| NEW RIVER PHARMACEUTICALS INC ITEM 1A RISK FACTORS Risk Factors Related to Our Business Except for the historical information contained in this annual report on Form 10-K, this annual report on Form 10-K contains forward-looking statements that involve risks and uncertainties |
| Our actual results may differ materially from those discussed here |
| Factors that could cause or contribute to differences in our actual results include those discussed in the following section, as well as those discussed in Item 7 under the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere throughout this annual report on Form 10-K You should consider carefully the following risk factors, together with all of the other information included in this annual report on Form 10–K Each of these risk factors could adversely affect our business, operating results and financial condition, as well as adversely affect the value of an investment in our common stock |
| We have a history of operating losses and may incur additional substantial losses in 2006 |
| We may never achieve profitability |
| We are focused on product development, and through January 1, 2006 we have not generated any revenues utilizing our Carrierwave technology |
| Since the end of 1997, we have incurred losses in each year of our operations, and we may continue to incur operating losses in 2006 |
| These operating losses have adversely affected and may continue to adversely affect our working capital, total assets and shareholders’ equity |
| The process of developing our products requires significant clinical, development and laboratory testing and clinical trials |
| In addition, commercialization of our product candidates will require that we obtain necessary regulatory approvals and establish sales, marketing and manufacturing capabilities, either through internal hiring or through contractual relationships with others |
| We may incur substantial losses in 2006 as a result of anticipated increases in our research and development costs, including costs associated with conducting preclinical testing and clinical trials, and regulatory compliance activities |
| We have incurred operating losses of approximately dlra31dtta8 million for the fiscal year ended January 1, 2006, approximately dlra16dtta3 million for the fiscal year ended January 2, 2005, and approximately dlra4dtta8 million for the fiscal year ended December 28, 2003 and at January 1, 2006, we had an accumulated deficit of approximately dlra70 million |
| Our ability to generate revenues and achieve profitability will depend on numerous factors, including success in: • developing and testing product candidates; • receiving regulatory approvals; • commercializing our products; and • establishing a favorable competitive position |
| Many of these factors will depend on circumstances beyond our control |
| We cannot assure you that we will ever have a product approved by the FDA, that we will bring any product to market or, if we are successful in doing so, that we will ever become profitable |
| Our product candidates are based on a technology that could ultimately prove ineffective or unsafe |
| Our product candidates are created using our proprietary Carrierwave technology |
| Our test results to date are limited to clinical studies in humans and preclinical studies in animals with respect to NRP104 and NRP290 and laboratory tests and preclinical trials in animals with respect to other product candidates |
| We have not fully characterized the mechanism of absorption of our CBDs |
| Ultimately, our research and preclinical findings, which currently indicate that our Carrierwave technology possesses beneficial properties, may prove to be incorrect, in which case the product candidates created using our Carrierwave technology may not differ substantially from competing drugs and may in fact be inferior to them |
| If these products are 23 _________________________________________________________________ [72]Table of Contents substantially identical or inferior to drugs already available, the market for our Carrierwave drugs would be reduced or eliminated |
| Based on our preclinical and clinical studies to date, we believe our lead product candidates are safe and have no known side effects other than those associated generally with therapeutic amounts of amphetamine and opioids |
| However, we may not be able to prove that our product candidates are safe |
| No assessment of the efficacy, safety or side effects of a product candidate can be considered complete until all clinical trials needed to support a submission for marketing approval are complete |
| Other than NRP104, our product candidates will require additional laboratory, animal and human testing |
| With respect to NRP104, we need to complete our third clinical abuse liability study |
| Success in earlier clinical and preclinical trials does not mean that subsequent trials will confirm the earlier findings, or that experience with use of a product in large-scale commercial distribution will not identify additional safety or efficacy issues |
| If we find that any of our products is not safe, or if efficacy of the products cannot be consistently demonstrated, we may not be able to commercialize the product, or may be required to cease distribution of the product |
| The safety of our Carrierwave formulations may vary with each drug and the ingredients used in each formulation, and therefore even if safety and effectiveness is established for one of our CBDs, this would not necessarily be predictive of the safety or effectiveness of any of our other product candidates, which would need to be separately established |
| If we are unable to develop and commercialize our product candidates successfully, we may never achieve profitability |
| We have not commercialized any products or recognized any revenue from product sales utilizing our Carrierwave technology |
| All of the compounds produced using our Carrierwave technology, with the exception of NRP104 and NRP290, are in early stages of development |
| On January 26, 2006, the FDA accepted for review the NDA application for NRP104 |
| There can be no assurance, however, that the FDA will approve that NDA or that, if the FDA requires additional data prior to approval, that we will be able to generate the required data |
| Other than with respect to NRP104, we must conduct significant additional research and development activities before we will be able to apply for regulatory approval to commercialize any products utilizing our Carrierwave technology |
| We must successfully complete adequate and well-controlled studies designed to demonstrate the safety and efficacy of the product candidates and obtain regulatory approval before we are able to commercialize these product candidates |
| There is no guarantee that we will receive regulatory approval with respect to any of our product candidates |
| Even if we succeed in developing and commercializing one or more of our product candidates utilizing our Carrierwave technology, we may never generate sufficient or sustainable revenue to enable us to be profitable |
| We face intense competition in the markets targeted by our lead product candidates |
| Many of our competitors have substantially greater resources than we do, and we expect that all of our product candidates under development will face intense competition from existing or future drugs |
| We have devoted substantial research efforts and capital to the development of our Carrierwave technology and our lead product candidates |
| We expect that all of our product candidates under development, if approved, will face intense competition from existing and future drugs marketed by large companies |
| The markets for amphetamines and other stimulants to treat ADHD and opioids to treat pain are well developed and populated with established drugs marketed by large pharmaceutical, biotechnology and generic drug companies |
| Amphetamines or other stimulants currently marketed for ADHD include Ritalin (Novartis AG), Concerta (McNeil Consumer & Specialty Pharmaceuticals), Dexedrine (GlaxoSmithKline PLC), Dextrostat (Shire), Cylert (Abbott Laboratories, Inc |
| ) and Adderall (Shire) |
| In addition, Eli Lilly and Company markets a non-stimulant drug, Strattera, for ADHD Opioids currently marketed for acute pain include Anexsia (Mallinckrodt Inc |
| Opioids currently marketed for chronic pain include OxyContin (Purdue Pharmaceuticals LP), Duragesic (Janssen Pharmaceutical Products, LP), MSContin (Purdue Frederick Company) and Avinza (Ligand Pharmaceuticals Inc |
| Each of these companies has significantly greater 24 _________________________________________________________________ [73]Table of Contents financial and other resources than we do |
| In addition, generic equivalent versions of many of these existing drug products are available and these products are therefore subject to substantial price competition |
| If we obtain regulatory approval to market one or more of our product candidates, we will compete with these established brand and generic drugs and will need to show that our drugs have safety or efficacy advantages in order to take market share and be successful |
| Currently, and as a direct consequence of the public debate of the social and economic costs of illegal diversion and abuse of, addiction to, and overdose from stimulants and narcotics, several companies are pursuing formulations that are less prone to abuse and are less toxic |
| Companies specifically engaged in developing abuse resistant drugs include Purdue Pharma LP, Nastech Pharmaceutical Company Inc |
| and Pain Therapeutics Inc |
| Other companies, including Johnson & Johnson and Noven Pharmaceuticals, Inc, are investigating alternative delivery mechanisms to control the delivery and availability of scheduled drugs |
| These technologies include transdermal skin patches, metered dose inhalers and extended release subcutaneous injections and implants |
| These competitors may: • successfully market products that compete with our products; • successfully identify drug candidates or develop products earlier than we do; or • develop products that are more effective, have fewer side effects or cost less than our products |
| Additionally, if a competitor receives FDA approval before we do for a drug that is similar to one of our product candidates, FDA approval for our product candidate may be precluded or delayed due to periods of non-patent exclusivity and/or the listing with the FDA by the competitor of patents covering its newly-approved drug product |
| Periods of non-patent exclusivity for new versions of existing drugs such as our current product candidates can extend up to three and one-half years |
| These competitive factors could require us to conduct substantial new research and development activities to establish new product targets, which would be costly and time consuming |
| These activities would adversely affect our ability to commercialize products and achieve revenue and profits |
| If we fail to protect our intellectual property rights, our ability to pursue the development of our technologies and products would be negatively affected |
| Our success will depend in part on our ability to obtain patents and maintain adequate protection of our technologies and products |
| If we do not adequately protect our intellectual property, competitors may be able to use our technologies to produce and market drugs in direct competition with us and erode our competitive advantage |
| Some foreign countries lack rules and methods for defending intellectual property rights and do not protect proprietary rights to the same extent as the United States |
| Many companies have had difficulty protecting their proprietary rights in these foreign countries |
| We may not be able to prevent misappropriation of our proprietary rights |
| Patent positions can be uncertain and involve complex legal and factual questions |
| We can protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary technologies are covered by valid and enforceable patents or are effectively maintained as trade secrets |
| To date, we hold one issued US patent relating to our core Carrierwave technology |
| In addition to the core patent, we have two issued US patents for an earlier developed delivery technology related to Carrierwave, and one directed to iodothyronine compounds |
| We have applied for additional patents relating to our technologies and our products and plan to file additional patent applications in the future |
| We have US patent applications pending covering each of our product candidates |
| Additionally, we have Patent Cooperation Treaty applications pending covering abuse resistant aspects of our technology, as well as, national stage applications pending in up to 18 countries depending on the specific product candidate |
| We also have national stage applications covering our core technology platform in Europe, Japan, China, South Korea, Canada, Australia, India and Israel |
| Others may challenge our patents, or our patent applications may not result in issued patents |
| Moreover, any patents issued to us may not provide us with meaningful protection, or others may challenge, circumvent 25 _________________________________________________________________ [74]Table of Contents or narrow our patents |
| Third parties may also independently develop products similar to our products, duplicate our unpatented products or design around any patents on products we develop |
| Additionally, extensive time is required for development, testing and regulatory review of a potential product |
| While extensions of patent term due to regulatory delays may be available, it is possible that, before any of our product candidates can be commercialized, any related patent, even with an extension, may expire or remain in force for only a short period following commercialization, thereby reducing any advantages of the patent |
| In addition to patents, we rely on a combination of trade secrets, confidentiality, nondisclosure and other contractual provisions, and security measures to protect our confidential and proprietary information |
| These measures may not adequately protect our trade secrets or other proprietary information |
| If they do not adequately protect our rights, third parties could use our technology, and we could lose any competitive advantage we may have |
| In addition, others may independently develop similar proprietary information or techniques or otherwise gain access to our trade secrets, which could impair any competitive advantage we may have |
| We have not commissioned an extensive investigation concerning our freedom to practice or the validity or enforceability of our Carrierwave technology or product candidates, and we may be held to infringe the intellectual property rights of others |
| Our ability to freely practice our product candidates is dependent upon the duration and scope of patents held by third parties |
| Our patent, prior art and infringement investigations have been conducted primarily by us |
| Although we have consulted with our patent counsel in connection with our intellectual property investigations, our patent counsel has not undertaken an extensive independent analysis to determine whether our Carrierwave technology or product candidates infringe upon any issued patents or whether our issued patents or patent applications relating to our Carrierwave technology could be invalidated or rendered unenforceable for any reason or could be subject to interference proceedings |
| There may be patents or patent applications of which we are unaware, and avoiding patent infringement may be difficult |
| We may inadvertently infringe third-party patents |
| Third-party patents may impair or block our ability to conduct our business |
| There are no unresolved communications, allegations, complaints or threats of litigation related to the possibility that we might infringe patents held by others |
| Claims may be asserted against us that our products or technology infringes patents or other intellectual property owned by others |
| We may be exposed to future litigation by third parties based on claims that our products or activities infringe the intellectual property rights of others |
| In the event of litigation, any claims may not be resolved in our favor |
| Any litigation or claims against us, whether or not valid, may result in substantial costs and may result in an award of damages, lost profits, attorneys fees, and tripling of those damages in the event that a court finds an infringement to have been willful |
| A lawsuit could also place a significant strain on our financial resources, divert the attention of management and harm our reputation |
| In addition, intellectual property litigation or claims could force us to do one or more of the following: • cease making, using, selling, offering to sell or importing any products that infringe a third party’s intellectual property through an injunction; • obtain a license or an assignment from the holder of the infringed intellectual property right, which license or assignment may be costly or may not be available on reasonable terms, if at all; or • redesign our products, which would be costly and time-consuming and may not be possible |
| We may be involved in lawsuits to protect or enforce our patents, which could be expensive and time-consuming |
| Our intellectual property includes four US patents, two foreign patents and 102 pending US, Patent Cooperation Treaty or national stage applications |
| We have licensed aspects of our Carrierwave technology with respect to NRP104 pursuant to our collaboration agreement with Shire |
| We have 54 applications covering anti-abuse aspects of NRP104, NRP290 and NRP369 generally with other commonly abused 26 _________________________________________________________________ [75]Table of Contents substances |
| Of these, NRP104 is the focus of 25 applications, NRP290 is the focus of two applications, NRP369 is the focus of three applications, and NRP409 is the focus of one application |
| Competitors may infringe our patents, and we may file infringement claims to counter infringement or unauthorized use |
| This can be expensive, particularly for a company of our size, and time-consuming |
| In addition, in an infringement proceeding, a court may decide that a patent of ours is not valid or is unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover its technology |
| An adverse determination of any litigation or defense proceedings could put one or more of our patents at risk of being invalidated or interpreted narrowly |
| There are no unresolved communications, allegations, complaints or threats of litigation related to the possibility that our patents are invalid or unenforceable |
| Any litigation or claims against us, whether or not merited, may result in substantial costs, place a significant strain on our financial resources, divert the attention of management and harm our reputation |
| An adverse decision in a litigation could result in inadequate protection for our product candidates and/or reduce the value of any license agreements we have with third parties |
| Interference proceedings brought before the US Patent and Trademark Office may be necessary to determine priority of invention with respect to our patents or patent applications |
| During an interference proceeding, it may be determined that we do not have priority of invention for one or more aspects in our patents or patent applications and could result in the invalidation in part or whole of a patent or could put a patent application at risk of not issuing |
| Even if successful, an interference may result in substantial costs and distraction to our management |
| Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation or interference proceedings, there is a risk that some of our confidential information could be compromised by disclosure |
| In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments |
| If investors perceive these results to be negative, the price of our common stock could be adversely affected |
| If preclinical testing or clinical trials for our product candidates are unsuccessful or delayed, we will be unable to meet our anticipated development and commercialization timelines |
| Other than NRP104, our potential drug products require preclinical testing and clinical trials prior to submission of any regulatory application for commercial sales |
| With respect to NRP104, our third clinical abuse liability study is ongoing, as is our continuing long-term safety study |
| Additional clinical study requirements could be imposed on us either prior to approval or as post-approval requirements |
| We have limited experience conducting clinical trials |
| We currently employ two clinical trial managers |
| We rely and expect to continue to rely on third parties, including clinical research organizations and outside consultants, to conduct, supervise or monitor some or all aspects of preclinical testing or clinical trials involving our product candidates |
| We have less control over the timing and other aspects of these preclinical testing or clinical trials than if we performed the monitoring and supervision entirely on our own |
| Third parties may not perform their responsibilities for our preclinical testing or clinical trials on our anticipated schedule or, for clinical trials, consistent with a clinical trial protocol |
| Delays in preclinical and clinical testing could significantly increase our product development costs and delay product commercialization |
| In addition, many of the factors that may cause, or lead to, a delay in the clinical trials may also ultimately lead to denial of regulatory approval of a product candidate |
| The commencement of clinical trials can be delayed for a variety of reasons, including delays in: • demonstrating sufficient safety and efficacy to obtain regulatory approval to commence a clinical trial; • reaching agreement on acceptable terms with prospective contract research organizations and trial sites; • manufacturing sufficient quantities of a product candidate; and • obtaining institutional review board approval to conduct a clinical trial at a prospective site |
| 27 _________________________________________________________________ [76]Table of Contents Once a clinical trial has begun, it may be delayed, suspended or terminated by us or the FDA or other regulatory authorities due to a number of factors, including: • ongoing discussions with the FDA or other regulatory authorities regarding the scope or design of our clinical trials; • failure to conduct clinical trials in accordance with regulatory requirements; • lower than anticipated recruitment or retention rate of patients in clinical trials; • inspection of the clinical trial operations or trial sites by the FDA or other regulatory authorities resulting in the imposition of a clinical hold; • lack of adequate funding to continue clinical trials; or • negative results of clinical trials |
| If clinical trials are unsuccessful, and we are not able to obtain regulatory approvals for our product candidates under development, we will not be able to commercialize these products, and therefore may not be able to generate sufficient revenues to support our business |
| We have received an observation from the FDA noting that we did not submit an IND before conducting certain clinical studies in 2001 |
| FDA has the authority to inspect a company’s drug manufacturing and testing processes and to take enforcement actions, with varying degrees of severity, in the event that it determines that violations of the Federal Food, Drug and Cosmetic Act and FDA regulations have occurred |
| In late April 2004, representatives of the FDA inspected our laboratory facility in Blacksburg, Virginia |
| In connection with this inspection, the FDA issued an observation on Form FDA-483 relating to our conduct of pharmacokinetic studies on thyroid compounds in humans in 2001 |
| The observation noted that we did not submit an IND application before conducting these studies |
| Such an observation on Form FDA-483 does not constitute a finding by FDA that a violation has occurred |
| We have responded to this observation, explaining our basis for believing in 2001 that these studies were exempt from FDA regulations requiring submission of an IND In subsequent correspondence with the FDA, the FDA has informed us that it believes those studies should have been conducted under an IND, and we have agreed to assure that future studies of this type are conducted under IND requirements |
| We do not believe that any enforcement action against us by the FDA based on this observation would be warranted or that, if pursued, any such action would have a material effect on us or our business |
| If the FDA does not accept our filing under Section 505(b)(1) and we are unable to file for approval under Section 505(b)(2) of the Federal Food, Drug and Cosmetic Act or if we are required to generate additional data related to safety and efficacy in order to obtain approval under Section 505(b)(1) or 505(b)(2), we may be unable to meet our anticipated development and commercialization timelines |
| Our current plans for filing NDAs for our product candidates include efforts to minimize the data we will be required to generate in order to obtain marketing approval for our product candidates and therefore possibly obtain a shortened review period for the applications |
| The FDA could change its determination on this issue, however, and require that we either generate additional data to support an approval under Section 505(b)(1) or submit or convert an application to a Section 505(b)(2) application so that we can rely on data generated by third parties, to which we do not have a right of reference |
| If we are required to rely on data generated with products already approved by the FDA and covered by third-party patents we would be required to certify that we do not infringe the listed patents for those products or that such patents are invalid or unenforceable |
| As a result of such a certification, the third party would have 45 days from notification of our certification to initiate an action for patent infringement against us |
| In the event that an action is brought in response to such a certification, the approval of our NDA could be subject to a stay of up to 30 months or more while we defend against such a suit |
| 28 _________________________________________________________________ [77]Table of Contents Approval of our product candidates may therefore be delayed until patent exclusivity expires or until we successfully challenge the applicability of those patents to our product candidates |
| Alternatively, we may elect to generate sufficient additional clinical data of our own so that we can maintain our application under Section 505(b)(1) |
| Even if no exclusivity periods apply to our applications, the FDA has broad discretion to require us to generate additional data on the safety and efficacy of our product candidates to supplement third-party data on which we may be permitted to rely |
| In either event, we could be required, before obtaining marketing approval for any of our product candidates, to conduct substantial new research and development activities beyond those we currently plan to engage in order to obtain approval of our product candidates |
| Such additional new research and development activities would be costly and time consuming |
| If we are required to generate additional data to support approval, we may be unable to meet our anticipated development and commercialization timelines, may be unable to generate the additional data at a reasonable cost, or at all, and may be unable to obtain marketing approval of our product candidates |
| If the FDA requires that NRP104 be scheduled by the DEA before the product is commercially sold, we will be unable to begin commercial sale of that product until the DEA completes scheduling proceedings, and if NRP104 is scheduled by the DEA in Schedule II under the Controlled Substances Act (CSA), the potential market for the drug may be significantly reduced |
| The DEA has indicated that NRP104 is not a scheduled drug at the present time |
| Based on data generated in our studies of the potential for abuse, however, and on the fact that the drug is designed to deliver quantities of amphetamine, the FDA and the DEA may, pursuant to their statutory responsibilities under the CSA, conclude that the drug should be scheduled in one of the CSA schedules at the time it is first approved for commercial sale |
| The process for scheduling a drug under these circumstances involves the forwarding by the FDA to the DEA of its medical and scientific findings, and its recommendation that the drug be scheduled on the appropriate schedule level |
| The DEA then publishes a notice in the Federal Register of a proposal to place the drug in an appropriate CSA schedule |
| Interested persons are then afforded an opportunity to comment on the proposal and to request a hearing |
| After consideration of the comments received, and potentially the holding of a formal administrative hearing, the DEA then publishes a regulation placing the drug in an appropriate CSA schedule |
| If the FDA is unwilling to permit the sale of the drug until it is placed in an appropriate CSA schedule, it may not grant NDA approval until completion of scheduling proceedings by the DEA We intend to seek timely conclusion of any consideration of the CSA scheduling of NRP104 so that these considerations do not result in any delay in our ability to market the drug |
| Because of the opportunity for public participation in the process, however, we cannot predict how long the FDA and the DEA may take to conclude any scheduling actions with respect to the drug that they may believe are warranted |
| The drug products with which our lead product candidate NRP104 is expected to compete are amphetamine products currently classified by the DEA under the CSA on Schedule II, the most restrictive schedule applicable to drug products marketed for legitimate medical use |
| The DEA has concluded that, based on its chemical structure, NRP104 is not a scheduled substance at the present time |
| Our commercialization strategy for this product depends in large part on our ability to obtain approval to market the drug either as an unscheduled drug or as a drug classified by the DEA in a less restrictive schedule than Schedule II A decision as to whether and how NRP104 should be scheduled at the time it is approved for commercial sale will be made by the DEA based on the medical and scientific determinations of the FDA which, in turn, will be based in large part on data we generate regarding the relative potential for abuse of the drug compared to existing Schedule II drugs |
| If the determination is made that the drug should be controlled in Schedule II, the potential market for our drug may be significantly reduced, which may have a material adverse effect on us |
| Furthermore, because amphetamine is a Schedule II substance, the amount of it that we can obtain for clinical trials and commercialization of NRP104 is limited by the DEA and our quota may not be sufficient to complete clinical trials or meet commercial demand |
| We cannot predict the outcome of the studies of the potential for abuse of our drug or of the consideration by the FDA and the DEA of the results of those studies |
| 29 _________________________________________________________________ [78]Table of Contents We have engaged in extensive financial and operational transactions with Randal J Kirk, our Chairman, President and Chief Executive Officer, and his affiliates |
| Our company was formed by, and has historically been controlled and managed and, prior to the initial public offering of our common stock, principally funded by, Randal J Kirk, our Chairman, President and Chief Executive Officer, and affiliates of Mr |
| As a result, we have engaged in a variety of financial and operational transactions with Mr |
| Kirk and these affiliates |
| While we believe that each of these transactions was on terms no less favorable to us than terms we could have obtained from unaffiliated third parties, none of these transactions was negotiated on an arm’s length basis |
| Accordingly, their terms may not be as favorable to us as if we had negotiated them with unaffiliated third parties |
| It is our intention to ensure that all future transactions, if any, between us and our officers, directors, principal shareholders and their affiliates, are approved by the audit committee or a majority of the independent and disinterested members of the board of directors, and are on terms no less favorable to us than those that we could obtain from unaffiliated third parties |
| As of January 1, 2006 Randal J Kirk controlled approximately 56dtta8prca of our common stock and is able to control or significantly influence corporate actions, which may result in Mr |
| Kirk taking actions that advance his interests to the detriment of our other shareholders |
| As of January 1, 2006 Randal J Kirk, Chairman, President and Chief Executive Officer, and shareholders affiliated with him controlled approximately 56dtta8prca of our common stock |
| Kirk is able to control or significantly influence all matters requiring approval by our shareholders, including the election of directors and the approval of mergers or other business combination transactions |
| Kirk may not always coincide with the interests of other shareholders, and he may take actions that advance his interests to the detriment of our other shareholders |
| We rely on Third Security, LLC, to provide us with certain services |
| If Third Security, LLC ceases to provide these services and we are unable to establish and maintain the necessary infrastructure to be self-sufficient, our business will be adversely affected |
| We rely on Third Security, LLC to provide support for tax, legal, information technology, and market research functions as well as provide the miscellaneous services that we may need from time to time until the earlier of August 9, 2006 or our termination of the administrative services agreement we have with Third Security |
| Currently, we expect to renew this agreement under similar terms upon its expiration |
| If Third Security will not agree to renew the agreement and ceases to provide these services and we are unable to add the necessary personnel and establish the necessary infrastructure to support our operations as a result, our business will be adversely affected |
| Third Security is owned by Randal J Kirk, our Chairman, President and Chief Executive Officer, who, with shareholders affiliated with him as of January 1, 2006, controlled approximately 56dtta8prca of our common stock |
| The administrative services agreement has terms no less favorable than those that we would have entered into with an unaffiliated third party, and the agreement was approved by a majority of the independent and disinterested members of our board of directors |
| Our executive officers and other key personnel are critical to our business, and our future success depends on our ability to retain them |
| We are highly dependent on the principal members of our management and scientific team, particularly, Mr |
| In order to pursue our product development, marketing and commercialization plans, we will need to hire additional personnel with experience in clinical testing, government regulation, manufacturing, marketing and business development |
| We may not be able to attract and retain personnel on acceptable terms given the intense competition for such personnel among biotechnology, pharmaceutical and healthcare companies, universities and non-profit research institutions |
| We have no employment agreements with any of our executive officers and while we have employment agreements with certain of our employees, all of our employees are at-will employees who may terminate their employment at any time |
| We do not currently have 30 _________________________________________________________________ [79]Table of Contents key personnel insurance on any of our officers or employees |
| The loss of any of our key personnel, or the inability to attract and retain qualified personnel, may significantly delay or prevent the achievement of our research, development or business objectives and could materially adversely affect our business, financial condition and results of operations |
| We rely on third parties to manufacture the compounds used in our trials, and we intend to rely on them for the manufacture of any approved products for commercial sale |
| If these third parties do not manufacture our product candidates in sufficient quantities and at an acceptable cost, clinical development and commercialization of our product candidates could be delayed, prevented or impaired |
| We have no manufacturing facilities, and we have no experience in the clinical or commercial-scale manufacture of drugs or in designing drug manufacturing processes |
| Certain specialized manufacturers provide us with modified and unmodified pharmaceutical compounds, including finished products, for use in our preclinical and clinical studies |
| We do not have any short-term or long-term manufacturing agreements with any of these manufacturers |
| If we fail to contract for manufacturing on acceptable terms or if third-party manufacturers do not perform as we expect, our development programs could be materially adversely affected |
| Any such delays could cause our prospects to suffer significantly |
| We intend to rely on third parties to manufacture some or all of our products that reach commercialization |
| We believe that there are a variety of manufacturers that we may be able to retain to produce these products |
| However, once we retain a manufacturing source, if our manufacturers do not perform in a satisfactory manner, we may not be able to develop or commercialize potential products as planned |
| Failure by our third-party manufacturers to comply with the regulatory guidelines set forth by the FDA and DEA with respect to our product candidates could delay or prevent the completion of clinical trials, the approval of any product candidates or the commercialization of our products |
| Our reliance on third-party manufacturers exposes us to the following additional risks, any of which could delay or prevent the completion of our clinical trials, the approval of our product candidates by the FDA or other regulatory agencies or the commercialization of our products, result in higher costs or deprive us of potential product revenues: • Manufacturers are obligated to operate in accordance with FDA-mandated current good manufacturing practice (cGMP) requirements |
| A failure of any of our third-party manufacturers to establish and follow cGMP requirements and to document their adherence to such practices may lead to significant delays in the availability of material for clinical trials, may delay or prevent filing or approval of marketing applications for our products, and may cause delays or interruptions in the availability of our products for commercial distribution following FDA approval |
| • Replacing our third-party manufacturers or contracting with additional manufacturers may require re-validation of the manufacturing processes and procedures in accordance with cGMP and compliance with supplemental approval requirements |
| Any such necessary re-validation and supplemental approvals may be costly and time- consuming |
| Drug manufacturers are subject to ongoing periodic unannounced inspections by the FDA, the DEA and corresponding state and foreign agencies to ensure strict compliance with cGMP requirements and other requirements under Federal drug laws, other government regulations and corresponding foreign standards |
| If our third-party manufacturers or we fail to comply with applicable regulations, sanctions could be imposed on us, including fines, injunctions, civil penalties, failure by the government to grant marketing approval of drugs, delays, suspension or withdrawal of approvals, seizures or recalls of product, operating restrictions and criminal prosecutions |
| We may need additional capital in the future |
| If additional capital is not available or is available at unattractive terms, we may be forced to delay, reduce the scope of or eliminate our research and development programs, reduce our commercialization efforts or curtail our operations |
| 31 _________________________________________________________________ [80]Table of Contents In order to develop and bring our product candidates to market, we must commit substantial resources to costly and time-consuming research, preclinical and clinical trials and marketing activities |
| We anticipate that our existing cash and cash equivalents and short-term investments will enable us to maintain our current planned operations for at least the next 18 months |
| We anticipate using our cash and cash equivalents and short-term investments to fund further research and development with respect to our lead product candidates |
| We may, however, need to raise additional funding sooner if our business or operations change in a manner that consumes available resources more rapidly than we anticipate, which may include if we are granted Fast Track status with respect to any of our product candidates |
| Our requirements for additional capital will depend on many factors, including: • successful commercialization of our product candidates; • continued progress of research and development of product candidates utilizing our Carrierwave technology; • the time and costs involved in obtaining regulatory approval for our product candidates; • costs associated with protecting our intellectual property rights; • development of marketing and sales capabilities; • payments received under our collaboration agreements with Shire and any future collaborative agreements, if any; and • market acceptance of our products |
| As of January 1, 2006, we have no committed additional sources of capital |
| To the extent our capital resources are insufficient to meet future capital requirements, we will need to raise additional funds to continue the development of our product candidates |
| We anticipate that we will need significant additional funds in order for us to commercialize NRP104 and continue the development of NRP290 and other product candidates |
| To the extent we raise additional capital through the sale of equity securities, the issuance of those securities could result in dilution to our shareholders |
| In addition, if we obtain debt financing, a substantial portion of our operating cash flow may be dedicated to the payment of principal and interest on such indebtedness, thus limiting funds available for our business activities |
| If adequate funds are not available, we may be required to delay, reduce the scope of or eliminate our research and development programs, reduce our commercialization efforts or curtail our operations |
| In addition, we may be required to obtain funds through arrangements with collaborative partners, such as our agreements with Shire, or others that may require us to relinquish rights to technologies, product candidates or products that we would otherwise seek to develop or commercialize ourselves or license rights to technologies, product candidates or products on terms that are less favorable to us than might otherwise be available |
| Even if we obtain regulatory approval to market our product candidates, our product candidates may not be accepted by the market |
| Even if we obtain regulatory approval to market our product candidates, our product candidates may not gain market acceptance among physicians, patients, healthcare payors and the medical community |
| The degree of market acceptance of any pharmaceutical product that we develop will depend on a number of factors, including: • cost-effectiveness; • the safety and effectiveness of our products, including any potential side effects, as compared to alternative products or treatment methods; • the timing of market entry as compared to competitive products; • the rate of adoption of our products by doctors and nurses; • product labeling or product insert required by the FDA for each of our products; 32 _________________________________________________________________ [81]Table of Contents • determination of scheduled or unscheduled status by the FDA and DEA; • reimbursement policies of government and third-party payors; • effectiveness of our sales, marketing and distribution capabilities and the effectiveness of such capabilities of our collaborative partners; and • unfavorable publicity concerning our products or any similar products |
| Our product candidates, if successfully developed, will compete with a number of products manufactured and marketed by major pharmaceutical companies, biotechnology companies and manufacturers of generic drugs |
| Physicians, patients, third-party payors and the medical community may not accept and utilize any of our product candidates |
| Physicians may not be inclined to prescribe the drugs created utilizing our Carrierwave technology unless our drugs bring substantial and demonstrable advantages over other drugs currently marketed for the same indications |
| If our products do not achieve market acceptance, we will not be able to generate significant revenues or become profitable |
| If we fail to establish marketing, sales and distribution capabilities, or fail to enter into arrangements with third parties to do this on our behalf, we will not be able to create a market for our product candidates |
| Currently, we do not have any sales, marketing or distribution capabilities |
| In order to generate sales of any product candidates that receive regulatory approval, we must either acquire or develop an internal marketing and sales force with technical expertise and with supporting distribution capabilities or make arrangements with third parties to perform these services for us, as we did in our collaboration with Shire |
| The acquisition or development of a sales and distribution infrastructure would require substantial resources, which may divert the attention of our management and key personnel and defer our product development efforts |
| To the extent that we enter into marketing and sales arrangements with other companies, our revenues will depend on the efforts of others |
| If we fail to develop sales, marketing and distribution channels, or enter into arrangements with third parties, we will experience delays in product sales and incur increased costs |
| In the event that we are successful in bringing any products to market, our revenues may be adversely affected if we fail to obtain acceptable prices or adequate reimbursement for our products from third-party payors |
| Our ability to commercialize pharmaceutical products successfully may depend in part on the availability of reimbursement for our products from: • government and health administration authorities; • private health insurers; and • other third-party payors, including Medicare |
| We cannot predict the availability of reimbursement for newly approved health care products |
| Third-party payors, including Medicare, are challenging the prices charged for medical products and services |
| Government and other third-party payors increasingly are limiting both coverage and the level of reimbursement for new drugs |
| Third-party insurance coverage may not be available to patients for any of our products |
| The continuing efforts of government and third-party payors to contain or reduce the costs of health care may limit our commercial opportunity |
| If government and other third-party payors do not provide adequate coverage and reimbursement for any prescription product we bring to market, doctors may not prescribe them or patients may ask to have their physicians prescribe competing drugs with more favorable reimbursement |
| In some foreign markets, pricing and profitability of prescription pharmaceuticals are subject to government control |
| In the United States, we expect that there will continue to be federal and state proposals for similar controls |
| In addition, we expect that increasing emphasis on managed care in the United 33 _________________________________________________________________ [82]Table of Contents States will continue to put pressure on the pricing of pharmaceutical products |
| Cost control initiatives could decrease the price that we receive for any products in the future |
| Further, cost control initiatives could impair our ability to commercialize our products and our ability to earn revenues from this commercialization |
| We could be forced to pay substantial damage awards if product liability claims that may be brought against us are successful |
| The use of any of our product candidates in clinical trials, and the sale of any approved products, may expose us to liability claims and financial losses resulting from the use or sale of our products |
| We have obtained limited product liability insurance coverage for our clinical trials of dlra10 million per occurrence and in the aggregate, subject to a deductible of dlra50cmam000 per occurrence and dlra500cmam000 per year in the aggregate |
| However, such insurance may not be adequate to cover any claims made against us |
| In addition, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts or scope to protect us against losses |
| We use hazardous chemicals in our business |
| Potential claims relating to improper handling, storage or disposal of these chemicals could be time consuming and costly |
| Our research and development processes involve the controlled use of hazardous chemicals |
| These hazardous chemicals are reagents and solvents typically found in a chemistry laboratory |
| Our operations also produce hazardous waste products |
| Federal, state and local laws and regulations govern the use, manufacture, storage, handling and disposal of hazardous materials |
| While we attempt to comply with all environmental laws and regulations, including those relating to the outsourcing of the disposal of all hazardous chemicals and waste products, we cannot eliminate the risk of accidental contamination from or discharge of hazardous materials and any resultant injury |
| Compliance with environmental laws and regulations may be expensive |
| Current or future environmental regulations may impair our research, development or production efforts |
| We might have to pay civil damages in the event of an improper or unauthorized release of, or exposure of individuals to, hazardous materials |
| We are not insured against these environmental risks |
| In our collaborations with third parties, they might also work with hazardous materials in connection with our collaborations |
| We may agree to indemnify our collaborators in some circumstances against damages and other liabilities arising out of development activities or products produced in connection with these collaborations |
| If Shire, our collaboration partner on NRP104, or any other collaborative partners we retain, do not satisfy their obligations, we will be unable to develop our partnered product candidates |
| Currently, we have entered into a collaborative agreement with Shire relating to the global commercialization of NRP104 for treatment of ADHD and other potential indications |
| This collaboration includes product development, manufacturing, marketing and sales |
| We do not have day-to-day control over the activities of Shire with respect to NRP104 |
| In the event we enter into any other collaborative agreements, we may not have day-to-day control over the activities of such collaborative partner with respect to any of these product candidates |
| Shire or any other collaborative partner may not fulfill its obligations under these agreements |
| If Shire or any other collaborative partner fails to fulfill its obligations under an agreement with us, we may be unable to assume the development of the products covered by that agreement or enter into alternative arrangements with a third party |
| In addition, we may encounter delays in the commercialization of the product candidate that is the subject of the agreement |
| Accordingly, our ability to receive any revenue from the product candidates covered by these agreements will be dependent on the efforts of our collaborative partner |
| We could also become involved in disputes with Shire or another collaborative partner, which could lead to delays in or termination of our development and commercialization programs and time-consuming and expensive litigation or arbitration |
| In addition, any such dispute could diminish our collaborators’ commitment to us and reduce the resources they devote to developing and commercializing our products |
| Conflicts or disputes with our collaborators, and competition from them, could harm our relationships with our other collaborators, restrict our ability to enter future collaboration agreements and delay the research, development or commercialization of our product candidates |
| If any collaborative partner terminates or 34 _________________________________________________________________ [83]Table of Contents breaches its agreement, or otherwise fails to complete its obligations in a timely manner, our chances of successfully developing or commercializing these product candidates would be materially and adversely affected |
| We may not be able to enter into other collaborative agreements with partners on terms favorable to us, or at all |
| Our inability to enter into collaborative arrangements with collaborative partners, or our failure to maintain such arrangements, would limit the number of product candidates that we could develop and ultimately, decrease our sources of any future revenues |
| Certain provisions of Virginia law, and our amended and restated articles of incorporation and amended and restated bylaws could make it more difficult for our shareholders to remove our board of directors and management |
| Certain provisions of Virginia law, the state in which we are incorporated, and our amended and restated articles of incorporation and amended and restated bylaws could make it more difficult for our shareholders, should they choose to do so, to remove our board of directors or management |
| These provisions include: • a provision allowing our board of directors to issue preferred stock with rights senior to those of the common stock without any vote or action by the holders of our common stock |
| The issuance of preferred stock could adversely affect the rights and powers, including voting rights, of the holders of common stock; • a provision allowing the removal of directors only for cause; • the requirement in our bylaws that shareholders provide advance notice when nominating our directors or submitting other shareholder proposals; and • the inability of shareholders to convene a shareholders’ meeting without the chairman of the board, the chief executive officer or a majority of the board of directors first calling the meeting |