| HOLLIS EDEN PHARMACEUTICALS INC /DE/ Item 1A Risk Factors In evaluating our business, you should consider the following discussion of risks, in addition to other information contained in this report as well as our other public filings with the Securities and Exchange Commission |
| Any of the following risks could materially adversely affect our business, financial condition, results of operations and prospects |
| If we do not obtain government regulatory approval for our products, we cannot sell our products and we will not generate revenues |
| Our principal development efforts are currently centered around immune regulating hormones, a class of drug candidates which we believe shows promise for the treatment of diseases and disorders in which the body is unable to mount an appropriate immune response |
| However, all drug candidates require approval by the FDA before they can be commercialized in the US as well as approval by various foreign government agencies before they can commercialized in other countries |
| These regulations change from time to time and new regulations may be adopted |
| None of our drug candidates have been approved for commercial sale |
| We may incur significant additional operating losses for the foreseeable future as we fund development, preclinical and clinical testing and other expenses in support of regulatory approval of our drug candidates |
| While limited clinical trials of our drug candidates have been conducted to date, significant additional trials are required, and we may not be able to demonstrate that these drug candidates are safe or effective |
| If we are unable to demonstrate the safety and effectiveness of a particular drug candidate to the satisfaction of regulatory authorities, the drug candidate will not obtain required government approval |
| If we do not receive FDA or foreign approvals for our drug candidates, we will not be able to sell products and will not generate revenues |
| If we receive regulatory approval of one of our drug candidates, such approval may impose limitations on the indicated uses for which we may market the resulting product, which may limit our ability to generate significant revenues |
| Further, US or foreign regulatory agencies could change existing, or promulgate new, regulations at any time which may affect our ability to obtain approval of our drug candidates or require significant additional costs to obtain such approvals |
| In addition, if 19 ______________________________________________________________________ [45]Table of Contents regulatory authorities determine that we or a partner conducting research and development activities on our behalf have not complied with regulations in the research and development of one of our drug candidates, then they may not approve the drug candidate and we will not be able to market and sell it |
| If we were unable to market and sell our drug candidates, our business and results of operations would be materially and adversely affected |
| If we do not successfully commercialize our products, we may never achieve profitability |
| We have experienced significant operating losses to date because of the substantial expenses we have incurred to acquire and fund development of our drug candidates |
| We have never had operating revenues and have never commercially introduced a product |
| Our accumulated deficit was approximately dlra161dtta3 million as of December 31, 2005 |
| Our net losses for fiscal years 2005, 2004 and 2003 were approximately dlra29dtta4 million, dlra24dtta8 million and dlra25dtta7 million, respectively |
| Many of our research and development programs are at an early stage |
| Potential drug candidates are subject to inherent risks of failure |
| These risks include the possibilities that no drug candidate will be found safe or effective, meet applicable regulatory standards or receive the necessary regulatory clearances |
| Even safe and effective drug candidates may never be developed into commercially successful drugs |
| If we are unable to develop safe, commercially viable drugs, we may never achieve profitability |
| If we become profitable, we may not remain profitable |
| The market for treating Acute Radiation Syndrome is uncertain |
| We do not believe any drug has ever been approved and commercialized for the treatment of severe acute radiation injury |
| In addition, the incidence of large-scale exposure to nuclear or radiological events has been low |
| Accordingly, even if NEUMUNE, our lead drug candidate to treat Acute Radiation Syndrome (ARS), is approved by the FDA, we cannot predict with any certainty the size of this market |
| The potential market for NEUMUNE is largely dependent on the size of stockpiling orders, if any, procured by government agencies |
| While a number of governments have historically stockpiled drugs to treat indications such as smallpox, anthrax exposure, plague, tularemia and certain long-term effects of radiation exposure, we are unaware of any significant stockpiling orders for drugs to treat ARS On December 9, 2005, the US Department of Health and Human Services (DHHS) issued a Request for Proposal (RFP) which specified an initial potential stockpiling order of up to 100cmam000 treatment regimens, which is substantially lower than we had anticipated |
| While we have responded to the RFP, we cannot guarantee that we will be able to meet the requirements set forth in the RFP or that we will receive any resulting stockpiling orders |
| A decision by any department of the US Government to enter into a commitment to purchase NEUMUNE, whether before or after FDA approval, is largely out of our control |
| Our development plans and timelines may vary substantially depending on whether we receive such a commitment and the size of such commitment, if any |
| In addition, even if NEUMUNE is approved by regulatory authorities, we cannot guarantee that we will receive any stockpiling orders for NEUMUNE, that any such order would be profitable to us or that NEUMUNE will achieve market acceptance by the general public |
| As a result of our intensely competitive industry, we may not gain enough market share to be profitable |
| The biotechnology and pharmaceutical industries are intensely competitive |
| We have numerous competitors in the US and elsewhere |
| Because we are pursuing potentially large markets, our competitors include major multinational pharmaceutical companies, specialized biotechnology firms and universities and other research institutions |
| Several of these entities have already successfully marketed and commercialized products that will compete with our products, assuming that our products gain regulatory approval |
| Companies such as Amgen Inc |
| have developed or are developing products to boost neutrophils after chemotherapy |
| are also developing and marketing new drugs for the treatment of chronic inflammatory conditions |
| Companies such as GlaxoSmithKline, Merck & Company, Roche Pharmaceuticals, Pfizer Inc |
| and Abbott Laboratories have significant market share for the treatment of a number of infectious diseases such as HIV In addition, biotechnology companies such as Gilead Sciences Inc, Chiron Corporation and Vertex Pharmaceuticals Inc, as well as many others, have marketed products or research and development programs in these fields |
| 20 ______________________________________________________________________ [46]Table of Contents Many of these competitors have greater financial and other resources, larger research and development staffs and more effective marketing and manufacturing organizations than we do |
| In addition, academic and government institutions have become increasingly aware of the commercial value of their research findings |
| These institutions are now more likely to enter into exclusive licensing agreements with commercial enterprises, including our competitors, to develop and market commercial products |
| Our competitors may succeed in developing or licensing technologies and drugs that are more effective or less costly than any we are developing |
| Our competitors may succeed in obtaining FDA or other regulatory approvals for drug candidates before we do |
| If competing drug candidates prove to be more effective or less costly than our drug candidates, our drug candidates, even if approved for sale, may not be able to compete successfully with our competitors’ existing products or new products under development |
| If we are unable to compete successfully, we may never be able to sell enough products at a price sufficient to permit us to generate profits |
| We may need to raise additional money before we achieve profitability; if we fail to raise additional money, it could be difficult to continue our business |
| As of December 31, 2005, our cash and cash equivalents totaled approximately dlra45dtta1 million |
| In February 2006, we completed an offering of common stock and warrants to purchase common stock, pursuant to which we received net proceeds of approximately dlra24dtta4 million |
| Based on our current plans, we believe these financial resources, and interest earned thereon, will be sufficient to meet our operating expenses and capital requirements for at least the next 12 months |
| However, changes in our research and development plans or other events affecting our operating expenses may result in the expenditure of such cash before that time |
| We may require substantial additional funds in order to finance our drug discovery and development programs, fund operating expenses, pursue regulatory clearances, develop manufacturing, marketing and sales capabilities, and prosecute and defend our intellectual property rights |
| We may seek additional funding through public or private financing or through collaborative arrangements with strategic partners |
| You should be aware that in the future: • we may not obtain additional financial resources when necessary or on terms favorable to us, if at all; and • any available additional financing may not be adequate |
| If we cannot raise additional funds when needed, or on acceptable terms, we will not be able to continue to develop our drug candidates |
| Failure to protect our proprietary technology could impair our competitive position |
| We own or have obtained a license to numerous US and foreign patents and foreign patent applications |
| Our success depends in part on our ability to obtain and defend patent rights and other intellectual property rights that are important to our ability to commercialize our drug candidates, if approved and our ability to operate our business without infringing the proprietary rights of third parties |
| We place considerable importance on obtaining patent protection for significant new technologies, products and processes |
| Legal standards relating to the validity of patents covering pharmaceutical and biotechnology inventions and the scope of claims made under such patents are still developing |
| In some of the countries in which we intend to market our drug candidates, if approved, pharmaceuticals are either not patentable or have only recently become patentable |
| Past enforcement of intellectual property rights in many of these countries has been limited or non-existent |
| Future enforcement of patents and proprietary rights in many other countries may be problematic or unpredictable |
| Moreover, the issuance of a patent in one country does not assure the issuance of a similar patent in another country |
| Claim interpretation and infringement laws vary by nation, so the extent of any patent protection is uncertain and may vary in different jurisdictions |
| Our domestic patent position is also highly uncertain and involves complex legal 21 ______________________________________________________________________ [47]Table of Contents and factual questions |
| The applicant or inventors of subject matter covered by patent applications or patents owned by or licensed to us may not have been the first to invent or the first to file patent applications for such inventions |
| Due to uncertainties regarding patent law and the circumstances surrounding our patent applications, the pending or future patent applications we own or have licensed may not result in the issuance of any patents |
| Existing or future patents owned by or licensed to us may be challenged, infringed upon, invalidated, found to be unenforceable or circumvented by others |
| Further, any rights we may have under any issued patents may not provide us with sufficient protection against similar competitive products or technologies that do not infringe on patents or otherwise cover commercially valuable products or processes |
| Litigation or other disputes regarding patents and other proprietary rights may be expensive, cause delays in bringing products to market and harm our ability to operate |
| The manufacture, use or sale of our drug candidates may infringe on the patent rights of others |
| If we are unable to avoid infringement of the patent rights of others, we may be required to seek a license, defend an infringement action or challenge the validity of the patents in court |
| Patent litigation is costly and time consuming and can preclude, delay or suspend commercialization of products |
| We may not have sufficient resources to bring these actions to a successful conclusion |
| In addition, if we do not obtain a license, develop or obtain non-infringing technology, or fail to successfully defend an infringement action or have the patents we are alleged to infringe declared invalid, we may: • incur substantial money damages; • encounter significant delays in bringing our drug candidates to market; • be precluded from participating in the manufacture, use or sale of our drug candidates or methods of treatment without first obtaining licenses to do so; and/or • not be able to obtain any required license on favorable terms, if at all |
| In addition, if another party claims the same subject matter or subject matter overlapping with the subject matter that we have claimed in a US patent application or patent, we may decide or be required to participate in interference proceedings in the US Patent and Trademark Office in order to determine the priority of invention |
| Loss of such an interference proceeding would deprive us of patent protection sought or previously obtained and could prevent us from commercializing our products |
| Participation in such proceedings could result in substantial costs, whether or not the eventual outcome is favorable |
| These additional costs could adversely affect our financial results |
| Litigation may be expensive and time consuming and may adversely affect our operations |
| From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business |
| Participation in such proceedings is time consuming and could result in substantial costs, whether or not the eventual outcome is favorable |
| These additional costs could adversely affect our financial results |
| Confidentiality agreements with employees and others may not adequately prevent disclosure of trade secrets and other proprietary information |
| In order to protect our proprietary technology and processes, we also rely in part on confidentiality agreements with our employees, consultants, outside scientific collaborators and sponsored researchers and other advisors |
| These agreements may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information |
| In addition, others may independently discover trade secrets and proprietary information |
| Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position |
| 22 ______________________________________________________________________ [48]Table of Contents Existing pricing regulations and reimbursement limitations may reduce our potential profits from the sale of our products |
| The requirements governing product licensing, pricing and reimbursement vary widely from country to country |
| In many countries, the pricing review period begins after product-licensing approval is granted |
| As a result, we may obtain regulatory approval for a drug candidate in a particular country, but then be subject to price regulations that reduce our profits from the sale of the product |
| In some foreign markets pricing of prescription pharmaceuticals is subject to continuing government control even after initial marketing approval |
| In addition, certain governments may grant third parties a license to manufacture our product without our permission |
| Such compulsory licenses may be on terms that are less favorable to us and would likely have the effect of reducing our revenues |
| Varying price regulation between countries can lead to inconsistent prices and some re-selling by third parties of products from markets where products are sold at lower prices to markets where those products are sold at higher prices |
| Any practice of exploiting price differences between countries could undermine our sales in markets with higher prices and reduce the sales of our future products, if any |
| While we do not have any applications for regulatory approval of our drug candidates currently pending, any decline in the size of the markets in which we may in the future sell commercial products, assuming our receipt of the requisite regulatory approvals, could cause the perceived market value of our business and the price of our common stock to decline |
| Our ability to commercialize our drug candidates successfully also will depend in part on the extent to which reimbursement for the cost of our drug candidates and related treatments will be available from government health administration authorities, private health insurers and other organizations |
| Third-party payors are increasingly challenging the prices charged for medical products and services |
| If we succeed in bringing any of our drug candidates to the market, such drug candidates may not be considered cost effective and reimbursement may not be available or sufficient to allow us to sell such drug candidates on a profitable or competitive basis |
| Delays in the conduct or completion of our preclinical or clinical studies or the analysis of the data from our preclinical or clinical studies may result in delays in our planned filings for regulatory approvals, or adversely affect our ability to enter into collaborative arrangements |
| The current status of our drug candidates is set forth below |
| We have either completed or are in the midst of: • animal efficacy studies with NEUMUNE for the treatment of radiation exposure; • Phase I clinical trials with NEUMUNE in the United States and the Netherlands; • Phase II clinical trials with IMMUNITIN in South Africa and Phase I/II clinical trials with IMMUNITIN in the United States for the treatment of HIV/AIDS; and • Phase II clinical trials with IMMUNITIN in Thailand for the treatment of malaria We may encounter problems with some or all of our completed or ongoing studies that may cause us or regulatory authorities to delay or suspend our ongoing studies or delay the analysis of data from our completed or ongoing studies |
| We rely, in part, on third parties to assist us in managing and monitoring our preclinical and clinical studies |
| We generally do not have control over the amount and timing of resources that our business partners devote to our drug candidates |
| Our reliance on these third parties may result in delays in completing or failure to complete studies if third parties fail to perform their obligations to us |
| If the results of our ongoing and planned studies for our drug candidates are not available when we expect or if we encounter any delay in the analysis of the results of our studies for our drug candidates: • we may not have the financial resources to continue research and development of any of our drug candidates; and 23 ______________________________________________________________________ [49]Table of Contents • we may not be able to enter into collaborative arrangements relating to any drug candidate subject to delay in regulatory filing |
| Any of the following reasons, among others, could delay or suspend the completion of our ongoing and future studies: • delays in enrolling volunteers; • interruptions in the manufacturing of our drug candidates or other delays in the delivery of materials required for the conduct of our studies; • lower than anticipated retention rate of volunteers in a trial; • unfavorable efficacy results; • serious side effects experienced by study participants relating to the drug candidate; • new communications from regulatory agencies about how to conduct these studies; or • failure to raise additional funds |
| If the manufacturers of our drug candidates do not comply with current Good Manufacturing Practices regulations, or cannot produce sufficient quantities of our drug candidates to enable us to continue our development, we will fall behind on our business objectives |
| Manufacturers producing our drug candidates must follow current Good Manufacturing Practices regulations enforced by the FDA and foreign equivalents |
| If a manufacturer of our drug candidates does not conform to the Good Manufacturing Practices regulations and cannot be brought up to such a standard, we will be required to find alternative manufacturers that do conform |
| This may be a long and difficult process, and may delay our ability to receive FDA or foreign regulatory approval of our drug candidates |
| We also rely on our manufacturers to supply us with a sufficient quantity of our drug candidates to conduct clinical trials |
| If we have difficulty in the future obtaining our required quantity and quality of supply, we could experience significant delays in our development programs and regulatory process |
| Our ability to achieve any significant revenue may depend on our ability to establish effective sales and marketing capabilities |
| Our efforts to date have focused on the development and evaluation of our drug candidates |
| As we continue preclinical and clinical studies and seek to commercialize our drug candidates, we may need to build a sales and marketing infrastructure |
| As a company, we have no experience in the sales and marketing of pharmaceutical products |
| If we fail to establish a sufficient marketing and sales force or to make alternative arrangements to have our drug candidates marketed and sold by others on attractive terms, it will impair our ability to commercialize our drug candidates and to enter new or existing markets |
| Our inability to effectively enter these markets would materially and adversely affect our ability to generate significant revenues |
| If we were to lose the services of Richard B Hollis, or fail to attract or retain qualified personnel in the future, our business objectives would be more difficult to implement, adversely affecting our operations |
| Our ability to successfully implement our business strategy depends highly upon our Chief Executive Officer, Richard B Hollis |
| Hollis’ services could impede the achievement of our objectives |
| We also highly depend on our ability to hire and retain qualified scientific and technical personnel |
| The competition for these employees is intense |
| Thus, we may not be able to continue to hire and retain the qualified personnel needed for our business |
| Loss of the services of or the failure to recruit key scientific and technical personnel could adversely affect our business, operating results and financial condition |
| 24 ______________________________________________________________________ [50]Table of Contents We may face product liability claims related to the use or misuse of our drug candidates, which may cause us to incur significant losses |
| We are currently exposed to the risk of product liability claims due to administration of our drug candidates in clinical trials, since the use or misuse of our drug candidates during a clinical trial could potentially result in injury or death |
| If we are able to commercialize our products, we will also be subject to the risk of losses in the future due to product liability claims in the event that the use or misuse of our commercial products results in injury or death |
| We currently maintain liability insurance on a claims-made basis |
| Because we cannot predict the magnitude or the number of claims that may be brought against us in the future, we do not know whether the insurance policies’ coverage limits are adequate |
| The insurance is expensive, difficult to obtain and may not be available in the future on acceptable terms, or at all |
| Any claims against us, regardless of their merit, could substantially increase our costs and cause us to incur significant losses |
| Trading in our securities could be subject to extreme price fluctuations that could adversely affect your investment |
| The market prices for securities of life sciences companies, particularly those that are not profitable, are highly volatile |
| Publicized events and announcements may have a significant impact on the market price of our common stock |
| For example: • biological or medical discoveries by competitors; • public concern about the safety of our drug candidates; • delays in the conduct or analysis of our preclinical or clinical studies; • unfavorable results from preclinical or clinical studies; • delays in obtaining or failure to obtain purchase orders of our drug candidates; • announcements in the scientific and research community; • changes in the potential commercial markets for our drug candidates; • unfavorable developments concerning patents or other proprietary rights; • unfavorable domestic or foreign regulatory or governmental developments or actions; or • broader economic, industry and market trends unrelated to our performance |
| may have the effect of temporarily or permanently driving down the price of our common stock |
| In addition, the stock market from time to time experiences extreme price and volume fluctuations which particularly affect the market prices for emerging and life sciences companies, such as ours, and which are often unrelated to the operating performance of the affected companies |
| These broad market fluctuations may adversely affect the ability of a stockholder to dispose of his shares at a price equal to or above the price at which the shares were purchased |
| In addition, in the past, following periods of volatility in the market price of a company’s securities, securities class-action litigation has often been instituted against that company |
| Any litigation against our company, including this type of litigation, could result in substantial costs and a diversion of management’s attention and resources, which could materially adversely affect our business, financial condition and results of operations |
| We may be delisted from The Nasdaq National Market, which could materially limit the trading market for our common stock |
| Our common stock is quoted on The Nasdaq National Market |
| In order to continue to be included in The Nasdaq National Market, a company must meet Nasdaq’s maintenance criteria |
| We may not be able to continue 25 ______________________________________________________________________ [51]Table of Contents to meet these listing criteria |
| Failure to meet Nasdaq’s maintenance criteria may result in the delisting of our common stock from The Nasdaq National Market |
| If our common stock is delisted, in order to have our common stock relisted on The Nasdaq National Market we would be required to meet the criteria for initial listing, which are more stringent than the maintenance criteria |
| Accordingly, if we were delisted we may not be able to have our common stock relisted on The Nasdaq National Market |
| If our common stock is removed from listing on The Nasdaq National Market, it may become more difficult for us to raise funds through the sale of our common stock or securities convertible into our common stock |
| Because stock ownership is concentrated, you and other investors will have minimal influence on stockholders’ decisions |
| Assuming that outstanding warrants and options have not been exercised, Richard B Hollis, our Chief Executive Officer, owns approximately 11prca of our outstanding common stock as of December 31, 2005 |
| Hollis exercises all of his outstanding warrants and options that vest within 60 days of December 31, 2005, Mr |
| Hollis would beneficially own approximately 18prca of our outstanding common stock |
| Hollis may be able to significantly influence our management and all matters requiring stockholder approval, including the election of directors |
| Such concentration of ownership may also have the effect of delaying or preventing a change in control of our company |
| Substantial sales of our stock may impact the market price of our common stock |
| Future sales of substantial amounts of our common stock, including shares that we may issue upon exercise of options and warrants, could adversely affect the market price of our common stock |
| Further, if we raise additional funds through the issuance of common stock or securities convertible into or exercisable for common stock, the percentage ownership of our stockholders will be reduced and the price of our common stock may fall |
| Issuing preferred stock with rights senior to those of our common stock could adversely affect holders of common stock |
| Our charter documents give our board of directors the authority to issue shares of preferred stock without a vote or action by our stockholders |
| The board also has the authority to determine the terms of preferred stock, including price, preferences and voting rights |
| The rights granted to holders of preferred stock may adversely affect the rights of holders of our common stock |
| For example, a series of preferred stock may be granted the right to receive a liquidation preference—a pre-set distribution in the event of a liquidation—that would reduce the amount available for distribution to holders of common stock |
| In addition, the issuance of preferred stock could make it more difficult for a third party to acquire a majority of our outstanding voting stock |
| As a result, common stockholders could be prevented from participating in transactions that would offer an optimal price for their shares |