| PALATIN TECHNOLOGIES INC Item 1A Risk Factors |
| We expect to continue to incur substantial losses over the next few years and we may never become profitable |
| We have never been profitable and we may never become profitable |
| We expect to incur additional losses as we continue our development of bremelanotide and our other product candidates |
| Unless and until we receive approval from the FDA or other equivalent regulatory authorities outside the United States, we cannot sell our products and will not have product revenues from them |
| Therefore, for the foreseeable future, we will have to fund all of our operations and capital expenditures from reimbursements and other contract revenue under our existing collaborative development agreements, existing cash balances and outside sources of financing, which may not be available on acceptable terms, if at all |
| If we do not succeed in raising additional funds on acceptable terms, we may be unable to complete planned pre-clinical and clinical trials or obtain approval of our product candidates from the FDA or other regulatory authorities |
| In addition, we could be forced to suspend or discontinue our product development programs and forego attractive business opportunities, which would have a material adverse effect on our business |
| We have a limited operating history upon which to base an investment decision |
| Our operations to date have been primarily focused on organizing and staffing our Company, acquiring, developing and securing our proprietary technology, conducting pre-clinical and clinical studies and formulating and manufacturing our principal product candidates |
| These operations provide a limited basis for you to assess our ability to commercialize our product candidates |
| We have not yet demonstrated our ability to perform the functions necessary for the successful commercialization of any of our product candidates other than NeutroSpec |
| The successful commercialization of our other product candidates will require us to perform a variety of functions, including: • continuing to conduct pre-clinical development and clinical trials; • participating in regulatory approval processes; • formulating and manufacturing products, or having third parties formulate and manufacture product; • conducting sales and marketing activities, either alone or with a partner; and • obtaining additional capital |
| If we are unable to obtain regulatory approval of any of our product candidates, or to successfully commercialize any products for which we receive regulatory approval, we may not be able to recover our investment in our development efforts |
| If any approved product does not achieve market acceptance, our business will suffer |
| Regulatory approval for the marketing and sale of any of our product candidates does not assure the product’s commercial success |
| Any approved product will compete with other products manufactured and marketed 9 _________________________________________________________________ [30]Table of Contents by major pharmaceutical and other biotechnology companies |
| The degree of market acceptance of any such product will depend on a number of factors, including: • perceptions by members of the healthcare community, including physicians, about its safety and effectiveness; • cost-effectiveness relative to competing products and technologies; • availability of reimbursement for our products from government or other healthcare payors; • advantages over alternative treatment methods |
| Because we voluntarily withdrew NeutroSpec from the market, it may be more difficult to gain market acceptance with NeutroSpec, assuming that the FDA permits NeutroSpec to be reintroduced to the market |
| If any approved product does not achieve adequate market acceptance, our business, financial condition and results of operations will be adversely affected |
| Development and commercialization of our proposed products involves a lengthy, complex and costly process and we may never successfully develop or commercialize any product |
| Our product candidates are at various stages of research and development, will require regulatory approval, and may never be successfully developed or commercialized |
| Our products will require significant further research, development and testing before we can seek regulatory approval to market and sell them |
| You should evaluate us in light of the uncertainties, delays, difficulties and expenses commonly experienced by early stage biopharmaceutical companies, including unanticipated problems and additional costs relating to: • the research, development and testing of products in animals and humans; • product approval or clearance; • regulatory compliance; • good manufacturing practices; • intellectual property rights; • product introduction; and • marketing and competition |
| The regulatory approval process is lengthy, expensive and uncertain, and may prevent us from obtaining the approvals we require |
| Government authorities in the United States and other countries extensively regulate the advertising, labeling, storage, record-keeping, safety, efficacy, research, development, testing, manufacture, promotion, marketing and distribution of drug products |
| Drugs are subject to rigorous regulation by the FDA in the United States and similar regulatory bodies in other countries |
| The steps ordinarily required by the FDA before a new drug may be marketed in the United States include: • completion of pre-clinical laboratory tests, pre-clinical trial and formulation studies; • submission to the FDA of an investigational new drug application, or IND, which must become effective before clinical trials may begin; • performance of adequate and well-controlled human clinical trials to establish the safety and efficacy of the drug for each proposed indication; • the submission of a new drug application, or NDA, to the FDA; and • FDA review and approval of the NDA before any commercial marketing or sale |
| The results of product development, pre-clinical studies and clinical studies are submitted to the FDA as part of a NDA The NDA also must contain extensive manufacturing information |
| Once the submission has been accepted for filing, the FDA generally has ten months to review the application and respond to the applicant |
| The review process is often significantly extended by FDA requests for additional information or clarification |
| The FDA may refer the NDA to an advisory committee for review, evaluation and recommendation as to whether the application should be approved, but the FDA is not bound by the recommendation of an advisory committee |
| The FDA may deny or delay approval of applications that do not meet applicable regulatory criteria or if the FDA 10 _________________________________________________________________ [31]Table of Contents determines that the clinical data do not adequately establish the safety and efficacy of the drug |
| Upon approval, a drug candidate may be marketed only in those dosage forms and for those indications approved by the FDA Once approved, the FDA may withdraw the product approval if compliance with pre- and post-market regulatory standards is not maintained or if problems occur after the product reaches the marketplace |
| In addition, the FDA may require post-marketing studies, referred to as Phase 4 studies, to monitor the effect of approved products, and may limit further marketing of the product based on the results of these post-market studies |
| The FDA has broad post-market regulatory and enforcement powers, including the ability to levy fines and civil penalties, suspend or delay issuance of approvals, seize or recall products, and withdraw approvals |
| Satisfaction of FDA pre-market approval requirements for new drugs typically takes several years and the actual time required for approval may vary substantially based upon the type, complexity and novelty of the product or disease |
| Government regulation may delay or prevent marketing of potential products for a considerable period of time and impose costly procedures upon our activities |
| Data obtained from clinical activities is not always conclusive and may be susceptible to varying interpretations that could delay, limit or prevent regulatory approval |
| Even if a product receives regulatory approval, later discovery of previously unknown problems with a product may result in restrictions on the product or even complete withdrawal of the product from the market |
| If regulatory approval of any of our products is granted, it will be limited to certain disease states or conditions |
| The manufacturers of approved products and their manufacturing facilities will be subject to continual review and periodic inspections by the FDA and other authorities where applicable, and must comply with ongoing regulatory requirements, including the FDA’s cGMP regulations |
| Failure to comply with the statutory and regulatory requirements subjects the manufacturer to possible legal or regulatory action, such as Warning Letters, suspension of manufacturing, seizure of product, voluntary recall of a product, injunctive action or possible civil penalties |
| Adverse experiences with the product must be reported to the FDA and could result in the imposition of market restriction through labeling changes or in product removal |
| Product approvals may be withdrawn if compliance with regulatory requirements is not maintained or if problems concerning safety or efficacy of the product occur following approval |
| Because we intend to contract with third parties for manufacturing of these products, our ability to control third party compliance with FDA requirements will be limited to contractual remedies and rights of inspection |
| Failure of third-party manufacturers to comply with cGMP or other FDA requirements may result in legal or regulatory action by the FDA Outside the United States, our ability to market our products will also depend on receiving marketing authorizations from the appropriate regulatory authorities |
| The foreign regulatory approval process includes all of the risks associated with FDA approval described above |
| The requirements governing the conduct of clinical trials and marketing authorization vary widely from country to country |
| At present, foreign marketing authorizations are applied for at a national level, although within the European Community, or EC, registration procedures are available to companies wishing to market a product to more than one EC member state |
| If the regulatory authority is satisfied that adequate evidence of safety, quality and efficiency has been presented, a marketing authorization will be granted |
| We may not be able to obtain regulatory approval to reintroduce NeutroSpec to the market, or may be required to conduct extensive clinical trials prior to regulatory approval |
| NeutroSpec was initially approved by the FDA for imaging of patients with equivocal signs and symptoms of appendicitis |
| However, the reported serious adverse events were associated with off-label use (use for an indication other than diagnosis of equivocal appendicitis), and substantial sales of NeutroSpec were for off-label uses |
| We are conducting additional laboratory studies to understand the relationship between NeutroSpec and reported serious adverse events |
| We may not be able to develop a sufficient understanding of the relationship to warrant application to the FDA to conduct additional studies or remarket the product |
| We may also not be able to develop methods, formulations or protocols that permit NeutroSpec to be used safely |
| We also do not know whether the FDA will concur in our risk/benefit assessment of NeutroSpec, or permit NeutroSpec to be marketed again |
| Even if we seek to reintroduce NeutroSpec to the market, we may seek approval to market NeutroSpec for other indications, such as osteomyelitis (infection deep inside a bone), which will require that Phase 2 and Phase 3 clinical trials be successfully completed prior to seeking approval of the FDA We rely on third parties to conduct clinical trials for our product candidates and their failure to timely perform their obligations could significantly harm our product development |
| We rely on outside scientific collaborators such as researchers at clinical research organizations and universities in certain areas that are particularly relevant to our research and product development plans, such as the conduct of clinical trials |
| The competition for these relationships is intense, and we may not be able to maintain our 11 _________________________________________________________________ [32]Table of Contents relationships with them on acceptable terms |
| These outside collaborators generally may terminate their engagements with us at any time |
| As a result, we can control their activities only within certain limits, and they will devote only a certain amount of their time to conduct research on our product candidates and develop them |
| If they do not successfully carry out their duties under their agreements with us, fail to inform us if these trials fail to comply with clinical trial protocols or fail to meet expected deadlines, this may adversely affect our ability to develop our product candidates and obtain regulatory approval on a timely basis if at all |
| The results of our clinical trials may not support our product claims |
| Even if our clinical trials are completed as planned, we cannot be certain that their results will support our product claims |
| The clinical trial process may fail to demonstrate that our product candidates are safe for humans and effective for indicated uses |
| This failure would cause us to abandon a product candidate and could delay development of other product candidates |
| Any delay in, or termination of, our clinical trials will delay or eliminate our ability to commercialize our product candidates and generate product revenues |
| Production and supply of bremelanotide and NeutroSpec depend on contract manufacturers over whom we have no control |
| We do not have the facilities to manufacture bremelanotide, NeutroSpec or our other product candidates |
| Our contract manufacturers must perform these manufacturing activities in a manner that complies with FDA regulations |
| Failure to conduct their activities in compliance with FDA regulations could delay our development programs or negatively impact our ability to receive FDA approval of our potential products |
| Establishing relationships with new suppliers, who must be FDA-approved, is a time-consuming and costly process |
| We are subject to extensive regulation in connection with the laboratory practices and the hazardous materials we use |
| We are subject to various laws and regulations regarding laboratory practices, the experimental use of animals and the use and disposal of hazardous or potentially hazardous substances in connection with our research |
| In each of these areas, as noted above, the FDA and other regulatory authorities have broad regulatory and enforcement powers, including the ability to levy fines and civil penalties, suspend or delay issuance of approvals, seize or recall products and withdraw approvals, any one or more of which could have a material adverse effect upon us |
| We are also subject to numerous federal, state and local laws relating to such matters as safe working conditions, manufacturing practices, environmental protection, fire hazard control and disposal of hazardous or potentially hazardous substances |
| We may incur significant costs to comply with such laws and regulations now or in the future |
| Contamination or injury from hazardous materials used in the development of our products could result in a liability exceeding our financial resources |
| Our research and development involves the use of hazardous materials and chemicals, including radioactive compounds |
| We cannot completely eliminate the risk of contamination or injury from these materials |
| In the event of contamination or injury, we may be responsible for any resulting damages |
| Damages could be significant and could exceed our financial resources, including the limits of our insurance |
| We have limited or no experience in marketing, distributing and selling products and will substantially rely on our marketing partners to provide these capabilities |
| If the FDA approves bremelanotide for marketing and sale, we will depend on our arrangements with King for the marketing, distribution and sale of bremelanotide |
| If King fails to market bremelanotide or devote enough resources to bremelanotide, our potential revenues from the sale of bremelanotide will be adversely affected |
| If these arrangements fail, we may have difficulty establishing new marketing relationships, and in any event, we will have limited control over these activities |
| If we recommence sales of NeutroSpec, we will depend on Mallinckrodt, our strategic collaboration partner, to market, sell and distribute the product |
| If Mallinckrodt fails to market NeutroSpec or devote enough resources to NeutroSpec, our potential revenues will be adversely affected |
| If the arrangement with Mallinckrodt fails, we may have difficulty establishing new marketing relationships, and in any event, we will have limited control over these activities |
| 12 _________________________________________________________________ [33]Table of Contents Competing products and technologies may make our proposed products noncompetitive |
| We are aware of three oral FDA-approved PDE-5 inhibitor drugs for the treatment of erectile dysfunction |
| These products are also approved in Europe, Japan and most of the world’s pharmaceutical markets |
| In addition, other products are being developed for ED and FSD In order to achieve approval and market acceptance, bremelanotide may potentially be required to demonstrate efficacy and safety equivalent or superior to these other products |
| We are aware of one company developing a technetium imaging product and another company marketing an antibody-based technetium product in some European countries, both of which may compete with NeutroSpec for certain indications |
| In addition, other technologies may also be used to diagnose appendicitis, osteomyelitis and other infection-related diseases, including CT and ultrasound technologies |
| The biopharmaceutical and diagnostic industries are highly competitive |
| We are likely to encounter significant competition with respect to bremelanotide, NeutroSpec and our other potential products |
| Many of our competitors have substantially greater financial and technological resources than we do |
| Many of them also have significantly greater experience in research and development, marketing, distribution and sales than we do |
| Accordingly, our competitors may succeed in developing, marketing, distributing and selling products and underlying technologies more rapidly than we may |
| These competitive products or technologies may be more effective and useful or less costly than bremelanotide, NeutroSpec or our other potential products |
| In addition, academic institutions, hospitals, governmental agencies and other public and private research organizations are also conducting research and may develop competing products or technologies on their own or through strategic alliances or collaborative arrangements |
| Our ability to achieve significant revenues from the sale of our future products will depend, in part, on the ability of healthcare providers to obtain adequate reimbursement from Medicare, Medicaid, private insurers and other healthcare payers |
| The continuing efforts of government and insurance companies, health maintenance organizations and other payers of healthcare costs to contain or reduce costs of healthcare may adversely affect our future revenues and ability to achieve profitability |
| Our ability to successfully commercialize our future products will depend, in significant part, on the extent to which healthcare providers can obtain appropriate reimbursement levels for the cost of our products and related treatment |
| Third-party payers are increasingly challenging the prices charged for diagnostic and therapeutic products and related services |
| Also, the trend towards managed health care in the US and the concurrent growth of organizations such as HMOs could control or significantly influence the purchase of healthcare services and products |
| In addition, legislative proposals to reform health care or reduce government insurance programs may result in lower prices or the actual inability of prospective customers to purchase our future products |
| The cost containment measures that healthcare payers and providers are instituting and the effect of any healthcare reform could materially and adversely affect our ability to operate profitably |
| Furthermore, even if reimbursement is available, it may not be available at price levels sufficient for us to realize a positive return on our investment |
| We could lose our rights to NeutroSpec, which could adversely affect our potential revenues |
| Our rights to a key antibody used in NeutroSpec are dependent upon an exclusive license agreement with The Wistar Institute of Biology and Anatomy |
| This agreement contains specific performance criteria and requires us to pay royalties and make other payments |
| Failure to meet these requirements, or any other event of default under the license agreement, could lead to termination of the license agreement |
| If the license agreement is terminated we will be unable to make or market NeutroSpec, in which case we may lose the value of our substantial investment in developing the product, as well as any future revenues from selling NeutroSpec |
| If we fail to adequately protect or enforce our intellectual property rights or secure rights to patents of others, the value of our intellectual property rights would diminish |
| Our success, competitive position and future revenues will depend in part on our ability and the abilities of our licensors to obtain and maintain patent protection for our products, methods, processes and other technologies, to preserve our trade secrets, to prevent third parties from infringing on our proprietary rights and to operate without infringing the proprietary rights of third parties |
| We cannot predict: • the degree and range of protection any patents will afford us against competitors, including whether third parties will find ways to invalidate or otherwise circumvent our patents; • if and when patents will be issued; 13 _________________________________________________________________ [34]Table of Contents • whether or not others will obtain patents claiming aspects similar to those covered by our patents and patent applications; and • whether we will need to initiate litigation or administrative proceedings, which may be costly whether we win or lose |
| If our products, methods, processes and other technologies infringe the proprietary rights of other parties, we could incur substantial costs and we may have to: • obtain licenses, which may not be available on commercially reasonable terms, if at all; • redesign our products or processes to avoid infringement; • stop using the subject matter claimed in the patents held by others; • pay damages; or • defend litigation or administrative proceedings, which may be costly whether we win or lose, and which could result in a substantial diversion of our management resources |
| If we are unable to keep our trade secrets confidential, our technologies and other proprietary information may be used by others to compete against us |
| In addition to our reliance on patents, we attempt to protect our proprietary technologies and processes by relying on trade secret laws and agreements with our employees and other persons who have access to our proprietary information |
| These agreements and arrangements may not provide meaningful protection for our proprietary technologies and processes in the event of unauthorized use or disclosure of such information |
| In addition, our competitors may independently develop substantially equivalent technologies and processes or gain access to our trade secrets or technology, either of which could materially and adversely affect our competitive position |
| Our collaboration agreements may fail or be terminated unexpectedly, which could result in significant delays and substantial increases in the cost of our research, development and the commercialization of our potential products |
| We are party to various arrangements with academic, governmental and corporate partners |
| The successful development and commercialization of the potential products covered by these arrangements will depend upon the ability of these third parties to fully perform their contractual responsibilities |
| If any of these parties breaches or unexpectedly terminates their agreement with us, or otherwise fails to conduct their activities in a timely manner, the development or commercialization of our potential products may be delayed |
| We intend to continue to enter into additional collaborations to develop and commercialize our potential products in the future |
| We may not be able to negotiate these arrangements on favorable terms, if at all, and these relationships may not be successful |
| In addition, our collaborative partners may pursue alternative technologies or develop alternative compounds designed to treat the same diseases that are the subject of their collaborative programs with us |
| We may incur substantial liabilities and may be required to limit commercialization of our products in response to product liability lawsuits |
| The testing and marketing of medical products entails an inherent risk of product liability |
| If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our products or cease clinical trials |
| Our inability to obtain sufficient product liability insurance at an acceptable cost to protect against potential product liability claims could prevent or inhibit the commercialization of pharmaceutical products we develop, alone or with corporate collaborators |
| We currently carry product/medical professional liability insurance, which includes liability insurance for our clinical trials |
| We, or any corporate collaborators, may not be able to obtain insurance at a reasonable cost or in sufficient amounts, if at all |
| Even if our agreements with any future corporate collaborators entitle us to indemnification against losses, such indemnification may not be available or adequate should any claim arise |
| We are highly dependent on our management team and senior research professionals |
| We are a relatively small company |
| Our success depends on our continued ability to attract, retain and motivate highly qualified management and scientific personnel, including executive officers and senior members of management that oversee our development programs |
| In addition, certain research personnel possess significant technical expertise and experience relevant to our development programs and we will need to hire additional 14 _________________________________________________________________ [35]Table of Contents personnel to expand our research and development activities |
| Our success also depends on our ability to develop and maintain relationships with consultants and scientific advisors |
| Competition for personnel is intense |
| If we lose the services of existing personnel or fail to attract required new personnel, our development programs could be adversely affected |
| If we acquire other products, technologies or operations, we will incur a variety of risks that could adversely affect our current business operations |
| We are, and expect to continue, actively searching for certain products and technologies to license or acquire, now or in the future |
| If we are successful in identifying a product or technology for acquisition, we may require substantial funds for such an acquisition and subsequent development or commercialization |
| We do not know whether any acquisition will be consummated in the future |
| Any such acquisition may expose us to additional risks, including the need to devote significant resources to new activities and to raise additional funds |
| Shareholders may experience dilution from the exercise of outstanding options and warrants |
| As of June 30, 2006, options and warrants to purchase 15cmam568cmam859 shares of common stock were outstanding at various exercise prices ranging from dlra1dtta00 per share to dlra8dtta00 per share |
| The issuance or potential issuance and sale of common stock upon the exercise of these options and warrants may adversely affect the market price of our common stock or result in substantial dilution to our existing stockholders |
| Our management and principal stockholders together control approximately 20prca of our voting securities and such concentration of ownership could delay or prevent a change in control |
| As of June 30, 2006, our executive officers and directors beneficially own approximately 5prca of our voting securities and our 5prca or greater stockholders beneficially own approximately 15prca of our voting securities |
| These stockholders, acting together, may be able to significantly influence any matters submitted for approval by our stockholders, including the election of directors, delaying or preventing a change of control, and the consideration of transactions in which stockholders might otherwise receive a premium for their shares over then current market prices |
| Anti-takeover provisions of Delaware law and our charter documents may make potential acquisitions more difficult and could result in the entrenchment of management |
| We are incorporated in Delaware |
| Anti-takeover provisions of Delaware law and our charter documents may make a change in control or efforts to remove management more difficult |
| Also, under Delaware law, our board of directors may adopt additional anti-takeover measures |
| Under Section 203 of the Delaware General Corporation Law, a corporation may not engage in a business combination with an “interested stockholder” for a period of three years after the date of the transaction in which the person first becomes an “interested stockholder,” unless the business combination is approved in a prescribed manner |
| Our charter authorizes us to issue up to 10cmam000cmam000 shares of preferred stock and to determine the terms of those shares of stock without any further action by our stockholders |
| If we exercise this power, it could be more difficult for a third party to acquire a majority of our outstanding voting stock |
| In addition, our equity incentive plans generally permit us to accelerate the vesting of options granted under these plans in the event of a change of control |
| If we accelerate the vesting of options, this action could make an acquisition more costly |
| The application of these provisions could have the effect of delaying or preventing a change of control, which could adversely affect the market price of our common stock |
| Our stock price is, and we expect it to remain, volatile, which could limit investors’ ability to sell stock at a profit |
| The volatile price of our stock makes it difficult for investors to predict the value of their investment, to sell shares at a profit at any given time, or to plan purchases and sales in advance |
| A variety of factors may affect the market price of our common stock |
| These include, but are not limited to: • publicity regarding actual or potential clinical results relating to products under development by our competitors or us; • delay or failure in initiating, completing or analyzing pre-clinical or clinical trials or unsatisfactory design or result of these trials; • achievement or rejection of regulatory approvals by our competitors or by us; 15 _________________________________________________________________ [36]Table of Contents • announcements of technological innovations or new commercial products by our competitors or by us; • developments concerning proprietary rights, including patents; • developments concerning our collaborations; • regulatory developments in the US and foreign countries; • economic or other crises and other external factors; • period-to-period fluctuations in our revenue and other results of operations; • changes in financial estimates by securities analysts; and • sales of our common stock |
| We will not be able to control many of these factors, and we believe that period-to-period comparisons of our financial results will not necessarily be indicative of our future performance |
| If our revenues, if any, in any particular period do not meet expectations, we may not be able to adjust our expenditures in that period, which could cause our operating results to suffer further |
| If our operating results in any future period fall below the expectations of securities analysts or investors, our stock price may fall by a significant amount |
| In addition, the stock market in general, and the market for biotechnology companies in particular, has experienced extreme price and volume fluctuations that may have been unrelated or disproportionate to the operating performance of individual companies |
| These broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance |
| We expect to sell additional equity securities, which will cause dilution |
| We expect to sell more equity securities in the future to obtain cash for operations |
| We may sell these securities at a discount to the market price |
| Any future sales of equity will dilute the holdings of existing stockholders, possibly reducing the value of their investment |
| We do not intend to pay cash dividends in the foreseeable future |
| We do not anticipate paying any cash dividends in the foreseeable future and intend to retain any future earnings for the development and expansion of our business |
| In addition, the terms of existing or future agreements may limit our ability to pay dividends |
| Therefore, our stockholders will not receive a return on their shares unless the value of their shares increases |
| We have broad discretion over the use of available cash and may not realize an adequate return |
| We have considerable discretion in the application of available cash and have not fixed the amounts that we will apply to various corporate purposes, including potential acquisitions |
| We may use cash for purposes that do not yield a significant return, if any, for our stockholders |