| NEUROBIOLOGICAL TECHNOLOGIES INC /CA/ ITEM 1A RISK FACTORS We may need to raise additional capital to fund ongoing operations |
| If we are unable to raise additional capital, we may be forced to curtail operations |
| If we succeed in raising additional capital through a financing transaction, it may adversely affect our stock price |
| In order to maintain sufficient cash and investments to fund future operations, we may need to raise additional capital |
| In August 2005, we obtained a dlra10 million revolving credit facility |
| The amount of money we can access from this facility may be limited based on certain liquidity covenants |
| We have received dlra29 million from Celtic through June 2006 and, pursuant to the terms of a promissory note issued by Celtic, are entitled to receive a payment of dlra4 million on January 15, 2007 |
| While we believe that our available liquidity is adequate to fund our operations at least through June 30, 2007, we may seek to raise up to dlra25 million in additional capital over the next twelve to 24 months through various alternatives, including selling shares of our common stock |
| If we raise capital by issuing additional shares of common stock at a price per share less than the then-current market price per share, the value of the shares of our common stock then outstanding may be reduced |
| Further, even if we were to sell shares of common stock at prices equal to or higher than the current market price, the issuance of additional shares may depress the market price of our common stock and dilute voting rights |
| We may not be able to raise capital on terms that we find acceptable, or at all |
| If we are unable to raise additional capital to fund future operations, then we might have to reduce operations or defer or abandon one or more of our clinical or preclinical research programs |
| We have restated our previously issued consolidated financial statements for the year ended June 30, 2005 and have a material weakness in our internal control over financial reporting that requires remediation |
| Pursuant to Section 404 of the Sarbanes-Oxley Act, we have concluded that our internal control over financial reporting was not effective at June 30, 2006 |
| This Annual Report on Form 10-K includes restated audited consolidated financial statements for the fiscal year ended June 30, 2005 and restated unaudited condensed consolidated financial statements for the quarters ended September 30, 2004 through March 31, 2006 |
| This restatement results from errors that were identified with respect to the accounting for acquisition costs assigned to certain tangible assets, intangible assets and in-process research and development acquired in connection with our acquisition of Empire Pharmaceuticals, Inc |
| As of June 30, 2006, our management has determined that we lacked the necessary internal controls and technical expertise and experience to ensure proper accounting of highly complex accounting issues and transactions related to sales and purchases of assets in accordance with US generally accepted accounting principles |
| We consider this deficiency to be a material weakness |
| This material weakness at June 30, 2006 caused us to conclude that our internal control over financial reporting was not effective as of June 30, 2006 |
| We intend to remediate this material weakness by improving our internal controls, enhancing our in-house technical expertise and accessing external experts to assist management in handling highly complex accounting issues and transactions in accordance with US generally accepted accounting principles, to strengthen our internal control over financial reporting and to prevent the recurrence of the circumstances that resulted in our determination to restate prior period financial statements |
| Because we have concluded that our internal control over financial reporting was not effective at June 30, 2006, we could be subject to regulatory sanctions and a loss of public confidence in our internal controls |
| In addition, any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to timely meet our regulatory reporting obligations |
| 17 ______________________________________________________________________ [46]Table of Contents In addition, this Annual Report on Form 10-K was not filed within the time period required by the rules of the Securities and Exchange Commission |
| As a result, we are deemed to be untimely in our reporting obligations and will thus be unable (for a period of time) to utilize certain forms for the registration of securities or other purposes |
| We currently have a registration statement on Form S-3 (File Nodtta 333-123017) on file with the Securities and Exchange Commission, which has not been declared effective |
| While we expect that we will be able to register shares on this Form S-3 if and when it is declared effective, we will not be eligible to register shares on any new Forms S-3 for a period of one year (currently anticipated to be November 2007) |
| We must meet stringent ongoing requirements of NASDAQ to maintain the listing of our common stock on the NASDAQ Capital Market |
| As previously announced, the staff of the NASDAQ Stock Market notified us on September 28, 2006 that our common stock was subject to delisting from the NASDAQ Capital Market due to our failure to timely file this Annual Report on Form 10-K for the fiscal year ended June 30, 2006 |
| We have requested an appeal of the staff’s determination and expect to be able to resolve the filing delay before NASDAQ would take any delisting action |
| There can be no assurance, however, that any request for an appeal will be granted or that our common stock will not be delisted |
| Because of the untimely filing of this Form 10-K or if we otherwise fail to comply with NASDAQ’s requirements for continued listing, we could be subject to immediate delisting |
| The delisting of our common stock would significantly affect the ability of investors to trade our securities and would significantly negatively affect the value and liquidity of our common stock |
| We are dependent on Merz and its marketing partners, Forest and Lundbeck, for the successful commercialization of Memantine |
| From fiscal 2003 through June 30, 2006 we have received license fee and royalty payments totaling dlra19dtta2 million from Merz related to our portion of payments received by Merz pursuant to its agreements with Forest and Lundbeck, its marketing partners |
| Our share of marketing payments received by Merz from Forest and Lundbeck and royalties on Memantine sales made by Merz or its marketing partners, depend, among other things, on the continuation of our research and marketing cooperation agreement with Merz and CMCC Although Merz has received approval to market Memantine for Alzheimer’s disease in Europe, we are not entitled to receive royalty payments for Memantine sales for Alzheimer’s disease in certain European countries, and any commercialization efforts in these markets would not directly benefit us |
| If Merz is unable to continue to successfully commercialize Memantine, or if Memantine is not commercialized for indications or in markets where we are entitled to royalty payments, our revenues would be adversely affected |
| In February 2005, Merz made a royalty payment to us in the amount of dlra765cmam000 for sales of Memantine during the quarter ended September 30, 2004, for the treatment of moderate-to-severe Alzheimer’s disease |
| Merz informed us that the payment reflected a one-time reduction of dlra108cmam000 to correct an apparent over-payment on royalties on certain sales outside of the United States in earlier quarters |
| We may be subject to such adjustments in the future |
| Merz or CMCC can terminate our research and marketing cooperation agreement upon six months’ notice in the event that Merz or its marketing partners do not continue to develop Memantine for neuropathic pain or another indication covered by the CMCC patents |
| The termination of our agreement with Merz or any failure by Merz or its partners to successfully commercialize Memantine could reduce 18 ______________________________________________________________________ [47]Table of Contents or terminate our future royalties under the research and marketing cooperation agreement and would have a material adverse effect on our business, financial condition and results of operations |
| We have recently been informed by Forest and Merz that they do not plan to pursue further development of Memantine for neuropathic pain |
| As a result, we, Merz and CMCC are discussing options for the development of Memantine for the indications covered by the CMCC patents |
| Our product candidates are based on new technologies and therefore are subject to numerous inherent risks of failure |
| Our product candidates are based on new and relatively unproven technologies |
| Viprinex has previously failed in the Phase III clinical trial in Europe conducted by Knoll AG, where patients receiving Viprinex in the trial suffered from intercranial hemorrhaging and higher mortality rates than those patients receiving the placebo treatment |
| A Phase III clinical trial conducted by Forest for Memantine for neuropathic pain failed to meet the primary endpoint |
| As evidenced by these trials, our product candidates face numerous risks of failure, including the possibility that these drug candidates may: • be found to be unsafe, ineffective or toxic; or • fail to receive necessary regulatory clearances |
| If any of these risks of failure should materialize, we may be forced to make additional significant expenditures for further clinical trials or cease further development of the drug candidate |
| Additionally, these risks may affect our ability to enroll patients in our clinical trials and/or enroll sites to conduct our clinical trials, as we have seen in the slow patient enrollment to date in our Viprinex clinical trials |
| Because we are currently conducting much of the clinical development work ourselves for the Viprinex clinical trials, and yet have only limited resources and experience in these areas, we may be unable to successfully enroll sites and encourage patient enrollment |
| We are dependent upon the Celtic entities for the development and commercialization of XERECEPT In November 2005, we completed the sale of all our rights and assets related to XERECEPT to two newly-formed subsidiaries of Celtic |
| Under the terms of the agreement, we are eligible to receive up to dlra15 million upon the achievement of certain regulatory objectives, and if XERECEPT is approved for commercial sale, we are eligible to receive profit-sharing payments on sales of XERECEPT in the United States and royalties on sales elsewhere in the world |
| However, because Celtic has assumed control of the clinical development of XERECEPT throughout the world, our ability to receive these payments largely depends on Celtic |
| Although we oversee the clinical development process, Celtic controls the design and execution of clinical trials and will direct the final regulatory approval process and commercialization, if the product is approved |
| The clinical development and commercialization of a new drug candidate is complex and requires significant expertise and experience |
| If Celtic is unable to successfully develop and market XERECEPT, we may not receive the potential development milestone payments, and the value of our potential future royalty and profit-sharing rights could be greatly diminished |
| Since November 2005, a substantial portion of our revenues have included the reimbursements we receive from Celtic for our direct expenses in providing clinical development services related to XERECEPT, combined with the amortized portion of the deferred revenue on the sale of the rights and 19 ______________________________________________________________________ [48]Table of Contents assets |
| Under the terms of our services agreement with Celtic, those services could be reduced or in certain circumstances, such as our breach of the agreement or a change of control, terminated, which would adversely affect our revenues |
| We have a history of losses and we may never achieve or maintain profitability |
| We have experienced operating losses in every year since inception, other than in fiscal 2001, resulting from funding the development and clinical testing of our product candidates |
| As of June 30, 2006, our accumulated deficit was approximately dlra95dtta1 million and we expect to continue to incur operating losses in the next several years as we continue our clinical trials for Viprinex and pursue potential acquisitions of complementary businesses, product candidates or technologies |
| To achieve profitability, we would need to generate significant additional revenue with a positive gross margin |
| Although we expect that our royalty revenues from the sales of Memantine will increase in future periods, these increases may not occur and, even if they do increase in line with our expectations, we do not expect that these increases will be sufficient to allow us to operate profitably at any time in the foreseeable future |
| Even if Viprinex is approved for commercialization, it may not be successfully commercialized |
| If Viprinex is approved for commercialization, we will be required either to market the drug directly, which would require the recruitment and training of a direct sales force, or license the drug to a larger biotechnology or pharmaceutical company with an existing sales force |
| The building of a direct sales force is costly, and we may not succeed in directly marketing any approved drug |
| If we elected to license the approved drug to a larger company with an existing sales force, we would be required to share the revenues from commercialization and would lose a significant degree of control over the commercialization of the drug |
| Our industry is highly competitive |
| Competition in the biopharmaceutical industry is intense and is expected to increase |
| There are other therapies under development for each of our therapeutic targets, and the development and sale of drugs for the treatment of the therapeutic targets that we and our collaborative partners are pursuing are highly competitive |
| Specifically, we face known competition from the following companies for each of the indications listed below |
| Acute ischemic stroke (Viprinex): • Activase^® (alteplase, recombinant)—Genentech, Inc |
| Peritumoral brain edema (XERECEPT): • Decadron^® (dexamenthasone)—Merck & Co |
| Alzheimer’s disease (Memantine): • ARICEPT^® (donepezil HCI)—Eisai Inc |
| • Exelon^® (rivastigmine tartrate)—Novartis • Reminyl^® (galantamine HBr)—Janssen Pharmaceutica 20 ______________________________________________________________________ [49]Table of Contents Neuropathic pain (Memantine) • Neurontin^® (gabapentin)—Parke-Davis • Cymbalta^® (duloxetine HCI)—Lilly • Lyrica^® (pregabalin)—Pfizer Inc |
| Our competitors are generally larger biotechnology or pharmaceutical companies with significantly greater financial resources and experience and have more internal development, sales and marketing personnel |
| Accordingly, we may not be able to develop products that will be as efficacious or as cost-effective as currently-marketed products or those products being developed by our competitors |
| In addition, others may develop, manufacture and market products that could compete with those that we are developing |
| Because we do not have our own manufacturing facilities, we face risks from outsourcing |
| Although Merz and its marketing partners have the responsibility of supplying Memantine for the clinical trials and commercialization of the drug, we must procure our own supplies of Viprinex for our clinical trials and supply XERECEPT to Celtic for its clinical trials |
| In January 2006, we entered into an agreement, which was amended in March 2006, with Nordmark to build facilities to house and maintain our colony of Malayan pit vipers and to purify the snake venom that is used to produce the active pharmaceutical ingredient of Viprinex |
| We have previously entered into agreements with Nordmark for the supply of the active pharmaceutical ingredient of Viprinex for our clinical trials and with Baxter Pharmaceutical Solutions, LLC for the development, supply and packaging of the Viprinex product |
| Any difficulties in obtaining raw Malayan pit viper venom in necessary quantities and potencies or failure of these suppliers could delay our clinical trials and impede the development and commercialization of Viprinex |
| Pursuant to our agreement with Celtic, we are required to supply XERECEPT for Celtic’s clinical trials |
| We have previously experienced delays obtaining the necessary clinical supplies of XERECEPT due to manufacturing difficulties |
| We may experience further delays in obtaining clinical supplies of XERECEPT, which could cause us to fail to meet our obligations to Celtic and delay the XERECEPT clinical trials |
| Further, although we perform audits on our contractors who supply our drug candidates to assess their compliance with the FDA’s current Good Manufacturing Practice, or cGMP, regulations, there can be no assurance that our suppliers will meet cGMP standards or be able to synthesize and deliver our drug compounds in a timely fashion |
| Although alternative cGMP suppliers of the bulk drugs and of finished dosage form products are available to us, Viprinex is difficult and costly to produce, and we believe that there is only a limited number of manufacturers who are capable of producing the compound |
| The loss of our current supply arrangement could significantly delay our planned clinical trials for Viprinex and could impact the commercialization of the drug, if it is approved by the FDA As a result of our reliance on manufacturers, we face the following outsourcing risks: • the delay of our preclinical and human clinical testing if our contractors are unable to supply sufficient quantities of product candidates manufactured in accordance with cGMP on acceptable terms; • the delay of market introduction and subsequent sales if we should encounter difficulties establishing relationships with manufacturers to produce, package and distribute products; and • adverse effects on FDA pre-market approval of potential products if contract manufacturers do not adhere to cGMP regulations |
| Because of these risks, our dependence on third parties for the manufacture of products may adversely affect our ability to develop and deliver products on a timely and competitive basis and our results of operations |
| 21 ______________________________________________________________________ [50]Table of Contents The FDA and state and local agencies, and comparable agencies and entities in foreign countries impose substantial requirements on the manufacturing and marketing of human therapeutics through lengthy and detailed laboratory and clinical testing procedures, sampling activities and other costly and time consuming procedures |
| Fulfillment of regulatory requirements for marketing human therapeutics typically takes many years and varies substantially based on the type, complexity, and novelty of the drug for which approval is sought |
| Government regulation may: • delay for a considerable period of time or prevent marketing of any product that we may develop; and/or • impose costly procedures upon our activities |
| Either of these effects of government regulation may provide an advantage to our competitors |
| There can be no assurance that FDA or other regulatory approval for any products developed by us will be granted on a timely basis or at all |
| Any delay in obtaining, or failure to obtain, required approvals would adversely affect the marketing of our proposed products and our ability to earn product revenues or royalties |
| In addition, success in pre-clinical or early stage clinical trials does not assure success in later-stage clinical trials |
| For example, although our Phase II clinical trials for Memantine for the treatment of neuropathic pain produced positive results, subsequent clinical trials conducted by Forest did not replicate these results |
| Similarly, the results of Knoll AG’s Phase III clinical trials for Viprinex in the United States were not replicated in the subsequent European clinical trial, and we cannot be certain that the current Phase III clinical trials that we are conducting will not encounter similar difficulties |
| Similar variations in later-stage clinical trial results may also occur in XERECEPT, as longer trials and larger patient populations are used |
| Further, since we began the first Phase III clinical trial of XERECEPT in April 2004, patient enrollment has been slower than anticipated |
| We were not able to commence the second Phase III trial until February 2006, and enrollment is proceeding much more slowly than expected |
| If we cannot improve enrollment or reach an agreement with the FDA to revise the clinical program, the development of XERECEPT could be impeded, making it less likely that we and Celtic will be able to further develop or successfully commercialize the drug |
| We have also experienced delays in enrollment in our Viprinex trials |
| These delays have already caused us to revise our estimated completion dates for these trials, and any additional delays could further impede the timely development of Viprinex and could further increase our development costs and risks |
| As with any regulated product, additional government regulations may be instituted which could delay regulatory approval of our potential products |
| Additional government regulations that might result from future legislation or administrative action cannot be predicted |
| We have relied and will continue to rely on others for research, development and commercialization of our potential products |
| We have periodically entered into various contractual arrangements with clinical research organizations, or CROs, consultants, academic collaborators, and others, and we are dependent upon the level of commitment and subsequent success of these outside parties in performing their responsibilities |
| Certain of these agreements may place significant responsibility on the collaborator or contractor for pre-clinical testing and human clinical trials and for preparing and submitting submissions for regulatory approval for potential products |
| In June 2005, we entered into an agreement with SCIREX Corporation, a CRO, for the design and management of our anticipated Phase III clinical trials for Viprinex |
| Although we amended the agreement in April 2006 to significantly reduce scope of the services to be provided by SCIREX, we are still dependent on SCIREX for services to some degree 22 ______________________________________________________________________ [51]Table of Contents for the success of our ongoing clinical trials for Viprinex |
| In 2006, we entered into an agreement with S&P Pharmatest Management GmbH, or S&P, to serve as our CRO in Europe |
| Recently, we have retained several clinical research associates, or CRAs, as consultants to oversee the Viprinex clinical trials, and we expect to hire additional CRAs over the next few months |
| If SCIREX, S&P, other CROs, these CRAs or any other collaborator, licensor or contractor fails to perform, the clinical development of Viprinex could be delayed and our business, financial condition and results may be adversely affected |
| We have also relied on scientific, mechanical, clinical, commercial and other data supplied and disclosed by others in entering into these agreements |
| We have relied on this data in support of applications for human clinical trials for our potential products |
| Although we have no reason to believe that this information contains errors or omissions of fact, it is possible that there are errors or omissions of fact that would change materially our view of the future likelihood of FDA approval or commercial viability of these potential products |
| Our success will depend, in large part, on our ability to obtain or license patents, protect trade secrets and operate without infringing upon the proprietary rights of others |
| The patent position of biotechnology firms generally is highly uncertain because: • patents involve complex legal and factual issues that have recently been the subject of much litigation; • no consistent policy has emerged from the United States Patent and Trademark Office regarding the breadth of claims allowed or the degree of protection afforded under biotechnology patents; and • others may independently develop similar products, duplicate any of our potential products, or design around the claims of any of our potential patented products |
| In addition, because of the time delay in patent approval and the secrecy afforded United States patent applications, we do not know if other applications, which might have priority over our applications, have been filed |
| As a result of all of these factors, there can be no assurance that patent applications relating to our potential products or processes will result in patents being issued, or that patents, if issued, will provide protection against competitors who may successfully challenge our patents, obtain patents that may have an adverse effect on our ability to conduct business, or be able to circumvent our patent position |
| No infringement claims have been brought by third parties, and we are not aware of any basis on which such claims could be made |
| Any infringement claims brought by a third party, even if these claims were ultimately found to be without merit, would be costly to defend against and would likely interfere with our operations while the claim was pending |
| If we were unsuccessful in defending against any such claims, it may be necessary for us to license certain additional rights |
| These licenses may be costly and may not be available on terms we find acceptable, if at all |
| Accordingly, the unfavorable resolution of any patent infringement claim could adversely affect our operations and prospects |
| We have recently made several changes to the composition of our management team and expect to make more |
| If the members of our management team are unable to work together effectively, our ability to manage our business will suffer |
| Following our acquisition of Empire in July 2004, we expanded our management team, adding Stephen J Petti as Vice President, Product Development, David E Levy as Vice President, Clinical 23 ______________________________________________________________________ [52]Table of Contents Development, Jonathan R Wolter as Vice President and Chief Financial Officer and Karl G Trass as Vice President, Regulatory Affairs |
| In June 2006, Messrs |
| Petti and Wolter resigned as officers and employees of the Company for personal reasons |
| In July 2006, Craig W Carlson joined the Company as Vice President and Chief Financial Officer |
| We are currently seeking to fill other management level positions |
| Changes in our management team can be disruptive to our business and, if our management team cannot work together effectively, our ability to manage our business will suffer |
| Clinical trials or marketing of any of our potential products may expose us to liability claims from the use of such products, which our insurance may not cover |
| We currently have a limited amount of product liability insurance for our clinical trials, with coverage limits of dlra5 million per incident and dlra5 million in the aggregate |
| It is possible that our current insurance may not be adequate to cover liabilities arising from our clinical trials |
| Our current product liability insurance does not cover the commercial sales of products |
| We cannot be sure that we will be able to obtain product liability insurance covering commercial sales if and when they commence or, if such insurance is obtained, that sufficient coverage can be acquired at a reasonable cost |
| An inability to obtain insurance at an acceptable cost or otherwise protect against potential product liability claims could prevent or inhibit commercialization of any products we develop |
| The market price of our common stock has been, and is likely to continue to be, highly volatile |
| The average daily trading volume of our common stock has historically been low, even when compared to that of other biopharmaceutical companies |
| Because of our relatively low trading volume, our stock price can be highly volatile |
| We have issued a total of 4cmam774cmam333 shares of common stock in connection with our acquisition of Empire Pharmaceuticals |
| Any large sales that may be made by former stockholders of Empire or other stockholders could have a negative effect our price and its volatility |
| Additional factors that may affect the volatility of our stock price include: • announcements of the results of pre-clinical studies and clinical trials by us, Celtic, Merz or its marketing partners, or our competitors; • other evidence of the safety or efficacy of our products, or those of Celtic, Merz or its marketing partners, or our competitors; • the termination of our strategic research and marketing cooperation agreement with Merz and CMCC or our collaboration and services agreement with Celtic; • announcements of technological innovations or new therapeutic products by us or our competitors; • developments in patent or other proprietary rights of us or our competitors, including litigation; • fluctuations in our operating results; • government regulation and health care legislation; and • market conditions for life science companies’ stocks in general |