| GTC BIOTHERAPEUTICS INC ITEM 1A RISK FACTORS The following are certain factors that could affect our future results |
| They should be considered in connection with evaluating forward-looking statements made by us because these factors could cause actual outcomes and results to differ materially from the outcomes and results as expressed in those forward-looking statements |
| RISKS RELATED TO OUR BUSINESS We cannot market and sell our transgenically produced products in the United States or in other countries if we fail to obtain the necessary regulatory approvals |
| Before we can sell any transgenically produced drug or biological products that we or our collaborators develop, we must receive regulatory approvals from federal, state and local governmental authorities, including the United States Food and Drug Administration, or FDA, and similar agencies in other countries, such as the European Medicines Agency, or EMEA, in Europe |
| To date, none of our transgenically produced compounds have been approved for sale in the United States or any foreign country |
| Moreover, to our knowledge, no therapeutic protein produced in the milk of a transgenic animal has been submitted to the FDA or, except for our submission of ATryn^^® to the EMEA, to any other regulatory agency for final regulatory approval |
| Obtaining required regulatory approvals for our transgenically produced products may take several years to complete and is expensive and uncertain |
| It is possible that the FDA or any other regulatory authority may not act quickly or favorably on our requests for approval or will require us to provide additional data that we do not currently anticipate |
| For example, the FDA may impose restrictions and demands on our clinical trials that require additional resources and result in longer delays than we anticipate |
| In addition, the FDA may require us to conduct further clinical trials and post-marketing testing and surveillance to monitor the effects of approved products |
| The FDA or other regulatory authorities may also place conditions on approval that could restrict the commercial applications of such products |
| Failure to comply with extensive FDA or similar regulations may result in delay, suspension or cancellation of a trial or a regulatory authority’s refusal to accept test results |
| Regulatory authorities may have varying interpretations of our pre-clinical and clinical trial data, which could delay, limit or prevent regulatory approval or clearance |
| Because transgenically produced products represent novel therapeutic products, the process for regulatory approval is unproven |
| There may be additional delays in regulatory approval due to issues arising from the breeding of transgenic animals and the use of proteins derived from them |
| Any delays or difficulties in obtaining regulatory approval or clearance for transgenically produced products may: • adversely affect the marketing of any transgenically produced products we or our collaborators develop; • impose significant additional costs on us or our collaborators; • diminish any competitive advantages that we or our collaborators may attain; and • limit our ability to receive royalties and generate revenue and profits |
| 11 ______________________________________________________________________ [38]Table of Contents If we do not receive regulatory approvals for our transgenically produced products in a timely manner, we will not be able to commercialize our products, or their commercialization may be limited or delayed and, therefore, our business and stock price will suffer |
| Even if we receive regulatory approval for our transgenically produced products, the FDA or similar agencies in other countries may impose limitations on the indicated uses for which our products may be marketed |
| These limitations could reduce the size of the potential market for a product |
| Failure to comply with applicable FDA and other regulatory requirements can result in, among other things, warning letters, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, refusal of the government to renew our marketing applications and criminal prosecution |
| Our MAA for ATryn^^® in the HD indication is currently subject to a re-examination process in Europe after the CHMP issued a negative opinion recommending against approval of ATryn^^® for commercial sale |
| If our application is not approved by EMEA upon re-examination, our MAA would terminate and the commercialization of ATryn^^® in Europe would likely be delayed until ATryn^^® is developed and approved for an acquired deficiency indication |
| There is no assurance that such development will ultimately be successful or that such approval will be obtained |
| We filed an investigational new drug application, or IND, with the FDA in 2003 for clinical development of ATryn^^® in HD indication |
| In April 2005, we received authorization from the FDA to begin a further clinical trial of ATryn^^® under an amended version of our IND If we are able to conduct this study successfully and on schedule, we currently anticipate filing a Biologics License Application for ATryn^^® for the HD indication in the United States in 2007 |
| Delays in completing our current ATryn^^® trial or in obtaining FDA approval of ATryn^® could cause substantial delays in the commercialization of ATryn^^®^ in the United States and adversely affect our business and stock price |
| We expect to continue to incur significant operating losses for the next several years and we may never become profitable |
| We have had operating losses since our inception, and we expect losses to continue for the next several years |
| From our inception in 1993 to January 1, 2006, we have incurred cumulative losses of approximately dlra209dtta8 million |
| These losses have resulted principally from the costs of our research and development activities |
| Our net losses for fiscal years ended, 2003, 2004 and 2005, have been dlra29dtta5 million, dlra29dtta5 million, and dlra30dtta1 million, respectively |
| We expect to continue incurring significant operating losses for at least the next several years |
| We may never receive material revenues from product sales or become profitable |
| We will need additional capital to fund our operations, including research and development, manufacturing and commercialization |
| If we do not have or cannot raise additional capital when needed, we will be unable to develop and commercialize our product programs successfully |
| In order to develop and bring our transgenically produced products to market, we and our collaboration partners must commit substantial resources to costly and time-consuming research, preclinical testing and clinical trials |
| As of January 1, 2006, we had dlra26dtta4 million in cash and cash equivalents and dlra9dtta8 million in marketable securities, which were offset in part by our dlra20dtta3 million in current liabilities |
| We expect our current cash resources and milestone payments and manufacturing revenue including those from our agreement with LEO Pharma to be sufficient to fund operations to mid 2007 |
| We will need additional capital to fund our operations, including our research and development, manufacturing and commercialization activities |
| If we do not have or cannot raise additional capital when needed, we would be forced to delay, scale back or eliminate one or more of our research and development programs |
| Our drug development programs and the further development of ATryn^® for approvals in the United States will require substantial additional cash to fund expenses that we will incur in connection with preclinical studies and clinical trials, regulatory review, manufacturing and sales and marketing efforts |
| Our cash requirements may vary materially from those now planned, depending upon the results of our research and development programs, competitive and technological advances, the terms of future collaborations, regulatory requirements and other factors |
| We expect we will need to obtain additional financing, through public or private sources, including debt or equity financing, in addition to any funding obtained through collaborative or other arrangements with corporate partners |
| Depending on the state of the capital markets, interest rates, our financial profile and other factors at that time, we may not be able to obtain adequate funds on acceptable terms when needed |
| If we raise capital through the sale of equity, or securities convertible into equity, existing shareholders’ proportionate ownership in us will be reduced |
| If we cannot obtain financing, we could be forced to delay, scale back or eliminate some of our research and development programs |
| 12 ______________________________________________________________________ [39]Table of Contents Our transgenically produced products other than ATryn^^®^ are at an early stage of development |
| Developing products based on transgenic technology is subject to significant development risks |
| Each DNA construct is unique and it is possible that it might not be expressed in the transgenic animal’s milk at a level that is commercially viable |
| Purifying the recombinant protein out of the milk to use as a biotherapeutic may be too difficult to be commercially feasible |
| In addition, production of the recombinant protein may have negative effects on the health of either the mammary gland or more systematically on the animal as a whole |
| This would compromise the ability of the animal to produce the recombinant protein |
| Directing the mammary gland to produce additional proteins in the milk could negatively affect lactation, thereby shutting down milk production |
| The mammary gland may also modify a protein in such a manner that it is non-functional or harmful to human subjects |
| It is also possible that there may be disease agents present in goats or cows that would prevent the use of products derived from these animals |
| If an as yet unknown disease was identified that could not be effectively mitigated, government agencies may confiscate or destroy the animals, or prevent the utilization of their milk |
| Any of these governmental actions would prevent the use of the recombinant proteins |
| To our knowledge, Pharming BV is the only other entity to have completed human clinical trials of a transgenically produced product, although Pharming has not filed for marketing authorization in the United States or Europe for any therapeutic protein produced in the milk of transgenic animals |
| Until we have completed our current pivotal trial and submitted a Biologics License Application, or BLA, to the FDA for ATryn^®, or our MAA for ATryn^® is approved upon successful re-examination in Europe, we will not have confirmation that our ATryn^® trials are sufficient for approval in the United States or Europe |
| If we are unable to complete all clinical trials that may be required by the FDA or EMEA, or if any of our other transgenically produced proteins in development are not proved to be safe or effective to the satisfaction of regulatory authorities, it would have a material adverse effect on our business and operations |
| In addition, it is possible that research and discoveries by others could render our transgenic technology obsolete or noncompetitive as a method of production for protein-based therapeutic products |
| We depend on collaboration agreements for our current revenue |
| Our revenues and business strategy depend largely on our entering into additional development and marketing agreements with third parties as well as existing agreements for our own therapeutic compounds |
| We may not be able to establish these agreements on commercially acceptable terms, if at all, depending on the market position of our technology and our compounds |
| The willingness of potential collaborators to enter into agreements with us depends on factors such as the perceived technological or economic advantages of transgenic production and our ability to structure a mutually acceptable collaboration arrangement |
| For existing and future development agreements, the collaborations may ultimately be unsuccessful, our partners could terminate the agreements or the agreements could expire before meaningful developmental milestones are reached |
| Depending upon the terms of any future collaborations, our role in the collaboration will often be limited to the production aspects of the proteins |
| As a result, we may also be dependent on collaborators for other aspects of the development of any transgenically produced product, including preclinical and clinical testing and regulatory approval, and marketing and distribution |
| The majority of our collaborations to date have been external programs that involve proteins proprietary to our partners |
| Much of the continuing revenue, if any, that we may receive under these collaborations will depend upon our partners’ willingness and ability to successfully develop and commercially introduce, market and sell the version of the collaborator’s product derived from our transgenic production systems |
| Our partners may choose competitive production technologies or competitive products outside of their collaborations with us, which could have a material adverse effect on our business |
| The failure of any significant number of these external collaborations could have a material adverse effect on our business |
| If clinical trials of any of our transgenically produced products are unsuccessful or delayed, we would be unable to meet our anticipated development timeline, which could cause our stock price to decline |
| We and our collaborators must demonstrate through preclinical and clinical trials that our transgenically produced products are safe and effective for use in humans |
| Clinical trials are expensive and may take several years |
| Several factors could prevent or delay completion of these trials, including an inability to enroll the required number of patients or demonstrate adequately the safety or efficacy of the product for humans |
| If safety concerns develop, regulatory authorities could stop or delay our trials |
| Furthermore, the results from early clinical trials are often not predictive of results in later clinical trials |
| 13 ______________________________________________________________________ [40]Table of Contents Any transgenically produced products for which we obtain regulatory approval will be subject to continuing review and extensive regulatory requirements, which could affect their manufacture and marketing |
| If and when the FDA or other foreign agencies approve any of our transgenically produced products under development, the manufacture and marketing of these products will be subject to continuing regulation and product approvals may be withdrawn if problems occur after initial approval |
| Post-approval regulation includes compliance with current Quality Systems Regulations and Good Manufacturing Practices, known as QSR/GMP, adverse event reporting requirements and prohibitions on promoting a product for unapproved uses |
| We will also be required to obtain additional approvals for any significant alterations in the product’s labeling or manufacturing process |
| Enforcement actions resulting from failure to comply with QSR/GMP requirements could result in fines, suspensions of approvals, recalls of products, operating restrictions and criminal prosecutions, and affect the manufacture and marketing of our transgenically produced products |
| The FDA or other regulatory agencies could withdraw a previously approved product from the market upon receipt of newly discovered information, including a failure to comply with regulatory requirements and the occurrence of unanticipated problems with products following approval |
| Any of these withdrawals could adversely affect our operating results |
| We have limited manufacturing capability and may rely on third party contract manufacturers to purify and formulate our transgenically produced products |
| We have the capability to purify pre-clinical and clinical trial quantities of our transgenically produced products |
| Our current capacity allows us to purify products for clinical trials, up to and including Phase II We also rely upon third party manufacturers to purify and formulate significant pre-clinical, clinical and commercial quantities of our transgenically produced products |
| We will depend on these third party manufacturers to perform their obligations in a timely manner and in accordance with applicable government regulations in order to conduct our clinical trials or commercialize any of our products |
| In addition, there are very few third party manufacturers that have sufficient production capacity to manufacture all of our products either for our clinical trials or on a commercial scale |
| Our third party manufacturers may encounter difficulties, including problems involving: • inconsistent production yields; • poor quality control and assurance or inadequate process controls; • lack of compliance with FDA, EMEA and other regulations; and • high production costs |
| These contract manufacturers may not be able to manufacture our products at a cost or in quantities necessary to make them commercially viable |
| If we are unable to enter into agreements with additional manufacturers on commercially reasonable terms, or if there is poor performance on the part of our third party manufacturers, we may not be able to complete development of, or market, our transgenically produced products |
| We have contracts with Cambrex Bio Science Hopkinton for large scale purification and with Medimmune (Holland) for fill/finish services of our lead product, ATryn^® |
| Although we have identified possible alternative suppliers with respect to these services for this product, interruptions in these services and the process of changing to an alternative manufacturer could have a material adverse effect on our timely ability to manufacture bulk delivery of ATryn^® for delivery to our collaborators or to market distribution after regulatory approval |
| Transgenically produced products may never become commercially successful |
| Even if our transgenically produced products are successfully developed and approved by the FDA and foreign regulatory agencies, they may not enjoy commercial acceptance or success, which would adversely affect our business and results of operations |
| Several factors could limit our success, including: • limited market acceptance among patients, physicians, medical centers and third party payors; • our inability to access a sales force capable of marketing the product, either through a third party contract sales force or by establishing our own internal sales force; 14 ______________________________________________________________________ [41]Table of Contents • our inability to supply a sufficient amount of product to meet market demand; • the number and relative efficacy of competitive products that may subsequently enter the market; and • for a transgenically produced product designed to replace or supplement currently marketed non-transgenically produced products, the relative risk-benefit profile and cost-effectiveness of the transgenically produced product |
| In addition, it is possible that we or our collaborative partners will be unsuccessful in developing, marketing or implementing a commercialization strategy for any transgenically produced products |
| Our business may fail due to intense competition in our industry |
| The industry in which we operate is highly competitive and may become even more so |
| Some of our competitors have greater financial and human resources and more experience in research and development than we have |
| We will need to continue to devote substantial efforts and expense in research and development to maintain a competitive position for our transgenic production technology and potential product offerings |
| It is also possible that others will develop alternative technologies or products that will render our proposed products or technologies obsolete |
| We may encounter significant competition for our protein development and production capabilities from other companies |
| In addition, our potential transgenic production capabilities may face significant competition from biological products manufactured in cell culture or by other traditional protein production methods |
| Our business will also compete against other companies whose business is dedicated to offering transgenic production and with prospective customers or collaborators who decide to pursue such transgenic production internally |
| Competitors that complete clinical trials, obtain regulatory approvals and begin commercial sales of their products before us will enjoy a significant competitive advantage |
| We anticipate that we will face increased competition in the future as new companies enter the market and alternative technologies become available |
| For ATryn^®, a number of companies internationally produce and market antithrombin from the fractionation of human plasma |
| CSL has approximately a 40prca share of this market worldwide, but is not approved for sale in the US Talecris Biotherapeutics, which purchased Bayer’s plasma business, is the only company that has commercially available fractionated antithrombin material that is approved for sale in the US, which sales represent only about 1prca of the worldwide market |
| The European market is served by multiple products, none of which is approved throughout the European Union |
| These products are fractionated from human plasma by Octapharma, CSL Limited, Grifols, Kedrian, Baxter International, LFB and BioProducts Laboratory |
| Like antithrombin, alpha-1 antitrypsin is sold today as a result of fractionation of human plasma |
| Talecris has a significant presence in the US with a product called Prolastin^® |
| This product is approved for chronic use in patients with a genetic deficiency of alpha-1 antitrypsin who are prone to pulmonary disorders such as emphasyma |
| There are a number of companies worldwide that produce and market human serum albumin from the fractionation of human plasma, including Talecris BioTherapeutics, CSL Limited and Baxter International |
| We are aware of two companies worldwide that are developing recombinant forms of human serum albumin derived from yeast cultures |
| One company, Aventis, is developing its recombinant albumin product for the excipient market |
| The other lead company is Mitsubishi Pharma Corporation which has been active in developing human albumin through genetic manipulation of Pichia pastoris, or yeast, on a commercial scale for use in Japan and other parts of Asia |
| To the extent that a market develops for transgenic production of therapeutic compounds generally, similar to the market for cell-based production of therapeutic compounds, we may be in competition with other transgenic technology companies |
| Pharming Group NV and BioProtein Technologies are other companies known to us that are extensively engaged in the application of transgenic technology in mammals for the production of proteins for therapeutic use in humans |
| Pharming, based in the Netherlands, is primarily engaged in the development of recombinant proteins in the milk of transgenic cows and rabbits |
| Pharming reports that it has one product in clinical development that has completed Phase III studies in the United States |
| Pharming has also submitted a request to the FDA to recognize their lactoferrin product as generally regarded as safe for nutritional applications |
| BioProtein Technologies is a contract manufacturing organization specializing in the production of human therapeutic proteins and vaccines in the milk of transgenic rabbits also under a technology license agreement |
| There are also other companies seeking to develop transgenic technology in animals and in plants, which may be competitive with our technology with respect to our patents and proprietary rights as discussed further below |
| 15 ______________________________________________________________________ [42]Table of Contents We may face public concerns about genetic engineering in animals |
| Our activities involve genetic engineering in animals |
| The success of our potential commercial products will depend in part on public acceptance of the use of genetic engineering |
| Public attitudes may be influenced by claims that these types of activities are unsafe and our products may not gain the acceptance of the public or the medical community |
| Negative public reaction to genetic engineering activities in general could result in greater restrictive legislation and regulations involving nuclear transfer and other methodologies which could impede our ability to conduct our business efficiently, delay preclinical studies or future clinical trials, or prevent us or our partners from obtaining regulatory approvals or commercializing transgenically produced products |
| We depend on patents and proprietary rights that may fail to protect our business |
| Our success will partly depend on our ability to obtain and maintain patent or other proprietary protection for our technologies, products and processes such as: • compositions of matter or processes; • processes developed by our employees; or • uses of compositions of matter discovered through our technology |
| We may not be able to obtain the necessary proprietary protection |
| Our success will also depend on our ability to operate without infringing the proprietary rights of other parties |
| Legal standards relating to the validity of patents covering pharmaceutical and biotechnological inventions and the scope of claims made under these patents are still developing |
| There is no consistent policy regarding the breadth of claims allowed in biotechnology patents |
| The patent position of a biotechnology company is susceptible to uncertainty and involves complex legal and factual questions |
| Our patents generally expire between 2013 and 2015, with the exception being the recent allowance in the United States of a patent which, after issuance would expire in 2021 |
| This patent provides us with claim coverage for the production of therapeutic proteins in the mammary glands of transgenic mammals and is expected to issue by the middle of 2006 |
| One in-licensed European patent, pertaining to transgenic animals secreting proteins in milk, expires in 2006 |
| In accordance with ongoing research and development efforts, we have 61 pending US patent applications and 226 corresponding foreign applications covering relevant and newly developed portions of our transgenic technology |
| Several of these pending applications are included in various cross-licensing or out-licensing arrangements with other companies that in turn provide access to their proprietary technologies |
| Specifically we have cross-licensed our proprietary technology for the production of proteins in milk to Pharming BV Other technologies for which we hold existing patents include: protein purification from the milk of transgenic animals, the production of monoclonal and assembled antibodies at commercial levels in the milk of transgenic mammals, the production of recombinant antithrombin in the milk of transgenic goats and one covering the production of Prolactin in the milk of transgenic animals |
| We cannot be certain that we will receive issued patents based on pending or future applications |
| Our issued patents may not contain claims sufficiently broad to protect us against competitors with similar technology |
| Additionally, our patents, our partners’ patents and patents for which we have license rights may be challenged, narrowed, invalidated or circumvented |
| Furthermore, rights granted under patents may not provide us with any competitive advantage |
| We may have to initiate arbitration or litigation to enforce our patent and license rights |
| If our competitors file patent applications that claim technology also claimed by us, we may have to participate in interference or opposition proceedings to determine the priority of invention |
| An adverse outcome could subject us to significant liabilities to third parties and require us to cease using the technology or to license the disputed rights from third parties |
| We may not be able to obtain any required licenses on commercially acceptable terms or at all |
| The cost to us of any litigation or proceeding relating to patent rights, even if resolved in our favor, could be substantial |
| Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because of their substantially greater resources |
| Uncertainties resulting from the initiation and continuation of any pending patent or related litigation could have a material adverse effect on our ability to compete in the marketplace |
| Advanced Cell Technologies, Inc, or ACT, has announced that the Board of Patent Appeals and Interferences of the US Patent Office has entered a judgment in an interference proceeding in favor of a patent application of Geron Corporation against ACT on all counts as to the priority of ACT’s US Patent Nodtta 5cmam945cmam577, which we license from ACT ACT has appealed that decision 16 ______________________________________________________________________ [43]Table of Contents in a proceeding in US District Court, during which proceeding we believe that we may continue to rely on the validity of the disputed patent |
| Until the final resolution of this dispute, the Geron application will not affect our freedom to operate with respect to the claims involved in the dispute |
| If the proceeding is ultimately resolved in favor of Geron, this could adversely affect our ability to conduct nuclear transfer after the date of such determination |
| While we have also licensed certain nuclear transfer technology from Pharming and Tufts University, we do not know at this time what impact, if any, this proceeding involving ACT may ultimately have on our ability to practice nuclear transfer for the production of animals expressing therapeutic proteins in their milk |
| Neither ATryn^^®^, our principal product, nor rhAAT have been produced using nuclear transfer technology |
| We rely on certain proprietary trade secrets and know-how that are not patentable |
| We have taken measures to protect our unpatented trade secrets and know-how, including having our employees, consultants and some contractors execute confidentiality agreements |
| These agreements could be breached |
| If so, it is possible that our remedies for a given breach might be inadequate |
| It is also possible that competitors emerge who could independently develop or discover our trade secrets or that the trade secrets could otherwise become known |
| Recovery from any catastrophic event may not be adequate |
| While we have measures in place to minimize and recover from catastrophic events that may substantially destroy our animal herd(s), these measures may not be adequate to recover our production processes quickly enough to support critical timelines, collaborator needs or market demands |
| These catastrophic events may include animal diseases that breach our biosecurity measures or weather events such as tornadoes, earthquakes or fires |
| In addition, these catastrophic events may render some or all of the products at the affected facilities unusable |
| Successful commercialization of our products will depend on obtaining coverage and reimbursement for use of the products from third-party payors |
| Sales of pharmaceutical products depend largely on the reimbursement of patients’ medical expenses by government health care programs and private health insurers |
| It is possible that third party payors will not reimburse sales of our transgenically produced products |
| Reimbursement by third party payors depends on a number of factors, including the payor’s determination that use of the product is safe and effective, not experimental or investigational, medically necessary, appropriate for the specific patient and cost-effective |
| Reimbursement in the United States or foreign countries may not be available or maintained for any of our products |
| If we do not obtain approvals for adequate third party reimbursements, we may not be able to establish or maintain price levels sufficient to realize an appropriate return on our or our partners’ investment in product development |
| Any limits on reimbursement available from third party payors may reduce the demand for, or negatively affect the price of, our or our partners’ products |
| Without the financial support of the government or third party insurers, the market for transgenically produced products will be limited |
| The US federal government and private insurers are continually working on ways to contain health care costs, particularly by limiting both coverage and the level of reimbursement for new therapeutic products |
| The government or private insurers may institute future price controls and other cost-containment measures on Medicare, Medicaid and other health care insurance spending |
| These controls and limits could affect the payments we collect from sales of our products |
| Internationally, medical reimbursement systems vary significantly, with some medical centers having fixed budgets, regardless of levels of patient treatment, and other countries requiring application for, and approval of, government or third party reimbursement |
| Even if we or our partners succeed in bringing transgenically produced products to market, uncertainties regarding future health care policy, legislation and regulation, as well as private market practices, could affect our ability to sell our products in commercially acceptable quantities at profitable prices |
| Our ability to negotiate with potential marketing partners may be limited |
| If we choose to commercialize ATryn^® with an additional marketing partner outside of Asia, Genzyme Corporation has an exclusive first right of negotiation for commercialization rights |
| This right is triggered on an indication-by-indication basis at such time as we apply for marketing approval with a regulatory authority |
| This right does not apply if we have already entered into a collaboration or other agreement with a prospective research, development and marketing partner prior to such regulatory submission |
| For example, the right also does not apply to commercialization rights in Europe, Canada or the Middle East for any indication because those rights are subject to our licensing and supply agreement entered into with LEO Pharma in October 2005 |
| 17 ______________________________________________________________________ [44]Table of Contents The manufacture and sale of our products may expose us to product liability claims for which we could have substantial liability |
| We face an inherent risk of product liability exposure related to testing of our transgenically produced products in human clinical trials and will face even greater risks when we commercialize our products |
| An individual may bring a product liability claim against us if one of our products causes, or is claimed to have caused, an injury or is found to be unsuitable for consumer use, even if the product involved is granted regulatory authorization for commercial sale |
| We do not maintain product liability insurance, although we do have product liability insurance in place for the clinical trials conducted to support our Marketing Authorization Application for filing with the EMEA for our ATryn^® program under an insurance policy arrangement with Genzyme Corporation and we have obtained product liability coverage for the clinical trials to be conducted to support a filing for marketing approval of ATryn^^®^ with the FDA through our own policies |
| It is possible that our insurance coverage will not be sufficient to cover any claim |
| Any product liability claim brought against us, with or without merit, could result in: • liabilities that substantially exceed our product liability insurance, which we would then be required to pay from other sources, if available; • an increase of our product liability insurance rates or the inability to maintain insurance coverage in the future on acceptable terms or at all; • damage to our reputation and the reputation of our products, resulting in lower sales; • regulatory investigations that could require costly recalls or product modifications; and • the diversion of management’s attention from managing our business |
| Qualified managerial and scientific personnel are scarce in our industry |
| We are highly dependent on the principal members of our scientific and management staff |
| Our success will depend in part on our ability to identify, attract and retain qualified managerial and scientific personnel |
| There is intense competition for qualified personnel in our industry |
| We may not be able to continue to attract and retain personnel with the advanced technical qualifications or managerial expertise necessary for the development of our business |
| If we fail to attract and retain key personnel, it could have a material adverse effect on our business, financial condition and results of operations |
| We have employment agreements with our executive officers, but these agreements do not guarantee that they will remain employed with us in the future |
| If we lose an executive officer, or a significant number of our staff, or are unable to hire and retain qualified personnel, then our ability to develop and commercialize our products and processes may be delayed or impaired |
| We do not carry key man insurance |
| If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud |
| The Sarbanes-Oxley Act of 2002 requires that we report annually on the effectiveness of our internal controls over financial reporting |
| Among other things, we must perform systems and process evaluation and testing |
| We must also conduct an assessment of our internal controls to allow management to report on, and our independent registered public accounting firm to audit, our assessment of our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act |
| These requirements were effective for the first time for 2004 |
| In connection with our Section 404 compliance efforts, we have incurred or expended, and expect to continue to incur or expend, substantial accounting and other expenses and significant management time and resources |
| Any subsequent assessment by us or our independent registered public accounting firm may reveal significant deficiencies or material weaknesses in our internal controls, which may need to be disclosed in subsequent periodic reports filed with the Securities and Exchange Commission, or SEC and could result in a restatement of previously issued financial information |
| Disclosures of this type could cause investors to lose confidence in our financial reporting and may negatively affect the price of our common stock |
| Moreover, effective internal controls are necessary to produce reliable financial reports and to prevent fraud |
| If we have deficiencies in our internal controls over financial reporting, these deficiencies may negatively impact our business and operations |
| 18 ______________________________________________________________________ [45]Table of Contents RISKS RELATED TO OUR COMMON STOCK We have obligations to issue shares of common stock in the future that will dilute your ownership interest and may adversely affect our stock price |
| Sales of substantial amounts of our common stock in the public market, or the perception that such sales may occur, could adversely affect our common stock’s market price |
| As of January 1, 2006, there were 60cmam647cmam874 shares of our common stock outstanding |
| As of January 1, 2006, options to purchase an aggregate of 4cmam414cmam748 shares of common stock at varying exercise prices were outstanding; of this total, options to purchase 3cmam498cmam198 shares were immediately exercisable and these shares could be immediately resold into the public market |
| As of January 1, 2006, Genzyme held 4cmam924cmam919 shares of our common stock which could be sold into the public markets under Rule 144 of the Securities Act |
| Genzyme is also entitled to registration rights with respect to some of these shares |
| An additional 373cmam324 shares of our common stock, issuable to Genzyme upon exercise of outstanding warrants, are also entitled to registration rights, which could expedite the resale of such shares into the public market |
| We also have outstanding warrants to purchase an aggregate of 6cmam823cmam668 shares of our common stock at exercise prices ranging from dlra2dtta05 to dlra8dtta75 per share, which were issued to investors in various prior financings |
| The warrants to purchase an aggregate of 1cmam828cmam573 of these shares of our common stock, which we issued in our August 2005 private placement, (the “August 2005 Warrants”) had an initial exercise price of dlra2dtta68 per share |
| The exercise price of these warrants is subject to adjustment upon the issuance of any shares of our common stock or common stock equivalents at an exercise price lower than the then-effective exercise price per share (a “Dilutive Issuance”) |
| Upon a Dilutive Issuance the exercise price of the unexercised portion of these warrants shall be reduced by multiplying the then-effective exercise price by a fraction, the numerator of which is the number of shares of common stock outstanding immediately prior to the Dilutive Issuance plus the number of shares of common stock which the aggregate consideration received or deemed to be received by the company in connection with the Dilutive Issuance would purchase at the exercise price, and the denominator of which is the number of shares of common stock and common stock equivalents issued and outstanding immediately following such Dilutive Issuance |
| Following the issuance of the shares and warrants offered in the December 2005 private placement, the exercise price of the August 2005 Warrants was reduced to dlra2dtta52 per share |
| If we raise additional capital by issuing equity securities, the issuance will result in a reduction of the percentage of ownership for our existing shareholders, a result commonly referred to as dilution |
| The extent of such dilution will vary based upon the amount of capital raised |
| Our common stock may have a volatile public trading price and low trading volume |
| Historically, the market price of our common stock has been highly volatile and the market for our common stock has experienced significant price and volume fluctuations, some of which are unrelated to our company’s operating performance |
| Since January 1, 2001, the trading price of our stock has fluctuated from a high of dlra15dtta50 to a low of dlra0dtta61 |
| It is likely that the market price of our common stock will continue to fluctuate in the future |
| Factors which may have a significant adverse effect on our common stock’s market price include: • actual or potential clinical or regulatory events relating to our products or compounds under development; • other regulatory developments in Europe or the United States; • announcements by us or our competitors of technological innovations or new commercial products; • an unexpected termination of one of our partnerships; • developments concerning our proprietary rights, including patent and litigation matters; • general market conditions; and • quarterly fluctuations in our cash position, revenues and other financial results |
| 19 ______________________________________________________________________ [46]Table of Contents The average daily trading volume of our common stock for the twelve-month period ending January 1, 2006 was approximately 313cmam000 shares |
| Anti-takeover provisions in our charter and by-laws and Massachusetts law may result in management entrenchment and adversely affect our stock price |
| Anti-takeover provisions in our charter, our by-laws and Massachusetts statutes could delay or make more difficult a merger, tender offer or proxy contest involving us |
| These provisions may delay or prevent a change of control without action by the shareholders, and may resist important changes shareholders seek to make if they are dissatisfied with the conduct of our management |
| Therefore, these provisions could result in the entrenchment of our management and adversely affect the price of our common stock |
| Our charter grants authority to the board of directors to issue series of preferred stock with certain rights and privileges, including voting rights, as it deems appropriate |
| This authority may enable our board of directors to deter or delay a change in control despite a shift in stock ownership, as a result of an increase in the number of shares needed to gain voting control |
| This may have the effect of discouraging tender offers and proxy contests, and give management the power to reject certain transactions which might be desired by shareholders |
| This provision could also be deemed to benefit incumbent management to the extent it deters offers by persons who would wish to make changes in management or exercise control over management |
| In addition, our by-laws may have the effect of preventing changes in our management because shareholders are required to give us written notice of any proposal or director nomination within a specified period of time before the annual meeting of shareholders, certain qualifications for a person to be elected to the board of directors must be established, and shareholders are prohibited from calling a special meeting of shareholders, unless the shareholder owns 90prca of our outstanding voting stock |
| Our shareholder rights plan is another anti-takeover device |
| It involves a distribution to our shareholders of certain rights to acquire shares of our capital stock in the event of an acquisition of a predetermined number of shares by an investor |
| The shareholder rights plan is designed to deter coercive takeover tactics and to encourage a party interested in acquiring the corporation to negotiate with the board of directors |
| Certain Massachusetts corporate statutes provide anti-takeover protections |
| Our charter gives effect to a provision of Massachusetts law that places directors of publicly-held Massachusetts corporations into three classes of nearly equal sizes with staggered terms, thereby permitting only one-third of the board of directors to be elected at once |
| In addition, with certain exceptions, Massachusetts law prohibits a publicly-held Massachusetts corporation from engaging in a business combination transaction with an “interested stockholder” for a period of three years |
| An “interested stockholder” is a person who owns 5prca or more of the outstanding voting stock of the corporation |
| Finally, our by-laws include a provision excluding us from the applicability of a Massachusetts statute that denies voting rights to any person acquiring 20prca or more of the outstanding voting stock of a corporation, unless such voting rights are approved by a majority of the corporation’s disinterested shareholders |
| Our by-laws may be amended at any time to subject us to this statute prospectively |