “Risk Factors - Our limited sales and marketing experience may restrict our success in commercializing our product candidates |
| ” 18 _________________________________________________________________ If we cannot protect our intellectual property, other companies could use our technology in competitive products |
| If we infringe the intellectual property rights of others, other companies could prevent us from developing or marketing our products |
| We seek patent protection for our drug candidates so as to prevent others from commercializing equivalent products in substantially less time and at substantially lower expense |
| The pharmaceutical industry places considerable importance on obtaining patent and trade secret protection for new technologies, products and processes |
| Our success will depend in part on our ability and that of parties from whom we license technology to: · defend our patents and otherwise prevent others from infringing on our proprietary rights; · protect trade secrets; and · operate without infringing upon the proprietary rights of others, both in the United States and in other countries |
| The patent position of firms relying upon biotechnology is highly uncertain and involves complex legal and factual questions for which important legal principles are unresolved |
| To date, the United States Patent and Trademark Office has not adopted a consistent policy regarding the breadth of claims that the United States Patent and Trademark Office allows in biotechnology patents or the degree of protection that these types of patents afford |
| Even if we obtain patents to protect our products, those patents may not be sufficiently broad and others could compete with us |
| We, and the parties licensing technologies to us, have filed various United States and foreign patent applications with respect to the products and technologies under our development, and the United States Patent and Trademark Office and foreign patent offices have issued patents with respect to our products and technologies |
| These patent applications include international applications filed under the Patent Cooperation Treaty |
| Our pending patent applications, those we may file in the future or those we may license from third parties may not result in the United States Patent and Trademark Office or foreign patent office issuing patents |
| Also, if patent rights covering our products are not sufficiently broad, they may not provide us with sufficient proprietary protection or competitive advantages against competitors with similar products and technologies |
| Furthermore, if the United States Patent and Trademark Office or foreign patent offices issue patents to us or our licensors, others may challenge the patents or circumvent the patents, or the patent office or the courts may invalidate the patents |
| Thus, any patents we own or license from or to third parties may not provide any protection against competitors |
| Furthermore, the life of our patents is limited |
| We have licensed a series of patents from Johnson & Johnson and its wholly owned subsidiary, Ortho Pharmaceutical Corporation, which are important, either individually or collectively, to our strategy of commercializing our surfactant technology |
| Such patents, which include relevant European patents, expire on various dates beginning in 2009 and ending in 2017 or, in some cases, possibly later |
| We have filed, and when possible and appropriate, will file, other patent applications with respect to our products and processes in the United States and in foreign countries |
| We may not be able to develop additional products or processes that will be patentable or additional patents may not be issued to us |
| See also Item 1A: “Risk Factors - If we cannot meet requirements under our license agreements, we could lose the rights to our products |
| ” Intellectual property rights of third parties could limit our ability to develop and market our products |
| Our commercial success also significantly depends on our ability to operate without infringing the patents or violating the proprietary rights of others |
| The United States Patent and Trademark Office keeps United States patent applications confidential while the applications are pending |
| As a result, we cannot determine which inventions third parties claim in pending patent applications that they have filed |
| We may need to engage in litigation to defend or enforce our patent and license rights or to determine the scope and validity of the proprietary rights of others |
| It will be expensive and time consuming to defend and enforce patent claims |
| Thus, even in those instances in which the outcome is favorable to us, the proceedings can result in the diversion of substantial resources from our other activities |
| An adverse determination may subject us to significant liabilities or require us to seek licenses that third parties may not grant to us or may only grant at rates that diminish or deplete the profitability of the products to us |
| An adverse determination could also require us to alter our products or processes or cease altogether any related research and development activities or product sales |
| 19 _________________________________________________________________ If we cannot meet requirements under our license agreements, we could lose the rights to our products |
| We depend on licensing agreements with third parties to maintain the intellectual property rights to our products under development |
| Presently, we have licensed rights from Johnson & Johnson, Ortho Pharmaceutical and Chrysalis |
| These agreements require us to make payments and satisfy performance obligations in order to maintain our rights under these licensing agreements |
| All of these agreements last either throughout the life of the patents, or with respect to other licensed technology, for a number of years after the first commercial sale of the relevant product |
| In addition, we are responsible for the cost of filing and prosecuting certain patent applications and maintaining certain issued patents licensed to us |
| If we do not meet our obligations under our license agreements in a timely manner, we could lose the rights to our proprietary technology |
| Finally, we may be required to obtain licenses to patents or other proprietary rights of third parties in connection with the development and use of our products and technologies |
| Licenses required under any such patents or proprietary rights might not be made available on terms acceptable to us, if at all |
| We rely on confidentiality agreements that could be breached and may be difficult to enforce |
| Although we believe that we take reasonable steps to protect our intellectual property, including the use of agreements relating to the non-disclosure of confidential information to third parties, as well as agreements that purport to require the disclosure and assignment to us of the rights to the ideas, developments, discoveries and inventions of our employees and consultants while we employ them, the agreements can be difficult and costly to enforce |
| Although we seek to obtain these types of agreements from our consultants, advisors and research collaborators, to the extent that they apply or independently develop intellectual property in connection with any of our projects, disputes may arise as to the proprietary rights to this type of information |
| If a dispute arises, a court may determine that the right belongs to a third party, and enforcement of our rights can be costly and unpredictable |
| In addition, we will rely on trade secrets and proprietary know-how that we will seek to protect in part by confidentiality agreements with our employees, consultants, advisors or others |
| Despite the protective measures we employ, we still face the risk that: · these agreements may be breached; · these agreements may not provide adequate remedies for the applicable type of breach; · our trade secrets or proprietary know-how will otherwise become known; · our competitors will independently develop similar technology; or · our competitors will independently discover our proprietary information and trade secrets |
| Our limited sales and marketing experience may restrict our success in commercializing our product candidates |
| We have limited experience in marketing or selling pharmaceutical products and have a limited marketing and sales team |
| To achieve commercial success for Surfaxin, or any other approved product, we must either rely upon our limited marketing and sales force and related infrastructure, or enter into arrangements with others to market and sell our products |
| We expect to rely primarily on our marketing and sales team to market Surfaxin in the United States, if Surfaxin is approved by the FDA Accordingly, we are further developing our marketing and sales team |
| Developing a marketing and sales team to market and sell products is a difficult, significantly expensive and time-consuming process |
| Recruiting, training and retaining qualified sales personnel is critical to our success |
| Competition for skilled personnel is intense, and we may be unable to attract and retain a sufficient number of qualified individuals to successfully launch Surfaxin |
| Additionally, we may not be able to provide adequate incentive to our sales force |
| If we are unable to successfully motivate and expand our marketing and sales force and further develop our sales and marketing capabilities, we will have difficulty selling, maintaining and increasing the sales of our products |
| 20 _________________________________________________________________ We may be unable to establish marketing, sales and distribution capabilities necessary to commercialize and gain market acceptance for Surfaxin or our other product candidates |
| Establishing the expertise necessary to successfully market and sell Surfaxin, or any other product, will require a substantial capital investment |
| We expect to incur significant expenses in developing our marketing and sales team |
| Our ability to make that investment and also execute our current operating plan is dependent on numerous factors, including, the performance of third party collaborators with whom we may contract |
| Accordingly, we may not have sufficient funds to successfully commercialize Surfaxin or any other potential product in the United States or elsewhere |
| We may enter into distribution arrangements and marketing alliances, which could require us to give up rights to our product candidates |
| We may rely on third-party distributors to distribute our products or enter into marketing alliances to sell our products |
| We may not be successful in entering into distribution arrangements and marketing alliances with third parties |
| Our failure to successfully develop a marketing and sales team or to enter into these arrangements on favorable terms could delay or impair our ability to commercialize our product candidates and could increase our costs of commercialization |
| Our dependence on distribution arrangements and marketing alliances to commercialize our product candidates will subject us to a number of risks, including: · we may be required to relinquish important rights to our products or product candidates; · we may not be able to control the amount and timing of resources that our distributors or collaborators may devote to the commercialization of our product candidates; · our distributors or collaborators may experience financial difficulties; · our distributors or collaborators may not devote sufficient time to the marketing and sales of our products thereby exposing us to potential expenses in terminating such distribution agreements; and · business combinations or significant changes in a collaborator’s business strategy may adversely affect a collaborator’s willingness or ability to complete its obligations under any arrangement |
| We may need to enter into additional co-promotion arrangements with third parties where our own sales force is neither well situated nor large enough to achieve maximum penetration in the market |
| We may not be successful in entering into any co-promotion arrangements, and the terms of any co-promotion arrangements may not be favorable to us |
| In addition, if we enter into co-promotion arrangements or market and sell additional products directly, we may need to further expand our sales force and incur additional costs |
| If we fail to enter into arrangements with third parties in a timely manner or if they fail to perform, it could adversely affect sales of our products |
| We and any of our third-party collaborators must also market our products in compliance with federal, state and local laws relating to the providing of incentives and inducements |
| Violation of these laws can result in substantial penalties |
| We have announced our intention to market and sell Surfaxin outside of the United States through one or more marketing partners upon receipt of regulatory approval abroad |
| Although our agreement with Esteve provides for collaborative efforts in directing a global commercialization effort, we have somewhat limited influence over the decisions made by Esteve or their sublicensees or the resources they devote to the marketing and distribution of Surfaxin products in their licensed territory, and Esteve or their sublicensees may not meet their obligations in this regard |
| Our marketing and distribution arrangement with Esteve may not be successful, and we may not receive any revenues from it |
| Also, we may not be able to enter into marketing and sales agreements on acceptable terms, if at all, for Surfaxin in territories not covered by the Esteve agreement, or for any of our other product candidates |
| 21 _________________________________________________________________ We depend upon key employees and consultants in a competitive market for skilled personnel |
| If we are unable to attract and retain key personnel, it could adversely affect our ability to develop and market our products |
| We are highly dependent upon the principal members of our management team, especially our Chief Executive Officer, Dr |
| Capetola, and our directors, as well as our scientific advisory board members, consultants and collaborating scientists |
| A loss of any of these personnel may have a material adverse effect on aspects of our business and clinical development and regulatory programs |
| As of March 14, 2006, we have employment agreements with eight officers expiring in December 2006 |
| Each employment agreement provides that its term shall automatically be extended for one additional year, unless at least 90 days prior to January 1 either party gives notice that it does not wish to extend the agreement |
| Although these employment agreements generally include non-competition covenants and provide for severance payments that are contingent upon the applicable employee’s refraining from competition with us, the applicable noncompete provisions can be difficult and costly to monitor and enforce |
| The loss of any of these persons’ services would adversely affect our ability to develop and market our products and obtain necessary regulatory approvals |
| Further, we do not maintain key-man life insurance |
| Our future success also will depend in part on the continued service of our key scientific and management personnel and our ability to identify, hire and retain additional personnel, including marketing and sales staff |
| We experience intense competition for qualified personnel, and the existence of non-competition agreements between prospective employees and their former employers may prevent us from hiring those individuals or subject us to suit from their former employers |
| While we attempt to provide competitive compensation packages to attract and retain key personnel, some of our competitors are likely to have greater resources and more experience than we have, making it difficult for us to compete successfully for key personnel |
| Our industry is highly competitive and we have less capital and resources than many of our competitors, which may give them an advantage in developing and marketing products similar to ours or make our products obsolete |
| Our industry is highly competitive and subject to rapid technological innovation and evolving industry standards |
| We compete with numerous existing companies intensely in many ways |
| We intend to market our products under development for the treatment of diseases for which other technologies and treatments are rapidly developing and, consequently, we expect new companies to enter our industry and that competition in the industry will increase |
| Many of these companies have substantially greater research and development, manufacturing, marketing, financial, technological, personnel and managerial resources than we have |
| In addition, many of these competitors, either alone or with their collaborative partners, have significantly greater experience than we do in: · developing products; · undertaking preclinical testing and human clinical trials; · obtaining FDA and other regulatory approvals or products; and · manufacturing and marketing products |
| Accordingly, our competitors may succeed in obtaining patent protection, receiving FDA or comparable foreign approval or commercializing products before us |
| If we commence commercial product sales, we will compete against companies with greater marketing and manufacturing capabilities who may successfully develop and commercialize products that are more effective or less expensive than ours |
| These are areas in which, as yet, we have limited or no experience |
| In addition, developments by our competitors may render our product candidates obsolete or noncompetitive |
| Presently, four products are specifically approved for the prevention of RDS in premature infants |
| There are no approved drugs that are specifically indicated for the prevention and treatment of ALI/ARDS in adults and current therapy consists of general supportive care and mechanical ventilation |
| ” 22 _________________________________________________________________ We also face, and will continue to face, competition from colleges, universities, governmental agencies and other public and private research organizations |
| These competitors are becoming more active in seeking patent protection and licensing arrangements to collect royalties for use of technology that they have developed |
| Some of these technologies may compete directly with the technologies that we are developing |
| These institutions will also compete with us in recruiting highly qualified scientific personnel |
| We expect that therapeutic developments in the areas in which we are active may occur at a rapid rate and that competition will intensify as advances in this field are made |
| As a result, we need to continue to devote substantial resources and efforts to research and development activities |
| If we acquire companies, products or technologies, we may face risks associated with those acquisitions |
| If we are presented with appropriate opportunities, we intend to acquire or make other investments in complementary companies, products or technologies |
| We may not realize the anticipated benefit of any acquisition or investment |
| If we acquire companies or technologies, we will likely face risks, uncertainties and disruptions associated with the integration process, including difficulties in the integration of these operations and services of an acquired company, integration of acquired technology with our products, diversion of our management’s attention from other business concerns, the potential loss of key employees or customers of the acquired businesses and impairment charges if future acquisitions are not as successful as we originally anticipate |
| If we fail to successfully integrate other companies, products or technologies that we may acquire, our business could be harmed |
| Furthermore, we may have to incur debt or issue equity securities to pay for any additional future acquisitions or investments, the issuance of which could be dilutive to our existing shareholders |
| In addition, our operating results may suffer because of acquisition-related costs or amortization expenses or charges relating to acquired intangible assets |
| If product liability claims are brought against us, it may result in reduced demand for our products or damages that exceed our insurance coverage |
| The clinical testing of, marketing and use of our products exposes us to product liability claims in the event that the use or misuse of those products causes injury, disease or results in adverse effects |
| Use of our products in clinical trials, as well as commercial sale, could result in product liability claims |
| In addition, sales of our products through third party arrangements could also subject us to product liability claims |
| We presently carry product liability insurance with coverages of up to dlra10 million per occurrence and dlra10 million in the aggregate, an amount we consider reasonable and customary relating to our clinical trials of Surfaxin |
| However, this insurance coverage includes various deductibles, limitations and exclusions from coverage, and in any event might not fully cover any potential claims |
| We may need to obtain additional product liability insurance coverage prior to initiating other clinical trials |
| We expect to obtain product liability insurance coverage before commercialization of our proposed products; however, the insurance is expensive and insurance companies may not issue this type of insurance when we need it |
| We may not be able to obtain adequate insurance in the future at an acceptable cost |
| Any product liability claim, even one that was not in excess of our insurance coverage or one that is meritless and/or unsuccessful, could adversely affect our cash available for other purposes, such as research and development |
| In addition, the existence of a product liability claim could affect the market price of our common stock |
| We expect to face uncertainty over reimbursement and healthcare reform |
| In both the United States and other countries, sales of our products will depend in part upon the availability of reimbursement from third party payors, which include government health administration authorities, managed care providers and private health insurers |
| Third party payors are increasingly challenging the price and examining the cost effectiveness of medical products and services |
| Directors, executive officers, principal stockholders and affiliated entities own a significant percentage of our capital stock, and they may make decisions that you do not consider to be in your best interest |
| As of December 31, 2005, our directors, executive officers, principal stockholders and affiliated entities beneficially owned, in the aggregate, approximately 16prca of our outstanding voting securities |
| As a result, if some or all of them acted together, they would have the ability to exert substantial influence over the election of our Board of Directors and the outcome of issues requiring approval by our stockholders |
| This concentration of ownership may have the effect of delaying or preventing a change in control of our company that may be favored by other stockholders |
| This could prevent transactions in which stockholders might otherwise recover a premium for their shares over current market prices |
| 23 _________________________________________________________________ The market price of our stock may be adversely affected by market volatility |
| The market price of our common stock, like that of many other development stage pharmaceutical or biotechnology companies, has been and is likely to be volatile |
| In addition to general economic, political and market conditions, the price and trading volume of our stock could fluctuate widely in response to many factors, including: · announcements of the results of clinical trials by us or our competitors; · adverse reactions to products; · governmental approvals, delays in expected governmental approvals or withdrawals of any prior governmental approvals or public or regulatory agency concerns regarding the safety or effectiveness of our products; · changes in the United States or foreign regulatory policy during the period of product development; · developments in patent or other proprietary rights, including any third party challenges of our intellectual property rights; · announcements of technological innovations by us or our competitors; · announcements of new products or new contracts by us or our competitors; · actual or anticipated variations in our operating results due to the level of development expenses and other factors; · changes in financial estimates by securities analysts and whether our earnings meet or exceed the estimates; · conditions and trends in the pharmaceutical and other industries; · new accounting standards; and · the occurrence of any of the risks described in this Item 1A Our common stock is listed for quotation on The NASDAQ National Market |
| During the twelve month period ended December 31, 2005, the price of our common stock has ranged from dlra5dtta05 to dlra9dtta15 |
| We expect the price of our common stock to remain volatile |
| The average daily trading volume in our common stock varies significantly |
| For the twelve month period ended December 31, 2005, the average daily trading volume in our common stock was approximately 560cmam000 shares and the average number of transactions per day was approximately 1cmam795 |
| Our relatively low average volume and low average number of transactions per day may affect the ability of our stockholders to sell their shares in the public market at prevailing prices and a more active market may never develop |
| In addition, we may not be able to continue to adhere to the strict listing criteria of the National Market |
| If the common stock were no longer listed on the National Market, investors might only be able to trade on the Nasdaq Capital Market, in the over-the-counter market in the Pink Sheets^® (a quotation medium operated by the National Quotation Bureau, LLC) or on the OTC Bulletin Board^® of the National Association of Securities Dealers, Inc |
| This would impair the liquidity of our securities not only in the number of shares that could be bought and sold at a given price, which might be depressed by the relative illiquidity, but also through delays in the timing of transactions and reduction in media coverage |
| In the past, following periods of volatility in the market price of the securities of companies in our industry, securities class action litigation has often been instituted against companies in our industry |
| If we face securities litigation in the future, even if meritless or unsuccessful, it would result in substantial costs and a diversion of management attention and resources, which would negatively impact our business |
| A substantial number of our securities are eligible for future sale and this could affect the market price for our stock and our ability to raise capital |
| The market price of our common stock could drop due to sales of a large number of shares of our common stock or the perception that these sales could occur |
| As of December 31, 2005, we had 61cmam021cmam694 shares of common stock issued and outstanding |
| 24 _________________________________________________________________ We have a universal shelf registration statement on Form S-3 (File Nodtta 333-128929), filed with the SEC on October 11, 2005, for the proposed offering from time to time of up to dlra100 million of our debt or equity securities, of which dlra80 million is remaining |
| We have no immediate plans to sell any securities under this registration statement |
| However, we may issue securities from time to time in response to market conditions or other circumstances on terms and conditions that will be determined at such time |
| Additionally, there are 10cmam587cmam651 shares of our common stock that are currently reserved for issuance under the CEFF See Item 1A: “Risk Factors - Our Committed Equity Financing Facility may have a dilutive impact on our stockholders |
| ” As of December 31, 2005, up to 10cmam903cmam542 shares of our common stock were issuable upon exercise of outstanding options and warrants |
| Holders of our stock options and warrants are likely to exercise them, if ever, at a time when we otherwise could obtain a price for the sale of our securities that is higher than the exercise price per security of the options or warrants |
| This exercise, or the possibility of this exercise, may impede our efforts to obtain additional financing through the sale of additional securities or make this financing more costly, and may reduce the price of our common stock |
| Provisions of our Certificate of Incorporation, Shareholders Rights Agreement and Delaware law could defer a change of our management which could discourage or delay offers to acquire us |
| Provisions of our Restated Certificate of Incorporation, as amended, our Shareholders Rights Agreement and Delaware law may make it more difficult for someone to acquire control of us or for our stockholders to remove existing management, and might discourage a third party from offering to acquire us, even if a change in control or in management would be beneficial to our stockholders |
| For example, our Restated Certificate of Incorporation, as amended, allows us to issue shares of preferred stock without any vote or further action by our stockholders |
| Our Board of Directors has the authority to fix and determine the relative rights and preferences of preferred stock |
| Our Board of Directors also has the authority to issue preferred stock without further stockholder approval |
| As a result, our Board of Directors could authorize the issuance of a series of preferred stock that would grant to holders the preferred right to our assets upon liquidation, the right to receive dividend payments before dividends are distributed to the holders of common stock and the right to the redemption of the shares, together with a premium, prior to the redemption of our common stock |
| In addition, our Board of Directors, without further stockholder approval, could issue large blocks of preferred stock |
| We have adopted a shareholders rights agreement which under certain circumstances would significantly impair the ability of third parties to acquire control of us without prior approval of our Board of Directors thereby discouraging unsolicited takeover proposals |
| The rights issued under the shareholders rights agreement would cause substantial dilution to a person or group that attempts to acquire us on terms not approved in advance by our Board of Directors |