| PHARMION CORP Item 1A Risk Factors |
| In addition to other information included in this report, the following factors should be considered in evaluating our business and future prospects |
| Risks Related to Our Business We have a history of net losses, and may not maintain profitability in the future |
| As of December 31, 2005, we had an accumulated deficit of dlra135dtta8 million |
| Although we achieved profitability for our 2005 fiscal year, we expect to further increase our expenditures to: • commercialize our marketed products; • support our development efforts associated with completing clinical trials and seeking regulatory approvals of our products, including development expenses associated with our recently-acquired product candidates, satraplatin and MGCD0103; • satisfy our obligations to make milestone payments under the existing license agreements for our product candidates; and • acquire additional product candidates or companies |
| Accordingly, we do not expect to maintain profitability during our 2006 fiscal year and we are unsure as to when we will again achieve profitability for any substantial period of time |
| If we fail to achieve profitability within the time frame expected by investors or securities analysts, the market price of our common stock may decline |
| Our existing commercial business is largely dependent on the success of Vidaza |
| Sales of Vidaza account for a significant portion of our total product sales |
| For the fiscal year ended December 31, 2005, Vidaza net sales represented 57prca of our total net sales |
| Vidaza sales have not increased significantly over the past several calendar quarters |
| In addition, Vidaza will face increased competition from Revlimid^tm, which was recently approved for marketing by the FDA as a treatment for a subset of low-risk MDS patients, and we may face competition from new therapeutics for treating MDS under development by our competitors that are currently being considered for approval by the FDA The commercial success of Vidaza and future growth in Vidaza sales will depend, among other things, upon: • continued acceptance by regulators, physicians, patients and other key decision-makers as a safe, superior therapeutic as compared to currently existing or future treatments for MDS; 24 _________________________________________________________________ [78]Table of Contents • the success of our current survival clinical trial for Vidaza in MDS; • our ability to achieve a marketing authorization for Vidaza in Europe and in other countries; and • our ability to expand the indications for which we can market Vidaza |
| As a consequence, we cannot make assurances that Vidaza will gain increased market acceptance from members of the medical community or that the acceptance of Vidaza we have observed thus far will be maintained |
| Even if Vidaza does gain increased market acceptance, we may not be able to maintain that market acceptance over time if these new products are introduced and are more favorably received than Vidaza or render Vidaza obsolete |
| Regulatory authorities in our markets subject approved products and manufacturers of approved products to continual regulatory review |
| Previously unknown problems, such as unacceptable toxicities or side effects, may only be discovered after a product has been approved and used in an increasing number of patients |
| If this occurs, regulatory authorities may impose labeling restrictions on the product that could affect its commercial viability or could require withdrawal of the product from the market |
| Accordingly, there is a risk that we will discover such previously unknown problems associated with the use of Vidaza in patients, which could limit sales growth or cause sales of Vidaza to decline |
| We may not receive regulatory approvals for our product candidates, including thalidomide, satraplatin or, outside of the United States, for Vidaza, or approvals may be delayed |
| Our ability to fully commercialize thalidomide and satraplatin is subject to regulatory approval by governmental authorities in Europe and our other markets, and our ability to commercialize Vidaza outside the US is subject to regulatory approval by governmental authorities in Europe and elsewhere |
| The regulatory review and approval process to obtain marketing approval, even for a drug that is approved in other jurisdictions, takes many years and requires the expenditure of substantial resources |
| This process can vary substantially based on the type, complexity, novelty and indication of the product candidate involved |
| Changes in the regulatory approval policy during the development period, changes in or the enactment of additional statutes or regulations, or changes in regulatory review for each submitted product application may cause delays in the approval or rejection of an application |
| The regulatory authorities have substantial discretion in the approval process and may refuse to accept any application or may decide that data is insufficient for approval and require additional pre-clinical, clinical or other studies |
| In addition, varying interpretations of the data obtained from pre-clinical and clinical testing by regulatory authorities could delay, limit or prevent regulatory approval of a product candidate |
| In July 2005, we announced the completion of the scientific advice procedure with the EMEA regarding the clinical data needed to support a marketing authorization for thalidomide in relapsed/ refractory multiple myeloma |
| Based on this scientific advice, we initiated a four arm randomized study of 400-500 patients in this indication in February 2006 |
| In January 2006, we announced that, pending further data review and communication with the European regulatory authorities, we expect that the results of a pivotal Phase III multiple myeloma trial conducted by Celgene Corporation will form the basis of a new MAA for thalidomide in the treatment of first-line treatment of multiple myeloma in Europe |
| Just before our announcement, Celgene announced that the study met the pre-specified interim endpoint for efficacy and would be stopped |
| We cannot assure you that the results of this trial or our ongoing clinical trials for thalidomide will support our applications for these regulatory approvals |
| In November 2005, we withdrew our previously filed MAA with the EMEA for Vidaza, based on the EMEA’s stated view that additional clinical data would be required before it can reach an opinion on whether or not Vidaza should be approved as a treatment of MDS We have previously initiated a clinical study of 354 high-risk MDS patients with overall survival as the primary endpoint of the study, which we expect to complete in 2007 |
| If the results of this study are positive, we intend to submit a new MAA for Vidaza with the EMEA based on data from this study |
| In addition, we have recently acquired marketing rights to satraplatin in Europe and certain other countries from GPC Biotech AG Satraplatin is the subject of an ongoing Phase III clinical trial as a second- 25 _________________________________________________________________ [79]Table of Contents line chemotherapy treatment for patients with HRPC Based on data from this trial, we expect to file an MAA in Europe in 2007 |
| We cannot assure you that the results of these studies for Vidaza or satraplatin will be positive or, even if either study is positive, that the EMEA will accept the results of the studies as the basis for a marketing approval |
| The timing of our submissions, the outcome of reviews by the applicable regulatory authorities in each relevant market, and the initiation and completion of clinical trials are subject to uncertainty, change and unforeseen delays |
| Moreover, favorable results in later stage clinical trials do not ensure regulatory approval to commercialize a product |
| Some companies that have believed their products performed satisfactorily in clinical trials have nonetheless failed to obtain regulatory approval of their products |
| We will not be able to market thalidomide, Vidaza or satraplatin in any country where the drug is not approved, and if thalidomide, Vidaza or satraplatin is not approved for sale in a market where we have acquired rights to the product, we will only be able to sell it in such market, if at all, on a compassionate use or named patient basis, which will limit sales |
| Thalidomide’s history of causing birth defects may prevent it from becoming commercially successful |
| At the time thalidomide first came on the market in the late 1950’s and into the early 1960’s, it was not known that the drug could cause birth defects in babies born to women who had taken the drug while pregnant |
| The majority of these births were in the UK and Germany, two of our largest target markets for sales of thalidomide |
| As a result, thalidomide’s historical reputation in our target markets may delay or prevent regulatory approval in Europe or may present a substantial barrier to its market acceptance |
| Thalidomide’s potential for causing severe birth defects and its negative historical reputation may limit the extent of its market acceptance among both doctors and patients, despite the efficacy that it has been proven to have in patients afflicted with a number of different diseases |
| In addition, any report of a birth defect attributed to the current use of thalidomide could result in a material decrease in our sales of thalidomide, and may result in the forced withdrawal of thalidomide from the market |
| If the third party manufacturers upon whom we rely fail to produce our products in the volumes that we require on a timely basis, or to comply with stringent regulations applicable to pharmaceutical drug manufacturers, we may face delays in the commercialization of, or be unable to meet demand for, our products and may lose potential revenues |
| We do not manufacture any of our products and we do not plan to develop any capacity to do so |
| We have contracted with third-party manufacturers to manufacture each of our products |
| The manufacture of pharmaceutical products requires significant expertise and capital investment, including the development of advanced manufacturing techniques and process controls |
| Manufacturers of pharmaceutical products often encounter difficulties in production, especially in scaling up initial production |
| These problems include difficulties with production costs and yields, quality control and assurance and shortages of qualified personnel, as well as compliance with strictly enforced federal, state and foreign regulations |
| Our third-party manufacturers may not perform as agreed or may terminate their agreements with us |
| Regulatory authorities in our markets require that drugs be manufactured, packaged and labeled in conformity with cGMP regulations and guidelines |
| In addition, before any product batch produced by our manufacturers can be shipped, it must conform to release specifications pre-approved by regulators for the content of the pharmaceutical product |
| The manufacturing process for Vidaza is very complex |
| There is a risk that our manufacturers will not comply with all applicable regulatory standards, and may not be able to manufacture Vidaza on a commercial scale that conforms on a consistent basis to our release specifications approved by the FDA To date, we have relied on sole sources for the manufacture of our products and, although we are in the process of qualifying a second-source manufacturer for the fill and finishing processes for Vidaza, we do not have operational alternate manufacturing facilities in place at this time |
| The number of third-party 26 _________________________________________________________________ [80]Table of Contents manufacturers with the expertise, required regulatory approvals and facilities to manufacture bulk drug substance on a commercial scale is extremely limited, and it would take a significant amount of time to arrange for alternative manufacturers |
| If we need to change to other commercial manufacturers, the FDA and comparable foreign regulators must approve these manufacturers’ facilities and processes prior to our use, which would require new testing and compliance inspections, and the new manufacturers would have to be educated in or independently develop the processes necessary for the production of our products |
| Any of these factors could cause us to delay or suspend clinical trials, regulatory submissions, required approvals or commercialization of our products or product candidates, entail higher costs and result in our being unable to effectively commercialize our products |
| Furthermore, if our third-party manufacturers fail to deliver the required commercial quantities of bulk drug substance or finished product on a timely basis and at commercially reasonable prices, and we are unable to promptly find one or more replacement manufacturers capable of production at a substantially equivalent cost, in substantially equivalent volume and on a timely basis, we would likely be unable to meet demand for our products and we would lose potential revenues |
| Moreover, failure of our third party manufacturers to comply with applicable regulations could result in sanctions being imposed on us, including fines, injunctions, civil penalties, suspension or withdrawal of approvals, license revocation, seizures or recalls of product candidates or products, operating restrictions and criminal prosecutions, any of which could significantly and adversely affect supplies of Vidaza and our other products |
| Fluctuations in our operating results could affect the price of our common stock |
| Our operating results may vary significantly from period to period due to many factors, including the amount and timing of sales of our products, underlying demand and wholesaler buying patters for Vidaza, the availability and timely delivery of a sufficient supply of our products, the timing and amount of operating expenses, particularly for development activities, announcements regarding clinical trial results and product introductions by us or our competitors, the availability and timing of third-party reimbursement and the timing of regulatory submissions and approvals |
| If our operating results do not match the expectations of securities analysts and investors as a result of these and other factors, the trading price of our common stock will likely decrease |
| Our effective tax rate has, and likely will continue to, vary significantly from period to period |
| Increases in our effective tax rate would have a negative effect on our results of operations |
| Our effective tax rate has varied significantly since our inception |
| This is largely due to the fact that we are subject to income taxes in a number of jurisdictions |
| The tax provision for each country is based on pre-tax earnings or losses in each specific country, and tax losses in one country cannot be used to offset taxable income in other countries |
| As a result, our consolidated effective tax rate has historically been far in excess of US statutory tax rates |
| We expect this trend will continue for the foreseeable future Since our inception, we have had minimal or no provision for US income taxes due to incurring losses in the US or, in the case of 2005, utilizing tax net operating loss carryforwards to offset taxable income in the US As of December 31, 2005 we had approximately dlra131 million in US federal and foreign tax loss carryforwards, including approximately dlra35 million in US loss carryforwards and dlra86 million in Swiss tax loss carryforwards |
| US net operating loss carryforwards are subject to “change of ownership” limitations under Sections 382 of the Internal Revenue Code and may also be subject to various other limitations on the amounts utilized |
| A change in ownership last occurred in 2001, but that change had minimal impact on the availability of net operating loss carryforwards as the majority of the losses were incurred subsequent to the change in ownership |
| We anticipate that a second change in ownership may occur in 2006 |
| If so, the amount of net operating loss carryforwards available in 2006 and in subsequent years may be reduced significantly |
| If we maintain profitability in the US, the reduction in the availability of net operating loss carryforwards may result in an increase in US income tax expense and our overall effective tax rate |
| This in turn would result in a reduction in our net income and net income per share beginning with the quarter of implementation |
| 27 _________________________________________________________________ [81]Table of Contents If we breach any of the agreements under which we license commercialization rights to products or technology from others, we could lose license rights that are important to our business |
| We license commercialization rights to products and technology that are important to our business, and we expect to enter into similar licenses in the future |
| For instance, we acquired rights to certain intellectual property and technology for Vidaza, thalidomide, satraplatin and MGCD0103 through exclusive licensing arrangements with third parties |
| Under these licenses we are subject to commercialization and development, sublicensing, royalty, milestone payments, insurance and other obligations |
| If we fail to comply with any of these requirements, or otherwise breach these license agreements, the licensor may have the right to terminate the license in whole or to terminate the exclusive nature of the license |
| Loss of any of these licenses or the exclusivity rights provided therein could harm our financial condition and operating results |
| We face substantial competition, which may result in others commercializing competing products before or more successfully than we do |
| Our industry is highly competitive |
| Our success will depend on our ability to acquire, develop and commercialize products and our ability to establish and maintain markets for our products |
| Potential competitors in North America, Europe and elsewhere include major pharmaceutical companies, specialized pharmaceutical companies and biotechnology firms, universities and other research institutions |
| Many of our competitors have substantially greater research and development capabilities and experience, and greater manufacturing, marketing and financial resources, than we do |
| Accordingly, our competitors may develop or license products or other novel technologies that are more effective, safer or less costly than our existing products or products that are being developed by us, or may obtain regulatory approval for products before we do |
| Clinical development by others may render our products or product candidates noncompetitive |
| Other pharmaceutical companies may develop generic versions of our products that are not subject to patent protection or otherwise subject to orphan drug exclusivity or other proprietary rights |
| In particular, because we have only limited patent protection for thalidomide, we face substantial competition from generic versions of thalidomide throughout Europe and other territories in which we sell thalidomide without orphan drug exclusivity |
| Governmental and other pressures to reduce pharmaceutical costs may result in physicians writing prescriptions for these generic products |
| Increased competition from the sale of competing generic pharmaceutical products could cause a material decrease in sales of our products |
| The primary competition and potential competition for our products currently are: • Vidaza: Thalomid^® and Revlimid^tm, each from Celgene, and Dacogen^tm from Supergen Inc, with marketing rights held by MGI Pharma, Inc, which like Vidaza, is a demethylating agent; • Thalidomide: Velcade^tm from Millennium Pharmaceuticals Inc, and Revlimid^tm from Celgene Corporation, in addition to competing sales of other versions of thalidomide described above; • Satraplatin: Emcyt^® from Pfizer Inc |
| ; Novantrone^® from (osi) pharmaceuticals/ Serono, Inc |
| ; Quadramet^® from Schering AG/Cytogen Corporation; Metastron^® from Amersham Health/ Medi-Physics, Inc |
| ; and Taxotere^® from Sanofi Aventis SA, as approved drugs |
| There are other agents in development for prostate cancer, including pemetrexel from Eli Lilly and Company; calcitriol from Novacea, Inc |
| ; Provenge^® from Dendreon Corporation; ixabepilone from Bristol-Myers Squibb Co |
| ; Avastin from Genentech Inc |
| ; Velcade^® from Millenium Pharmaceuticals Inc |
| ; and Arixtra, from GlaxoSmithKline plc; and • Refludan: Argatroban, from GlaxoSmithKline |
| Dacogen is currently under review for regulatory approval by the FDA and Revlimid was recently approved by the FDA as a treatment for certain low risk MDS patients and is currently under review for regulatory approval by the EMEA In addition to these products, there are additional products in clinical 28 _________________________________________________________________ [82]Table of Contents development for the treatment of MDS and the enrollment of patients in clinical trials for these products may reduce the number of patients that will receive Vidaza treatment |
| We also face competition for Vidaza from traditional therapies for the treatment of MDS, including the use of blood transfusions and growth factors |
| In addition, MGCD0103, a histone deacetylase (HDAC) inhibitor recently licensed by us from MethylGene Inc, is in a very early stage of development and we do not anticipate completing clinical trials for several years |
| However, several other HDAC inhibitors are in more advanced clinical trials, including SAHA from Merck & Co, Inc, and may reach the market before MGCD0103 |
| If this occurs, the market potential for MGCD0103 may be significantly reduced |
| The timing of customer purchases and the resulting product shipments have a significant impact on the amount of product sales that we recognize in a particular period |
| The majority of our sales of Vidaza in the United States are made to independent pharmaceutical wholesalers, including specialty oncology distributors, which, in turn, resell the product to an end user customer (normally a clinic, hospital, alternative healthcare facility or an independent pharmacy) |
| Inventory in the distribution channel consists of inventory held by these wholesalers |
| Our product sales in a particular period are impacted by increases or decreases in the distribution channel inventory levels |
| We cannot significantly control or influence the purchasing patterns or buying behavior of independent wholesalers or end users |
| Although our wholesaler customers typically buy product from us only as necessary to satisfy projected end user demand, we cannot predict future wholesalers buying practices |
| For example, wholesalers may engage in speculative purchases of product in excess of the current market demand in anticipation of future price increases |
| Accordingly, purchases by any given customer, during any given period, may be above or below actual patient demand of any of our products during the same period, resulting in fluctuations in product inventory in the distribution channel |
| If distribution channel inventory levels substantially exceed end user demand, we could experience reduced revenue from sales in subsequent periods due to a reduction in end user demand |
| Furthermore, our customer base is highly concentrated |
| Net sales generated from our largest three wholesale customers in the US totaled approximately 45prca of our total consolidated net sales for the year ended December 31, 2005 |
| If any of these customers becomes insolvent or disputes payment of the amount it owes us, it would adversely affect our results of operations and financial condition |
| Our failure to successfully acquire, in-license, develop and market additional product candidates or approved products would impair our ability to grow and could affect the price of our common stock |
| As part of our growth strategy, we intend to acquire, in-license, develop and market additional products and product candidates |
| Because we neither have, nor currently intend to establish, internal research capabilities, we are dependent upon pharmaceutical and biotechnology companies and other researchers to sell or license products to us |
| The success of this strategy depends upon our ability to identify, select and acquire the right pharmaceutical product candidates and products |
| Any product candidate we license or acquire may require additional development efforts prior to commercial sale, including extensive clinical testing and approval by the FDA and applicable foreign regulatory authorities |
| All product candidates are prone to the risks of failure inherent in pharmaceutical product development, including the possibility that the product candidate will not be shown to be sufficiently safe and effective for approval by regulatory authorities |
| Even where we are successful in gaining approval for product candidates we acquire, we cannot assure you that those products will be manufactured or produced economically, successfully commercialized or widely accepted in the marketplace |
| In addition, we will be required to integrate any acquired products into our existing operations, including satraplatin and MGCD0103, products that we have only recently acquired |
| Managing the development of a new product entails numerous financial and operational risks, including difficulties in attracting qualified employees to develop the products |
| Proposing, negotiating and implementing an economically viable acquisition and licenses is a lengthy and complex process |
| Other companies, including those with substantially greater financial, marketing and sales resources, may compete with us for the acquisition of product candidates and approved products |
| We may not 29 _________________________________________________________________ [83]Table of Contents be able to acquire the rights to additional product candidates and approved products on terms that we find acceptable, or at all |
| We may not be able to obtain sufficient product liability insurance on commercially reasonable terms or with adequate coverage for thalidomide |
| Historically, the vast majority of product liability insurers have been unwilling to write any product liability coverage for thalidomide |
| Although we currently have product liability coverage for thalidomide that we believe is appropriate, if our sales of this product grow in the future, our current coverage may be insufficient |
| We may be unable to obtain additional coverage on commercially reasonable terms if required, or our coverage may be inadequate to protect us in the event claims are asserted against us |
| In addition, we might be unable to renew our existing level of coverage if there were a report of a birth defect attributable to the current use of thalidomide, whether or not sold by us |
| Failure to achieve our sales targets or raise additional funds in the future may require us to delay, reduce the scope of, or eliminate one or more of our planned activities |
| We will need to generate greater sales to maintain profitability on an annual basis |
| The product development, including clinical trials, manufacturing development and regulatory approvals of Vidaza, thalidomide, satraplatin and MGCD0103, and the acquisition and development of additional product candidates by us will require a commitment of substantial funds |
| Our future capital requirements are dependent upon many factors and may be significantly greater than we expect |
| We believe, based on our current operating plan, including anticipated sales of our products, that our cash, cash equivalents and short-term investments will be sufficient to fund our operations through at least the next twelve months |
| If our existing resources are insufficient to satisfy our liquidity requirements due to slower than anticipated sales of our products or otherwise, or if we acquire additional products or product candidates, we may need to sell additional equity or debt securities |
| If we are unable to obtain this additional financing, we may be required to delay, reduce the scope of, or eliminate one or more of our planned development, commercialization or expansion activities, which could harm our financial condition and operating results |
| We may not be able to manage our business effectively if we are unable to attract and retain key personnel |
| Our industry has experienced a high rate of turnover of management personnel in recent years |
| We are highly dependent on our senior management team, whose services are critical to the successful implementation of our business strategies |
| Each of our senior executives have entered into an employment agreement with us for a term that runs until the agreement is otherwise terminated by us or them |
| These employment agreements provide that the executive cannot compete with us for a period of one year after his or her employment with us is terminated |
| If we lose the services of our senior management or other key employees, our ability to successfully implement our business strategy could be seriously harmed |
| We do not maintain key person life insurance on any of the members of our senior management |
| Replacing key employees may be difficult and may take an extended period of time because of the limited number of individuals in our industry with the breadth of skills and experience required to develop, gain regulatory approval of and commercialize products successfully |
| Competition to hire from this limited pool is intense, and we may be unable to hire, train, retain or motivate these additional key personnel |
| We have limited patent protection for our current products, and we may not be able to obtain, maintain and protect proprietary rights necessary for the development and commercialization of our products or product candidates |
| Our commercial success will depend in part on obtaining and maintaining a strong proprietary position for our products both in the US, Europe and elsewhere |
| We currently own or have exclusive rights to issued patents and pending patent applications covering thalidomide from Celgene Corporation, Vidaza, from Pfizer, Inc, satraplatin from GPC Biotech AG and MGCD0103 from MethylGene Inc |
| We have limited patent 30 _________________________________________________________________ [84]Table of Contents protection for Vidaza, currently consisting of two issued patents covering certain polymorphic forms of Vidaza drug substance and methods of isolating a crystalline form of Vidaza drug substance |
| In addition, in May 2004 the FDA awarded orphan drug exclusivity to Vidaza for the treatment of MDS patients, which lasts for seven years from the date granted |
| Given the limited patent protection for Vidaza, we must still rely in large part on orphan drug exclusivity to protect and enhance our competitive position in the US, and we will rely on orphan drug designation and data exclusivity available in the EU, if and when Vidaza is approved for marketing in Europe |
| However, orphan drug exclusivity does not prohibit competitors from developing or marketing different drugs for an indication or from independently developing generic versions of Vidaza for different indications |
| In addition, while we are selling thalidomide on a compassionate use and named patient basis, we do not have orphan drug exclusivity and we must rely on our use patent protection to prevent competitors from selling thalidomide in our markets until we are granted a marketing authorization |
| Finally, the primary European patents we have licensed for satraplatin expire in 2009 and, therefore, we will be relying on supplementary protection certificates to extend patent protection and on data exclusivity available in the EU if and when we achieve marketing approval for this product |
| We also rely on protection derived from trade secrets, process patents, know-how and technological innovation |
| To maintain the confidentiality of trade secrets and proprietary information, we generally seek to enter into confidentiality agreements with our employees, consultants and collaborators upon the commencement of a relationship with us |
| However, we may not obtain these agreements in all circumstances |
| In addition, adequate remedies may not exist in the event of unauthorized use or disclosure of this information |
| The loss or exposure of our trade secrets, know-how and other proprietary information could harm our operating results, financial condition and future growth prospects |
| Furthermore, others may have developed, or may develop in the future, substantially similar or superior know-how and technology |
| We intend to seek patent protection whenever it is available for any products or product candidates we acquire in the future |
| However, any patent applications for future products or pending applications for our existing products may not issue as patents, and any patent issued on such products may be challenged, invalidated, held unenforceable or circumvented |
| Furthermore, the claims in patents that do ultimately issue on those patent applications may not be sufficiently broad to prevent third parties from commercializing competing products |
| In addition, the laws of various foreign countries in which we compete may not protect the intellectual property on which we may rely to the same extent as do the laws of the US If we fail to obtain adequate patent protection for our products, our ability to compete could be impaired |
| We may undertake acquisitions in the future and any difficulties from integrating such acquisitions could damage our ability to attain or maintain profitability |
| We may acquire additional businesses, products or product candidates that complement or augment our existing business |
| To date, our only experience in acquiring and integrating a business involved our acquisition of Laphal in March 2003 |
| Integrating any newly acquired business or product could be expensive and time-consuming |
| We may not be able to integrate any acquired business or product successfully or operate any acquired business profitably |
| Moreover, if we acquire additional businesses or products we will incur significant acquisition costs and operating expenses, which could harm our financial condition and operating results |
| In addition, we may need to raise additional funds through public or private debt or equity financing to make acquisitions, which may result in dilution for stockholders and the incurrence of indebtedness |
| Changes to financial accounting standards may affect our results of operations and cause us to change our business practices |
| We prepare our financial statements to conform with generally accepted accounting principles, or GAAP, in the United States |
| These accounting principles are subject to interpretation by the American Institute of Certified Public Accountants, the Financial Accounting Standards Board, or FASB, the SEC and various bodies formed to promulgate and interpret appropriate accounting policies |
| A change in those accounting principles or interpretations could have a significant effect on our reported financial results and may affect our reporting of transactions completed before a change is announced or adopted |
| Changes to those rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our 31 _________________________________________________________________ [85]Table of Contents business |
| For example, accounting policies affecting certain aspects of our business, including rules relating to employee stock option grants, have recently been revised |
| In December 2004, the FASB issued a revision of SFAS Nodtta 123, “Accounting for Stock-Based Compensation,” which amends SFAS Nodtta 123 to require the recognition of employee stock options as compensation based on their fair value at the time of grant (with limited exceptions) |
| As a result of these new rules, on January 1, 2006 we changed our accounting policies and will thereafter record an expense for our stock-based compensation plans based on the estimated fair value of options granted, which will result in additional accounting charges as described in Management’s Discussion and Analysis of Financial Condition and Results of Operations — Recently Issued Accounting Standards |
| Our business is subject to economic, political, regulatory and other risks associated with international sales and operations |
| Since we sell our products in Europe, Australia and many additional countries, our business is subject to risks associated with conducting business internationally |
| We anticipate that sales from international operations will continue to represent a substantial portion of our total sales |
| In addition, a number of our suppliers are located outside the United States |
| Accordingly, our future results could be harmed by a variety of factors, including: • difficulties in compliance with foreign laws and regulations; • changes in foreign regulations and customs; • changes in foreign currency exchange rates and currency controls; • changes in a specific country’s or region’s political or economic environment; • trade protection measures, import or export licensing requirements or other restrictive actions by the US or foreign governments; • negative consequences from changes in tax laws; • difficulties associated with staffing and managing foreign operations; • longer accounts receivable cycles in some countries; and • differing labor regulations |
| Risks Related to Our Industry Our ability to generate sales from our products will depend on reimbursement and drug pricing policies and regulations |
| Our ability to achieve acceptable levels of reimbursement for drug treatments by governmental authorities, private health insurers and other organizations will have an effect on our ability to successfully commercialize, and attract collaborative partners to invest in the development of, product candidates |
| The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 together with rulemaking by the Centers for Medicare and Medicaid Services, or CMS, changed the methodology for Medicare reimbursement of pharmaceutical products administered in physician offices and hospital outpatient facilities, including Vidaza and Innohep |
| Under these regulations, reimbursements are the average selling price, or ASP, of a product plus 6prca, rather than a specified discount from the average wholesale price, or AWP, as was the case under prior regulations |
| The ASP-based reimbursement regime generally reduced the reimbursement physicians receive under Medicare for most office-administered injectable drugs, including Vidaza and Innohep |
| The changes made to date have not yet resulted in an adverse affect on reimbursement for our products, however we cannot predict the impact, if any, that future reimbursement policies will adversely affect product use by physicians, thereby reducing our sales for these products |
| In other countries, particularly the countries of the European Union, the pricing of prescription pharmaceuticals and the level of reimbursement are subject to strict governmental control |
| We cannot be sure that reimbursement in the US, Europe or elsewhere will be available for any products we may develop or, if 32 _________________________________________________________________ [86]Table of Contents already available, will not be decreased or eliminated in the future |
| If reimbursement is not available or is available only at limited levels, we may not be able to successfully commercialize our products, and may not be able to obtain a satisfactory financial return on our products |
| Third-party payers increasingly are challenging prices charged for medical products and services |
| Also, the trend toward managed health care in the US and the changes in health insurance programs, as well as legislative proposals to reform health care or reduce government insurance programs, may result in lower prices for pharmaceutical products, including any products that may be offered by us |
| Cost-cutting measures that health care providers are instituting, and the effect of any health care reform, could harm our ability to sell any products that are successfully developed by us and approved by regulators |
| Moreover, we are unable to predict what additional legislation or regulation, if any, relating to the health care industry or third-party coverage and reimbursement may be enacted in the future or what effect this legislation or regulation would have on our business |
| In the event that governmental authorities enact legislation or adopt regulations that affect third-party coverage and reimbursement, demand for our products may be reduced thereby harming our sales and profitability |
| If product liability lawsuits are brought against us, we may incur substantial liabilities |
| The clinical testing and commercialization of pharmaceutical products involves significant exposure to product liability claims |
| If losses from such claims exceed our liability insurance coverage, we may incur substantial liabilities |
| Whether or not we were ultimately successful in product liability litigation, such litigation could consume substantial amounts of our financial and managerial resources, and might result in adverse publicity, all of which would impair our business |
| We may not be able to maintain our clinical trial insurance or product liability insurance at an acceptable cost, if at all, and this insurance may not provide adequate coverage against potential claims or losses |
| If we are required to pay a product liability claim, we may not have sufficient financial resources to complete development or commercialization of any of our product candidates and our business and results of operations will be harmed |
| If our promotional activities fail to comply with the regulations and guidelines of the various relevant regulatory agencies, we may be subject to warnings or enforcement action that could harm our business |
| Physicians may prescribe drugs for uses that are not described in the product’s labeling for uses that differ from those tested in clinical studies and approved by the FDA or similar regulatory authorities in other countries |
| These “off-label” uses are common across medical specialties and may constitute the best treatment for many patients in varied circumstances |
| Regulatory authorities generally do not regulate the behavior of physicians in their choice of treatments |
| Regulatory authorities do, however, restrict communications on the subject of off-label use |
| Companies cannot actively promote approved drugs for off-label uses, but in some countries outside of the EU, including the US, they may disseminate to physicians articles published in peer-reviewed journals, like “The New England Journal of Medicine” and “The Lancet,” that discuss off-label uses of approved products |
| To the extent allowed, we may disseminate peer-reviewed articles on our products to our physician customers |
| We believe our promotional activities are currently in compliance with the regulations and guidelines of the various regulatory authorities |
| If, however, our promotional activities fail to comply with these regulations or guidelines, we may be subject to warnings from, or enforcement action by, these authorities |
| Furthermore, if the discussion of off-label use in peer-reviewed journals or the dissemination of these articles is prohibited, it may harm demand for our products |
| We are subject to numerous complex regulatory requirements and failure to comply with these regulations, or the cost of compliance with these regulations, may harm our business |
| The testing, development and manufacturing of our products are subject to regulation by numerous governmental authorities in the US, Europe and elsewhere |
| These regulations govern or affect the testing, manufacture, safety, labeling, storage, record-keeping, approval, advertising and promotion of our products and product candidates, as well as safe working conditions and the experimental use of animals |
| Noncompliance with any applicable regulatory requirements can result in refusal of the government to approve products for marketing, criminal prosecution and fines, recall or seizure of products, total or partial suspension of 33 _________________________________________________________________ [87]Table of Contents production, prohibitions or limitations on the commercial sale of products or refusal to allow us to enter into supply contracts |
| Regulatory authorities typically have the authority to withdraw approvals that have been previously granted |
| The regulatory requirements relating to the manufacturing, testing, and marketing of our products may change from time to time |
| For example, at present, member states in the EU are in the process of incorporating into their domestic laws the provisions contained in the EU Directive on the implementation of good clinical practice in the conduct of clinical trials |
| The Directive imposes more onerous requirements in relation to certain aspects of the conduct of clinical trials than are currently in place in many member states |
| This may impact our ability to conduct clinical trials and the ability of independent investigators to conduct their own research with support from us |
| Risks Related to Our Common Stock Our certificate of incorporation, our bylaws, Delaware law and our employment agreements with members of our senior management contain provisions that could discourage, delay or prevent a change in control or management of Pharmion |
| Our amended and restated certificate of incorporation, bylaws, Delaware law and our employment agreements with members of senior management contain provisions which could delay or prevent a third party from acquiring shares of our common stock or replacing members of our board of directors, each of which certificate of incorporation provisions can only be amended or repealed upon the consent of 80prca of our outstanding shares |
| Our amended and restated certificate of incorporation allows our board of directors to issue up to 10cmam000cmam000 shares of preferred stock |
| The board can determine the price, rights, preferences and privileges of those shares without any further vote or action by the stockholders |
| As a result, our board of directors could make it difficult for a third party to acquire a majority of our outstanding voting stock, for example by adopting a stockholders’ rights plan |
| Our amended and restated certificate of incorporation also provides that the members of the board are divided into three classes |
| Each year the terms of approximately one-third of the directors will expire |
| Our bylaws do not permit our stockholders to call a special meeting of stockholders |
| Under the bylaws, only our Chief Executive Officer, Chairman of the Board or a majority of the board of directors are able to call special meetings |
| The staggering of directors’ terms of office and the limitation on the ability of stockholders to call a special meeting may make it difficult for stockholders to remove or replace the board of directors should they desire to do so |
| Since management is appointed by the board of directors, any inability to effect a change in the board may result in the entrenchment of management |
| The bylaws also require that stockholders give advance notice to our Secretary of any nominations for director or other business to be brought by stockholders at any stockholders’ meeting |
| These provisions may delay or prevent changes of control or management, either by third parties or by stockholders seeking to change control or management |
| We are also subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law |
| Under these provisions, if anyone becomes an “interested stockholder,” we may not enter into a “business combination” with that person for three years without special approval, which could discourage a third party from making a takeover offer and could delay or prevent a change of control |
| For purposes of Section 203, “interested stockholder” means, generally, someone owning 15prca or more of our outstanding voting stock or an affiliate of ours that owned 15prca or more of our outstanding voting stock during the past three years, subject to certain exceptions as described in Section 203 |
| The employment agreements with members of our senior management provide that certain benefits will be payable to the executives in the event we undergo a change in control and the termination of the executive’s employment within two years after such change in control for any reason other than for cause, disability, death, normal retirement or early retirement |
| 34 _________________________________________________________________ [88]Table of Contents Our stock price has been and may continue to be volatile and your investment in our common stock could suffer a decline in value Our common stock has been and in the future may be subject to substantial price volatility |
| During the period January 1, 2005 to December 31, 2005, the closing price of our common stock ranged from a high of dlra44dtta55 per share to a low of dlra16dtta49 per share |
| Some specific factors that could have a significant effect on our common stock market price include: • actual or anticipated fluctuations in our operating results; • our announcements or our competitors’ announcements of clinical trial results or regulatory approval of new products; • changes in our growth rates or our competitors’ growth rates; • the timing or results of regulatory submissions or actions with respect to our products; • public concern as to the safety of our products; • changes in health care, drug pricing or reimbursement policies in a country where we sell our products; • our inability to raise additional capital; • our ability to grow through successful product acquisitions and in-licensing agreements; • conditions of the pharmaceutical industry or in the financial markets or economic conditions in general; and • changes in stock market analyst recommendations regarding our common stock, other comparable companies or the pharmaceutical industry generally |