| Our current business operations began in 1994 and we have a limited operating history |
| We may encounter delays, uncertainties and complications typically encountered by development stage businesses |
| We have generated minimal revenues from the limited sales of Befar^® in Asia and research and development agreements and have received an initial dlra4 million payment from Novartis, but have not marketed or generated revenues in the US from our products under development |
| We are not profitable and have incurred an accumulated deficit of dlra117cmam687cmam621 since our inception and through December 31, 2005 |
| Our ability to generate revenues and to achieve profitability and positive cash flow will depend on the successful licensing or commercialization of our products currently under development |
| However, even if we eventually generate revenues from sales of our products currently under development or from licensing fees, we expect to incur significant operating losses over the next several years |
| Our ability to become profitable will depend, among other things, on our (1) development of our proposed products, (2) obtaining of regulatory approvals of our proposed products on a timely basis and (3) success in licensing, manufacturing, distributing and marketing our proposed products |
| Our independent registered public accounting firm has doubt as to our ability to continue as a going concern |
| As a result of our losses to date, expected losses in the future, limited capital resources and accumulated deficit, our independent registered public accounting firm has concluded that there is substantial doubt as to our ability to continue as a going concern, and accordingly, our independent registered public accounting firm has modified their report on our December 31, 2005 consolidated financial statements included in this annual report on Form 10-K in the form of an explanatory paragraph describing the events that have given rise to this uncertainty |
| These factors may make it more difficult for us to obtain additional funding to meet our obligations |
| Our continuation is dependent upon our ability to generate or obtain sufficient cash to meet our obligations on a timely basis and ultimately to attain profitable operations |
| We anticipate that we will continue to incur significant losses at least until successful commercialization of one or more of our products, and we may never operate profitably in the future |
| We will need partnering agreements and significant funding to continue with our research and development efforts, and they may not be available |
| Our research and development expenses for the years ended December 31, 2005, 2004, 2003 were dlra11cmam222cmam099, dlra10cmam684cmam477 and dlra8cmam439cmam340, respectively |
| Since January 1, 1994, when we repositioned ourselves as a medical and pharmaceutical technology company, and from such date through December 31, 2005 we have spent dlra81cmam041cmam264 on research and development |
| Given our current level of cash reserves and low rate of revenue generation, we will not be able to fully advance our products under development unless we enter into additional partnering agreements |
| If we are successful in entering into additional partnering agreements for our products under development, we may receive milestone payments, which will offset some of our research and development expenses |
| 6 _________________________________________________________________ We will also need significant funding to pursue our overall product development plans |
| In general, products we plan to develop will require significant time-consuming and costly research and development, clinical testing, regulatory approval and significant investment prior to their commercialization |
| Even with funding, research and development activities may not be successful; our products may not prove to be safe and effective; clinical development work may not be completed; and the anticipated products may not be commercially viable or successfully marketed |
| We currently have no sales force or marketing organization and will need, but may not be able, to attract marketing partners or afford qualified or experienced marketing and sales personnel |
| In order to market our proprietary products under development, we will need to attract additional marketing partner(s) that will need to spend significant funds to inform potential customers, including third-party distributors, of the distinctive characteristics and benefits of our products |
| Our operating results and long term success will depend, among other things, on our ability to establish (1) successful arrangements with domestic and additional international distributors and marketing partners and (2) an effective internal marketing organization |
| Consummation of partnering arrangements is subject to the negotiation of complex contractual relationships, and we may not be able to negotiate such agreements on a timely basis, if at all, or on terms acceptable to us |
| Pre-clinical and clinical trials are inherently unpredictable |
| If we or our partners do not successfully conduct these trials, we or our partners may be unable to market our products |
| Through pre-clinical studies and clinical trials, our products must be demonstrated to be safe and effective for their indicated uses |
| Results from pre-clinical studies and early clinical trials may not allow for prediction of results in later-stage testing |
| Future clinical trials may not demonstrate the safety and effectiveness of our products or may not result in regulatory approval to market our products |
| Commercial sales in the United States of our products cannot begin until final FDA approval is received |
| We depend on Novartis to realize the potential of NM100060, and, if we successfully enter into similar licensing agreements for other products, we will similarly be dependent upon our other partners |
| In September 2005, we announced a global licensing agreement with Novartis, pursuant to which Novartis acquired the exclusive worldwide rights to NM100060, our topical anti-fungal nail treatment product, and agreed to pay us up to dlra51 million on the achievement of specific development and regulatory milestones and assume all costs and responsibilities related to NM100060 |
| In addition, Novartis agreed to pay us royalties based upon the level of sales achieved |
| In order to realize the full potential of NM100060, we will depend upon Novartis for the development, manufacturing and commercialization of NM100060 and for obtaining regulatory approval of NM100060 |
| In addition, many of the milestones upon which the Company would receive payment are based upon the satisfaction of criteria set by Novartis and the determination by Novartis to seek regulatory approval for the drug |
| Novartis may terminate the licensing agreement, in its entirety or on a country-by-country basis, by providing the Company up to 180 days notice |
| However, in such case Novartis would be obligated to complete the first Phase III clinical trial for the product and the rights to NM100060 would revert back to NexMed |
| Since we intend to pursue similar licensing arrangements for other products, we will similarly be dependent on our partners to realize the full potential of such products |
| Patents and intellectual property rights are important to us but could be challenged |
| Proprietary protection for our pharmaceutical products is of material importance to our business in the US and most other countries |
| We have sought and will continue to seek proprietary protection for our products to attempt to prevent others from commercializing equivalent products in substantially less time and at substantially lower expense |
| Our success may depend on our ability to (1) obtain effective patent protection within the US and internationally for our proprietary technologies and products, (2) defend patents we own, (3) preserve our trade secrets, and (4) operate without infringing upon the proprietary rights of others |
| In addition, we have agreed to indemnify our partners for certain liabilities with respect to the defense, protection and/or validity of our patents and would also be required to incur costs or forego revenue if it is necessary for our partners to acquire third party patent licenses in order for them to exercise the licenses acquired from us |
| 7 _________________________________________________________________ We have twelve US patents either acquired or received out of a series of patent applications that we have filed in connection with our NexACT^® technology and our NexACT-based products under development |
| To further strengthen our global patent position on our proprietary products under development, and to expand the patent protection to other markets, we have filed under the Patent Cooperation Treaty, corresponding international applications for our issued US patents and pending US patent applications |
| While we have obtained patents and have several patent applications pending, the extent of effective patent protection in the US and other countries is highly uncertain and involves complex legal and factual questions |
| No consistent policy addresses the breadth of claims allowed in or the degree of protection afforded under patents of medical and pharmaceutical companies |
| Patents we currently own or may obtain might not be sufficiently broad to protect us against competitors with similar technology |
| Any of our patents could be invalidated or circumvented |
| While we believe that our patents would prevail in any potential litigation, the holders of competing patents could determine to commence a lawsuit against us and even prevail in any such lawsuit |
| Litigation could result in substantial cost to and diversion of effort by us, which may harm our business |
| In addition, our efforts to protect or defend our proprietary rights may not be successful or, even if successful, may result in substantial cost to us |
| We and our licensees depend upon third party manufacturers for chemical manufacturing supplies |
| We and our licensees are dependent on third party chemical manufacturers for the active drugs in our NexACT^®-based products under development, and for the supply of our NexACT^® enhancers that are essential in the formulation and production of our topical products on a timely basis and at satisfactory quality levels |
| If our validated third party chemical manufacturers fail to produce quality products on time and in sufficient quantities, our results would suffer, as we or our licensees would encounter costs and delays in revalidating new third party suppliers |
| We face severe competition |
| We are engaged in a highly competitive industry |
| We and our licensees can expect competition from numerous companies, including large international enterprises, and others entering the industry with regard to our products |
| Most of these companies have greater research and development, manufacturing, marketing, financial, technological, personnel and managerial resources |
| Acquisitions of competing companies by large pharmaceutical or healthcare companies could further enhance such competitors &apos financial, marketing and other resources |
| Competitors may complete clinical trials, obtain regulatory approvals and commence commercial sales of their products before we could enjoy a significant competitive advantage |
| Products developed by our competitors may be more effective than our products |
| We may be subject to potential product liability and other claims, creating risks and expense |
| We are also exposed to potential product liability risks inherent in the development, testing, manufacturing, marketing and sale of human therapeutic products |
| Product liability insurance for the pharmaceutical industry is extremely expensive, difficult to obtain and may not be available on acceptable terms, if at all |
| We currently have liability insurance to cover claims related to our products that may arise from clinical trials, with coverage of dlra1 million for any one claim and coverage of dlra3 million in total, but we do not maintain product liability insurance and we may need to acquire such insurance coverage prior to the commercial introduction of our products |
| If we obtain such coverage, we have no guarantee that the coverage limits of such insurance policies will be adequate |
| A successful claim against us if we are uninsured, or which is in excess of our insurance coverage, if any, could have a material adverse effect upon us and on our financial condition |
| Our stock may be delisted from Nasdaq, which may make it more difficult for you to sell your shares |
| Currently, our Common Stock trades on the Nasdaq National Market |
| NASD Marketplace Rule 4450 provides that a company must comply with continuing listing criteria to maintain its Nasdaq listing |
| On December 30, 2005, the Company was notified by The Nasdaq Stock Market (“Nasdaq”) that for the previous 10 consecutive trading days the market value of the Company’s Common Stock had been below the minimum dlra50cmam000cmam000 requirement for continued inclusion by Marketplace Rule 4450(b)(1)(A) |
| Pursuant to Marketplace Rule 4450(e)(4), the Company was provided 30 calendar days, or until January 30, 2006, to regain compliance |
| In addition, the Company did not comply with the alternative continued listing criteria provided in Marketplace Rule 4450(b)(1)(B), which requires total assets and total revenue of dlra50cmam000cmam000 each for the most recently completed fiscal year or two of the last three most recently completed fiscal years |
| On February 6, 2006, the Company received a letter from the Nasdaq Hearings Department stating that it has demonstrated full compliance with requirements necessary for continued listing on the Nasdaq National Market |
| 8 _________________________________________________________________ In addition, included in Nasdaq’s continued listing criteria is a minimum bid price per share of dlra1dtta00 |
| Failure to maintain such price for 30 consecutive days and beyond a grace period of 180 days could lead to delisting from the Nasdaq National Market |
| If we were to be delisted from the Nasdaq National Market, our Common Stock would be listed on the Nasdaq SmallCap Market, assuming we meet those listing requirements |
| If we failed to meet the Nasdaq SmallCap listing requirements, our stock would be considered a penny stock under regulations of the Securities and Exchange Commission and would therefore be subject to rules that impose additional sales practice requirements on broker-dealers who sell our securities |
| The additional burdens imposed upon broker-dealers by these requirements could discourage broker-dealers from effecting transactions in our Common Stock, which could severely limit the market liquidity of the Common Stock and your ability to sell our securities in the secondary market |
| In addition, if we fail to maintain our listing on Nasdaq or any other United States securities exchange, quotation system, market or over-the-counter bulletin board, we will be subject to cash penalties under investor rights agreements to which we are a party until a listing is obtained |
| INDUSTRY RISKS We are vulnerable to volatile market conditions |
| The market prices for securities of biopharmaceutical and biotechnology companies, including ours, have been highly volatile |
| The market has from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies |
| In addition, future announcements, such as the results of testing and clinical trials, the status of our relationships with third-party collaborators, technological innovations or new therapeutic products, governmental regulation, developments in patent or other proprietary rights, litigation or public concern as to the safety of products developed by us or others and general market conditions, concerning us, our competitors or other biopharmaceutical companies, may have a significant effect on the market price of our Common Stock |
| We and our licensees are subject to numerous and complex government regulations which could result in delay and expense |
| Governmental authorities in the US and other countries heavily regulate the testing, manufacture, labeling, distribution, advertising and marketing of our proposed products |
| None of our proprietary products under development has been approved for marketing in the US Before any products we develop are marketed, FDA and comparable foreign agency approval must be obtained through an extensive clinical study and approval process |
| The studies involved in the approval process are conducted in three phases |
| In Phase 1 studies, researchers assess safety or the most common acute adverse effects of a drug and examine the size of doses that patients can take safely without a high incidence of side effects |
| Generally, 20 to 100 healthy volunteers or patients are studied in the Phase 1 study for a period of several months |
| In Phase 2 studies, researchers determine the drugapstas efficacy with short-term safety by administering the drug to subjects who have the condition the drug is intended to treat, assess whether the drug favorably affects the condition, and begin to identify the correct dosage level |
| Up to several hundred subjects may be studied in the Phase 2 study for approximately 6 to 12 months, depending on the type of product tested |
| Several hundred to thousands of patients may be studied during the Phase 3 studies for a period of from 12 months to several years |
| Upon completion of Phase 3 studies, a New Drug Application is submitted to the FDA or foreign governmental regulatory authority for review and approval |
| 9 _________________________________________________________________ The failure to obtain requisite governmental approvals for our products under development in a timely manner or at all would delay or preclude us and our licensees from marketing our products or limit the commercial use of our products, which could adversely affect our business, financial condition and results of operations |
| Because we intend that our products will be sold and marketed outside the US, we and/or our licensees will be subject to foreign regulatory requirements governing the conduct of clinical trials, product licensing, pricing and reimbursements |
| These requirements vary widely from country to country |
| The failure to meet each foreign countryapstas requirements could delay the introduction of our proposed products in the respective foreign country and limit our revenues from sales of our proposed products in foreign markets |
| Successful commercialization of our products may depend on the availability of reimbursement to the consumer from third-party healthcare payers, such as government and private insurance plans |
| Even if one or more products is successfully brought to market, reimbursement to consumers may not be available or sufficient to allow the realization of an appropriate return on our investment in product development or to sell our products on a competitive basis |
| In addition, in certain foreign markets, pricing or profitability of prescription pharmaceuticals is subject to governmental controls |
| In the US, federal and state agencies have proposed similar governmental control and the US Congress has recently considered legislative and regulatory reforms that may affect companies engaged in the healthcare industry |
| Pricing constraints on our products in foreign markets and possibly in the US could adversely affect our business and limit our revenues |
| RISKS RELATED TO OWNING OUR COMMON STOCK We do not expect to pay dividends on our common stock in the foreseeable future |
| Although our shareholders may receive dividends, if and when declared by our board of directors, we do not intend to declare dividends on our Common Stock in the foreseeable future |
| Therefore, you should not purchase our Common Stock if you need immediate or future income by way of dividends from your investment |
| We may issue additional shares of our capital stock that could dilute the value of your shares of common stock |
| We are authorized to issue 130cmam000cmam000 shares of our capital stock, consisting of 120cmam000cmam000 shares of our Common Stock and 10cmam000cmam000 shares of our preferred stock of which 1cmam000cmam000 are designated as Series A Junior Participating Preferred Stock, 800 are designated as Series B 8prca Cumulative Convertible Preferred Stock and 600 are designated as Series C 6prca Cumulative Convertible Preferred Stock |
| As of March 6, 2006, 65cmam046cmam658 shares of our Common Stock were issued and outstanding and 21cmam978cmam306 shares of our Common Stock were issuable upon the exercise or conversion of outstanding preferred stock, options, warrants, or other convertible securities (including preferred stock, warrants and convertible notes held by certain selling shareholders) |
| As of March 6, 2006, there were no shares of Series A or Series B Preferred Stock outstanding and 87dtta5 shares of Series C Preferred Stock outstanding |
| In light of our need for additional financing, we may issue authorized and unissued shares of Common Stock at below current market prices or additional convertible securities that could dilute the earnings per share and book value of your shares of our Common Stock |
| In addition to provisions providing for proportionate adjustments in the event of stock splits, stock dividends, reverse stock splits and similar events, certain warrants, as well as our outstanding Preferred Stock, provide (with certain exceptions) for an adjustment of the exercise price if we issue shares of Common Stock at prices lower than the then exercise or conversion price or the then prevailing market price |
| This means that if we need to raise equity financing at a time when the market price for our Common Stock is lower than the exercise or conversion price, or if we need to provide a new equity investor with a discount from the then prevailing market price, then the exercise or conversion price will be reduced and the dilution to shareholders increased |