| GENELABS TECHNOLOGIES INC /CA Item 1A Risk Factors There are a number of risk factors that should be considered by Genelabs’ shareholders and prospective investors |
| It is not possible to comprehensively address all risks that exist, but the following risks in particular should be considered, in addition to other information in this Annual Report on Form 10-K Risks Related to Genelabs We will need to raise additional capital within the next several months, and if we are unable to timely secure adequate funds on acceptable terms, we will be required to cease our operations and will not be able to continue as a going concern |
| On March 15, 2006, Genelabs had cash and cash equivalents totaling approximately dlra8dtta3 million, which we presently estimate can sustain our existing operations only until the beginning of the fourth quarter of 2006 |
| We will need to raise additional capital in order to execute our business plans, provide adequate working capital to satisfy our obligations and continue as a going concern |
| While we are in the process of seeking additional funds, including entering into a new collaboration for our hepatitis C virus drug discovery program, selling equity, renegotiating an existing corporate collaboration, and/or other arrangements, it is possible that none of these efforts to seek additional funds will be successful |
| If these efforts are not successful we will need to terminate operations and you may lose your entire investment |
| If one or more of these efforts are successful, the amount of funds we raise may still not be sufficient for us to sustain operations as planned or at all |
| As of the date of this filing, there is substantial doubt about the Company’s ability to continue as a going concern due to its historical negative cash flow and because the Company does not currently have sufficient committed capital to meet its projected operating needs for at least the next twelve months |
| Additionally, our financial condition may lead our vendors and suppliers to require advance payments or security deposits, further draining our resources, and may result in loss of some of our employees who seek employment elsewhere |
| If we raise additional funds through the issuance of equity, or securities convertible into equity, we may be required to do so at a price per share below then-current trading prices, thereby diluting our current shareholders |
| 11 _________________________________________________________________ [53]Table of Contents We may not be able to obtain additional funds on acceptable terms, or at all |
| Other sources of capital, such as a collaboration or strategic alliance, may require us to grant third parties rights to our intellectual property assets, or require us to adversely renegotiate the terms of one or more of our existing collaborations |
| Although we are currently discussing with third parties a collaboration for our HCV non-nucleoside drug discovery program, we may fail to enter into any agreement on acceptable terms, if at all |
| We also may be unable to find buyers willing to purchase our equity or to license other products or technology on commercially favorable terms, if at all |
| If additional funds are not available we may be required to cease operations |
| In order to maintain its license to use radioactive research materials, Genelabs has established a dlra150cmam000 standby letter of credit in favor of the Radiologic Health Branch of the California Department of Health Services |
| If we our unable to raise additional funds, the letter of credit may be terminated and the radioactive materials license may be suspended or revoked |
| Because we may not continue to qualify for listing on the Nasdaq quotation system, the value of your investment in Genelabs may substantially decrease |
| To remain listed on the Nasdaq Capital Market we must have at least dlra2dtta5 million in shareholders’ equity or a market value of at least dlra35 million |
| Our shareholders’ equity as of December 31, 2005 was dlra2dtta3 million and as of March 15, 2006 the Company’s market value was approximately dlra34 million |
| We currently do not comply with the minimum shareholder’s equity requirement, and will not be able to comply with this requirement unless we are able to increase our shareholders’ equity through a financing or other means |
| We may not be able to maintain compliance with the market capitalization requirement |
| To remain listed on the Nasdaq Capital Market the closing bid price of our stock must be at least dlra1dtta00 per share |
| We may not be able to maintain compliance with the minimum closing bid price requirement |
| If Genelabs is unable to meet or maintain compliance with all of the Nasdaq listing requirements, it will be delisted from the Nasdaq Capital Market |
| If delisted from the Nasdaq Capital Market, Genelabs might apply for listing on the American Stock Exchange |
| Genelabs may fail to meet the requirements for initial listing or may fail to maintain compliance with the continued listing requirements of the American Stock Exchange |
| Delisting from the Nasdaq Capital Market would adversely affect the trading price of our common stock, significantly limit the liquidity of our common stock and impair our ability to raise additional funds |
| We may not be profitable in the near future or at all and in order to carry out our business plans we will require additional funds which may not be available |
| We have incurred losses each year since our inception and have accumulated approximately dlra229 million in net losses through December 31, 2005, including a net loss of dlra10dtta8 million for the year ended December 31, 2005 |
| We may never be profitable and our revenues may never be sufficient to fund operations |
| We presently estimate that our current cash resources are adequate to fund our current operations to approximately the beginning of the fourth quarter of 2006 |
| We will require additional capital to carry out our business plans |
| The following are illustrations of potential impediments to our ability to successfully secure sufficient additional funds: • the current trading price of our stock will materially and adversely affect our ability to raise funds through the issuance of stock; • the amount of stock we may sell and capital we may raise privately without a shareholder vote is limited, and we may be unable to secure capital on a timely basis with acceptable terms if we must submit such a transaction to our shareholders for approval; • the listing of our stock on the Nasdaq Capital Market may materially and adversely affect our ability to raise funds through the issuance of stock because of factors such as reduced liquidity and the requirement to comply with state securities laws; • if we are unable to maintain compliance with the Nasdaq’s listing requirements, our ability to successfully obtain additional equity financing will be negatively impacted; 12 _________________________________________________________________ [54]Table of Contents • since our research programs are in an early stage, there are fewer opportunities to enter into collaborations with other companies and up-front payments for early-stage pharmaceutical research collaborations are generally smaller for projects that are further from potential marketability; • biotechnology research and development projects have a high risk of failure and the failure of our research-stage drug candidates or those of other companies could discourage funding sources from providing us with financing; and • discussions with the Food and Drug Administration have indicated that the Company will need to conduct at least one additional Phase III clinical trial of Prestara in order to qualify for approval, and the Company does not have the funds to conduct the trial |
| Additional funds for our research and development activities may not be available on acceptable terms, if at all |
| The unavailability of additional funds could delay or prevent the development of some or all of our products and technologies, which would have a material adverse effect on our business, financial condition and results of operations |
| The results of our clinical trial of Prestara^tm, Genelabs’ drug candidate for systemic lupus erythematosus, were not positive, substantially decreasing the probability that Prestara will ever be approved for marketing and diminishing our business prospects |
| In order to satisfy conditions set by the US Food and Drug Administration, or FDA, we conducted a Phase III clinical trial of Prestara on women with lupus taking glucocorticoids using BMD as the trial’s primary endpoint |
| Prestara is a pharmaceutical formulation containing highly purified prasterone, the synthetic equivalent of dehydroepiandrosterone or DHEA, a naturally occurring hormone |
| This clinical trial did not demonstrate a statistically significant difference between the bone mineral density of the group of patients taking Prestara and the group taking placebo |
| Additionally, the trial was not powered to demonstrate, and in fact did not demonstrate, a statistically significant benefit in secondary endpoints such as amelioration of lupus symptoms |
| While we believe we have identified most probable causes for the failure of this study to reach its primary endpoint, we may never know with certainty what the cause or causes of this failure were |
| A clinical trial of prasterone (the active ingredient in Prestara) was conducted by Genovate Biotechnology Co, Ltd, or Genovate, a Taiwan-based company that has a license from us for Prestara in most Asian countries |
| In April 2005 we announced that this clinical trial did not meet its primary endpoint, bone mineral density at the lumbar spine |
| Because both our and Genovate’s clinical trials did not meet their primary endpoints, the FDA will not approve Prestara without another Phase III clinical trial |
| It may not be possible to design and implement a trial that would successfully provide results sufficient to obtain FDA approval for Prestara, and Genelabs currently does not have the funds to conduct such a trial |
| Our research programs are in an early stage and may not successfully produce commercial products |
| Pharmaceutical discovery research is inherently high-risk because of the high failure rate of projects |
| To date, our pharmaceutical research has been focused on a limited number of targets for which no or few commercial drugs have been successfully developed |
| Our projects may fail if, among other reasons, the compounds being developed fail to meet criteria for potency, toxicity, pharmacokinetics, manufacturability, intellectual property protection and freedom from infringement, or other criteria; if others develop competing therapies; or if we fail to make progress due to lack of resources or access to enabling technologies |
| Genelabs’ product candidates, other than Prestara, are in an early stage of research |
| If Genelabs discovers compounds that have the potential to be drugs, public information about our research success may lead other companies with greater resources to focus more efforts in areas similar to ours |
| Genelabs has limited human and financial resources |
| Creation of the type of compounds we seek to discover requires sophisticated and expensive lab equipment and facilities, a team of scientists with advanced scientific knowledge in many disciplines such as chemistry, biochemistry and biology, and time and effort |
| Large pharmaceutical companies have access to the latest equipment and have many more personnel available to focus on solving particular research 13 _________________________________________________________________ [55]Table of Contents problems, including those that Genelabs is investigating |
| Therefore, even if our research programs are successful, we may have a competitive disadvantage |
| Our collaborations may fail |
| We have entered into collaborations with Gilead, GSK, Watson, Tanabe and other companies and we may enter into future collaborations with these or other companies |
| Our collaborators may breach their contracts, or our collaborators may not diligently and successfully develop and commercialize the results of the research |
| Alternatively, our collaborators may elect not to extend or augment the collaborations |
| In this regard, Gilead may not continue to fund our research beyond its obligation in the research contract and GSK may choose not to continue developing the HEV vaccine |
| We are dependent on our collaborators to successfully carry out preclinical and clinical development, to obtain regulatory approvals, and/or to market and sell any products arising from the research and/or development conducted by the company or the collaborator |
| Factors which may cause our collaborators to fail in these efforts include: problems with toxicity, bioavailability or efficacy of the product candidate, difficulties in manufacture, problems in satisfying regulatory requirements, emergence of competitive product candidates developed by the collaborator or by others, insufficient commercial opportunity, problems the collaborators may have with their own contractors, lack of patent protection for our product candidate or claims by others that it infringes their patents or other intellectual property rights |
| Collaboration on a project also may result in disputes with the collaborator over the efforts of the Company and/or the collaborator or rights to intellectual property |
| If we are unable to obtain the funds to ensure the continuance of our business or fail to perform all of our obligations, our collaborators may withhold further funding, seek to seize control over our intellectual property and other assets, and/or assert claims for damages against us |
| In the course of the collaboration our collaborator may obtain know-how which enables it to compete with us in the same area of research and/or development |
| Because research and development results are unpredictable, we and our collaborators may not achieve any of the milestones in the collaboration agreements |
| We do not have the resources to conduct preclinical development |
| We do not have the personnel or facilities to conduct the formal preclinical development of our hepatitis C compounds as necessary to file an application to conduct clinical trials in humans |
| Our experience in conducting preclinical development, including formal toxicology studies, is limited |
| Outsourcing is expensive, time-consuming and requires reliance on the performance of third parties |
| Because of our financial condition, stock performance and setbacks in our Prestara^tm program, we may have difficulty hiring specialized personnel |
| We may be unable to attract or retain key personnel |
| Our ability to develop our business depends in part upon our attracting and retaining qualified management and scientific personnel |
| As the number of qualified personnel is limited, competition for such staff is intense |
| We may not be able to continue to attract or retain such people on acceptable terms, given the competition for those with similar qualifications among biotechnology, pharmaceutical and healthcare companies, universities and nonprofit research institutions |
| Furthermore, the negative results from the most recent clinical trials of Prestara^tm and the ensuing drop in our stock price, as well as the Company’s declining cash position, have significantly diminished our future business prospects, thus making it more difficult to retain existing employees and to recruit new employees |
| Since the announcement of the results of our Phase III trial of Prestara in October 2004, substantially all of our clinical development staff have left the Company |
| The loss of our key personnel or the failure to recruit additional key personnel could significantly impede attainment of our objectives and harm our financial condition and operating results |
| Additionally, recent and proposed laws, rules and regulations increasing the liability of directors and officers may make it more difficult to retain incumbents and to recruit for these positions |
| If third parties on whom we rely do not perform as contractually required or expected, we may not be able to obtain regulatory approval for or commercialize our product candidates |
| As part of our process of conducting drug discovery research and clinical trials we rely on third parties such as medical institutions, pre-clinical and clinical investigators, contract laboratories and contract research 14 _________________________________________________________________ [56]Table of Contents organizations to participate in the conduct of our clinical trials |
| We depend on Gilead for nucleoside compounds for treatment of hepatitis C infections, and on GSK for the hepatitis E vaccine, to conduct preclinical and clinical development, to obtain regulatory approval and to manufacture and commercialize |
| If these third parties do not successfully carry out their contractual duties or regulatory obligations or meet expected deadlines, if the third parties need to be replaced or if the quality or accuracy of the data they obtain is compromised due to their failure to adhere to our clinical protocols or regulatory requirements or for other reasons, our preclinical development activities or clinical trials may be extended, delayed, suspended or terminated, and we may not be able to obtain regulatory approval for or successfully commercialize our product candidates |
| If our Japanese marketing partner for Prestara^tm does not obtain approval to market Prestara in Japan, our business prospects will suffer because we do not have capabilities to develop Prestara for Japan ourselves and we would lose a significant source of potential revenue |
| Our licensee in Japan, Tanabe, has not conducted clinical trials for Prestara in Japan |
| Given the most recent negative results in the clinical trials of Prestara and the similar formulation used in Taiwan, Tanabe may not proceed with clinical trials, or if it does, the results from such trials may not be positive |
| Our outside suppliers and manufacturers for Prestara^tm and our hepatitis C compounds are subject to regulation, including by the FDA, and if they do not meet their commitments, we would have to find substitute suppliers or manufacturers which could delay supply of product to the market |
| Regulatory requirements applicable to pharmaceutical products tend to make the substitution of suppliers and manufacturers costly and time consuming |
| We rely on a single supplier of prasterone, the active ingredient in Prestara, and we rely on a single finished product manufacturer, Patheon Inc, for production of Prestara capsules and for packaging |
| We rely on another manufacturer for the scale up and production of our hepatitis C compounds |
| The disqualification of these suppliers and manufacturers through their failure to comply with regulatory requirements could negatively impact our business because of delays and costs in obtaining and qualifying alternate suppliers |
| We have no internal manufacturing capabilities for pharmaceutical products and are entirely dependent on contract manufacturers and suppliers for the manufacture of our drug candidates |
| Genelabs and our North American collaborator, Watson, previously arranged for the manufacture of quantities of Prestara and its active ingredient in anticipation of possible marketing approval |
| This inventory has exceeded its initial expiration date, although the expiration date of the active ingredient may be extended if it successfully passes re-testing |
| The following could harm our ability to manufacture Prestara or our hepatitis C compounds: • the unavailability at reasonable prices of adequate quantities of the active ingredient or intermediates; • the loss of a supplier’s or manufacturer’s regulatory approval; • the failure of a supplier or manufacturer to meet regulatory agency pre-approval inspection requirements; • the failure of a supplier or manufacturer to maintain compliance with ongoing regulatory agency requirements; • the inability to develop alternative sources in a timely manner or at all; • inability or refusal of the manufacturers to meet our needs for any reason, such as loss or damage to facilities or labor disputes; • manufacture of product that is defective in any manner; • competing demands on the contract manufacturer’s capacity, for example, shifting manufacturing priorities to their own products or more profitable products for other customers; and • complications in the scale-up or large-scale manufacturing of our hepatitis C compounds |
| 15 _________________________________________________________________ [57]Table of Contents We may be unable to obtain patents or protect our intellectual property rights, or others could assert their patents against us |
| Agency or court proceedings could invalidate our current patents, or patents that issue on pending applications |
| Our business would suffer if we do not successfully defend or enforce our patents, which would result in loss of proprietary protection for our technologies and products |
| Patent litigation may be necessary to enforce patents to determine the scope and validity of our proprietary rights or the proprietary rights of another |
| The active ingredient in Prestara is prasterone, more commonly known as dehydroepiandrosterone, or DHEA DHEA is a compound that has been in the public domain for many years |
| Although the specific polymorphic form of DHEA we have used may be patentable, we do not believe it is possible to obtain patent protection for the base chemical compound anywhere in the world |
| Genelabs licensed two United States patents covering uses of DHEA in treating lupus from Stanford University in 1993 |
| The Stanford patents expire in 2012 and 2013, and the license expires when the patents expire |
| In addition, we have filed patent applications covering additional uses for Prestara and various pharmaceutical formulations and intend to file additional applications as appropriate |
| We have filed patent applications covering compounds from our HCV drug discovery programs; however, no patents are currently issued |
| A number of patents have issued to Genelabs covering our drug discovery technologies and methods related to selective regulation of gene expression and the control of viral infections |
| A number of patent applications are pending |
| If another company successfully brings legal action against us claiming our activities violate, or infringe, their patents, a court may require us to pay significant damages and prevent us from using or selling products or technologies covered by those patents |
| Others could independently develop the same or similar discoveries and may have priority over any patent applications Genelabs has filed on these discoveries |
| Prosecuting patent priority proceedings and defending litigation claims can be very expensive and time-consuming for management |
| In addition, intellectual property that is important for advancing our drug discovery efforts or for uses for the active ingredient in Prestara owned by others might exist now or in the future |
| We might not be able to obtain licenses to a necessary product or technology on commercially reasonable terms, or at all, and therefore, we may not pursue research, development or commercialization of promising products |
| The lease for our facilities expires in November and we may not have the facilities to continue our operations |
| The lease for the facilities housing nearly all of our operations expires in November 2006 |
| If we are unable to remain on our current premises, we may be unable to obtain alternative facilities due to our financial condition or for other reasons, and we may be unable to fully relocate our operations before termination of our current lease, thereby incurring a significant interruption in our business operations |
| Any relocation would result in substantial disruption of our operations and diversion of management and staff away from our core business activities |
| The terms for the existing or any new premises may require higher rent, advance payments, deposits or other terms disadvantageous to us |
| We sublease a portion of our premises to Genitope Corp |
| for approximately dlra150cmam000 per year and there is no assurance that the sublease will continue on favorable terms, or at all, or that we would be able to remove the space from any extension of our lease |
| Our facilities in California are located near an earthquake fault, and an earthquake could disrupt our operations and adversely effect results |
| Almost all of our operations are conducted in a single facility built on landfill in an area of California near active geologic faults which historically have caused major earthquakes from time to time |
| The office park where the facility is located is approximately at sea level behind levees sheltering the buildings from the San Francisco Bay |
| In the event of a significant earthquake, we could experience significant damage and business interruption |
| The Company currently has insurance coverage for earthquake and flood damage, including business interruption coverage due to those events, with limits of dlra5 million and subject to a deductible which currently is approximately dlra1dtta6 million |
| There is no assurance that earthquake or flood insurance will continue to be available at a cost that is acceptable to the Company or that such insurance will be adequate to reimburse our losses |
| 16 _________________________________________________________________ [58]Table of Contents Industry Risks Our activities involve hazardous materials and improper handling of these materials by our employees or agents could expose us to significant legal and financial penalties |
| Our research and development activities involve the controlled use of hazardous materials, including infectious agents, chemicals and various radioactive compounds |
| Our organic chemists use solvents, such as chloroform, isopropyl alcohol and ethanol, corrosives such as hydrochloric acid and other highly flammable materials, some of which are pressurized, such as hydrogen |
| We use radioactive compounds in small quantities under license from the State of California, including Carbon(14), Cesium(137), Chromium(51), Hydrogen(3), Iodine(125), Phosphorus(32), Phosphorus(33) and Sulfur(35) |
| Our biologists use biohazardous materials, such as bacteria, fungi, parasites, viruses and blood and tissue products |
| We also handle chemical, medical and radioactive waste, byproducts of our research, through licensed contractors |
| As a consequence, we are subject to numerous environmental and safety laws and regulations, including those governing laboratory procedures, exposure to blood-borne pathogens and the handling of biohazardous materials |
| Federal, state and local governments may adopt additional laws and regulations affecting us in the future |
| We may incur substantial costs to comply with, and substantial fines or penalties if we violate, current or future laws or regulations |
| Although we believe that our safety procedures for using, handling, storing and disposing of hazardous materials comply with the standards prescribed by state and federal regulations, we cannot eliminate the risk of accidental contamination or injury from these materials |
| In the event of an accident, state or federal authorities may curtail our use of these materials and we could be liable for any civil damages that result, the cost of which could be substantial |
| Further, any failure by us to control the use, disposal, removal or storage of, or to adequately restrict the discharge of, or assist in the cleanup of, hazardous chemicals or hazardous, infectious or toxic substances could subject us to significant liabilities, including joint and several liability under state or federal statutes |
| We do not specifically insure against environmental liabilities or risks regarding our handling of hazardous materials |
| Additionally, an accident could damage, or force us to shut down, our research facilities and operations |
| We may not be able to obtain or maintain sufficient insurance on commercially reasonable terms or with adequate coverage against potential liabilities in order to protect ourselves against product liability claims |
| Our business exposes us to potential product liability risks that are inherent in the testing, manufacturing and marketing of human therapeutic products |
| We may become subject to product liability claims if someone alleges that the use of our products injured subjects or patients |
| This risk exists for products tested in human clinical trials as well as products that are sold commercially |
| Although we currently have insurance coverage in amounts that we believe are customary for companies of our size and in our industry and sufficient for risks we typically face, including general liability insurance of dlra6 million, we may not be able to maintain this type of insurance in a sufficient amount |
| We currently maintain dlra5 million of product liability insurance for claims arising from the use of our products in clinical trials |
| In addition, product liability insurance is becoming increasingly expensive |
| As a result, we may not be able to obtain or maintain product liability insurance in the future on acceptable terms or with adequate coverage against potential liabilities which could harm our business by requiring us to use our resources to pay potential claims |
| Market Risks Because our stock is volatile, the value of your investment in Genelabs may substantially decrease |
| The market price of our common stock, like the stock prices of many publicly traded biopharmaceutical companies, has been and will probably continue to be highly volatile |
| Between January 1, 2005 and December 31, 2005, the price of our common stock fluctuated between dlra1dtta70 and dlra6dtta15 per share, as adjusted for the reverse-split |
| Between January 1, 2006 and February 28, 2006, the price of our common stock fluctuated between dlra1dtta73 and dlra2dtta30 per share |
| In addition to the factors discussed in this Risk Factors section, a variety of events can impact the stock price, including the low percentage of institutional ownership of our stock, which contributes to lack of stability for the stock price |
| The availability of a large block of stock for sale in relation to our normal trading volume could also result in a decline in the market price of our common stock |
| In the event we do not obtain the 17 _________________________________________________________________ [59]Table of Contents capital necessary to continue as a going concern, we may be required to discontinue operations, which could result in the complete loss of investment to our shareholders |
| In addition, numerous events occurring outside of our control may also impact the price of our common stock, including general market conditions or those related to the biopharmaceutical industry |
| Other companies have defended themselves against securities class action lawsuits following periods of volatility in the market price of their common stock |
| If a party brings this type of lawsuit against us, it could result in substantial costs and diversion of management’s time |