| RENOVIS INC Item 1A Risk Factors An investment in our common stock is very risky |
| You should carefully consider the risks described below, together with all of the other information in this report before making a decision to invest in our common stock |
| If any of the following risks actually occur, our business, financial condition, results of operations and growth prospects could be adversely affected |
| In this case, the trading price of our common stock could decline and you may lose all or part of your investment in our common stock |
| Additional risks and uncertainties, not presently known to us, or that we presently deem as immaterial, may also adversely affect our business |
| If any of these additional risks and uncertainties occur, the trading price of our common stock could decline, and you might lose all or part of your investment |
| Risks Related to Our Company Clinical trials may fail to demonstrate the safety and efficacy of our product candidates, which could prevent or significantly delay their regulatory approval |
| Our future success is dependent upon, among other factors, our ability to develop working products and our ability to successfully complete clinical trials |
| All of our potential products currently are in research, preclinical development or clinical testing, and commercialization of those products will not occur for at least the next several years, if at all |
| All of our potential products will require extensive additional research and development prior to any commercial introduction |
| There can be no assurance that any of our research and development and clinical trial efforts will result in viable new products |
| For example, in July 2004, we announced our decision to discontinue efforts to commercialize REN-213, an intravenous drug candidate we were developing for the treatment of acute post-operative pain |
| In August 2005, based on results of our Phase II clinical trials with REN-1654 in patient volunteers with post-herpetic neuralgia and sciatica, we announced that we were discontinuing development of REN-1654 as an oral medication |
| In June 2005 we announced our decision to discontinue efforts to develop REN-850 for the treatment of multiple sclerosis |
| Any failure or substantial delay in completing clinical trials for our product candidates, including NXY-059, may severely harm our business |
| Before obtaining regulatory approval for the sale of any of our potential products or the potential products of our current and future strategic partners and licensees, we and our strategic partners or licensees must subject these product candidates to extensive preclinical and clinical testing to demonstrate their safety and efficacy in humans |
| The success of this preclinical and clinical testing is critical to achieving our product development goals |
| If our product development efforts are unsuccessful, we will not obtain regulatory approval for them, we will not generate sales from them, and our business and results of operations would be adversely affected |
| Clinical trials are expensive, time-consuming and typically take years to complete |
| In connection with clinical trials, we face the risks that: • a product candidate may not prove to be efficacious; • we may discover that a product candidate may cause harmful side effects; • patients may die or suffer other adverse medical effects for reasons that may not be related to the product candidate being tested; • the results may not confirm the positive results of earlier trials; and • the results may not meet the level of statistical significance required by the FDA or other regulatory agencies |
| The results in early phases of clinical testing are based upon limited numbers of patients and a limited follow-up period and our success may not be indicative of results in a large number of patients or long-term 16 ______________________________________________________________________ [40]Table of Contents efficacy |
| A number of companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in late stage clinical trials even after achieving promising results in earlier development activities, including previous late-stage clinical trials |
| The results from the Phase III SAINT I trial for NXY-059 may not be predictive of results obtained in the second Phase III clinical trial, SAINT II If a larger population of patients does not experience positive results, or if these results do not have a lasting effect, our products may not receive approval from the FDA In addition, even if the primary endpoint of the SAINT II trial is achieved, if the SAINT II trial does not demonstrate positive trends or statistically significant benefits with respect to neurological impairment measured using the NIHSS, our ability to obtain regulatory approval for NXY-059 in certain jurisdictions outside the United States could be impaired and market acceptance for NXY-059 could be adversely affected |
| The potential market opportunity for NXY-059 will also likely depend in part on whether NXY-059 may be labeled for administration prior to a CT scan |
| Failure to demonstrate the safety and effectiveness of our product candidates in larger patient populations could have a material adverse effect on our business that would cause our stock price to decline significantly |
| Failure to enroll patients for clinical trials may cause delays in developing our product candidates |
| We may encounter delays or rejections if we, our strategic partners or licensees are unable to enroll enough patients to complete clinical trials |
| Patient enrollment depends on many factors, including the size of the patient population, the nature of the protocol, the proximity of patients to clinical sites, the eligibility criteria for the trial and the number and size of ongoing clinical trials sponsored by others that seek to enroll similar patients |
| When one product candidate is evaluated in multiple clinical trials simultaneously, patient enrollment in ongoing trials can be adversely affected by negative results from completed trials |
| At various times, NXY-059 has been involved in multiple clinical trials that were enrolling patients simultaneously |
| Any delays in planned patient enrollment may result in increased costs and delays, which could harm our ability to develop products |
| The independent clinical investigators and contract research organizations that we and our strategic partners or licensees rely upon to conduct clinical trials may not be diligent, careful or timely, and may make mistakes in the conduct of our trials |
| We depend on independent clinical investigators and contract research organizations (CROs) to conduct our clinical trials under their agreements with us or, in the case of NXY-059, with AstraZeneca |
| We are not employing these investigators, and we cannot control the amount or timing of resources that they devote to our programs |
| Our contracts with these investigators involve fixed fees |
| If the costs of performing the clinical trials exceed estimates, these investigators may fail to devote sufficient time and resources to our drug development programs, fail to enroll patients as rapidly as expected, or otherwise fail to perform in a satisfactory manner, regulatory approval and our introductions of new products will be delayed |
| We contract with CROs for execution of our clinical trials for our product candidates other than NXY-059 |
| Failure of the CROs to meet their obligations could adversely affect clinical development of our product candidates |
| Moreover, these independent investigators and CROs may also have relationships with other commercial entities, some of which may compete with us |
| If independent investigators and CROs assist our competitors, it could harm our competitive position |
| We depend on our licensee, AstraZeneca, for the completion of the NXY-059 clinical program and for the commercialization of NXY-059 |
| Under our exclusive license agreement with AstraZeneca, AstraZeneca is responsible for all aspects of clinical development of NXY-059 |
| If NXY-059 receives regulatory approval, AstraZeneca will be responsible for marketing and sales of the commercial product |
| Because AstraZeneca is responsible for these functions, we have no control over the development schedule or, if NXY-059 receives regulatory approval, the marketing plan for NXY-059 |
| If the clinical trials for NXY-059 are not successful, NXY-059 will not be commercialized |
| Moreover, if AstraZeneca elects to terminate the clinical program for NXY-059, the rights to develop and market NXY-059 will revert to us |
| If these rights revert to us, we will have to fund the clinical programs for NXY-059 on our own, seek a strategic partner or licensee for clinical development or abandon NXY-059 |
| 17 ______________________________________________________________________ [41]Table of Contents Our reliance on AstraZeneca poses a number of risks, including the following: • AstraZeneca has discretion to elect whether to pursue the development of NXY-059 or to modify or abandon the clinical program at any time; • we cannot control whether AstraZeneca will devote sufficient resources to the clinical program and, if NXY-059 is approved by the FDA or other regulatory agencies, the marketing plan for the commercial drug product; • although we have no history of royalty payment disputes, even if NXY-059 is approved and commercialized, disputes may arise in the future with respect to the calculation of royalty payments based on net sales related to NXY-059; and • if AstraZeneca perceives that the market opportunity for NXY-059 or its profit margin from the sale of NXY-059 is too small to justify commercialization, the interests and motivations of AstraZeneca may not be, or may not remain, aligned with ours |
| If any of these risks materialize, it could delay the development schedule for NXY-059 and impair its commercialization |
| If we or our strategic partners or licensees fail to obtain US regulatory approvals for product candidates under development, including our lead product candidate, NXY-059, we will not be able to generate revenue in the US market from the commercialization of product candidates |
| We must receive FDA approval for each of our product candidates before we can commercialize or sell that product candidate in the United States, and AstraZeneca, our licensee for NXY-059, must receive regulatory approval for NXY-059 and commercialize or sell NXY-059 before we will receive royalties |
| The FDA can limit or deny their approval for many reasons, including: • a product candidate may be found to be unsafe or ineffective; • regulators may interpret data from preclinical testing and clinical trials differently and less favorably than the way we interpret it; • regulators may not approve the manufacturing processes or facilities that we or our strategic partners or licensees use; and • regulators may change their approval policies or adopt new regulations |
| Failure to obtain FDA approval or any delay or setback in obtaining such approval could: • adversely affect our ability to market any drugs we develop independently or with strategic partners or licensees; • impose additional costs and diminish any competitive advantages that we may attain; and • adversely affect our ability to generate royalties or product revenues |
| Any such failures or delays in the regulatory approval process for any of our product candidates would delay or diminish our receipt of product revenues, if any, and would materially adversely affect our business, financial condition and results of operations |
| Even if we obtain FDA approval, our product candidate may not be approved for all indications that we request, which could limit the uses of our product and adversely impact our potential royalties and product sales |
| If FDA approval of a product is granted, such approval may be subject to limitations on the indicated uses for which the product may be marketed or require costly, post-marketing follow-up studies |
| As to any product for which marketing approval is obtained, the labeling, packaging, adverse event reporting, storage, advertising, promotion and record keeping related to the product will be subject to extensive regulatory requirements |
| The 18 ______________________________________________________________________ [42]Table of Contents subsequent discovery of previously unknown problems with the product may result in restrictions on the product, including withdrawal of the product from the market |
| We may be slow to adapt, or we may never adapt, to changes in existing requirements or adoption of new requirements or policies |
| If we fail to comply with applicable US regulatory requirements, we may be subject to fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions and criminal prosecution |
| If we or our strategic partners or licensees fail to obtain regulatory approvals in other countries for product candidates under development, we will not be able to generate revenue in such countries from the commercialization of product candidates |
| In order to market our products outside of the United States, we and our strategic partners and licensees must establish and comply with numerous and varying regulatory requirements of other countries regarding safety and efficacy |
| Approval procedures vary among countries and can involve additional product testing and additional administrative review periods |
| The time required to obtain approval in other countries might differ from that required to obtain FDA approval |
| The regulatory approval process in other countries may include all of the risks detailed above regarding FDA approval in the United States |
| Regulatory approval in one country does not ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval in one country may negatively impact the regulatory process in others |
| Failure to obtain regulatory approval in other countries or any delay or setback in obtaining such approval could have the same adverse effects detailed above regarding FDA approval in the United States, including the risks that our product candidate may not be approved for all indications that we request, which could limit the uses of our product and adversely impact our potential royalties and product sales, and that such approval may be subject to limitations on the indicated uses for which the product may be marketed or require costly, post-marketing follow-up studies |
| If we fail to comply with applicable foreign regulatory requirements, we may be subject to fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions and criminal prosecution |
| Even if our product candidates are approved and commercialized, competitive products may impede market acceptance of our products |
| Hospitals, physicians or patients may conclude that our potential products are less safe or effective or otherwise less attractive than existing drugs |
| Even if approved and commercialized, NXY-059, or any future product candidates, may fail to achieve market acceptance with hospitals, physicians or patients |
| If our products do not receive market acceptance for any reason, our revenue potential could be diminished which would materially adversely affect our business, financial condition and results of operations |
| Further, our competitors may develop new products that could be more effective or less costly, or that may seem more cost-effective, than our products |
| For example, although we believe that NXY-059 would not face direct competition from products currently available to stroke victims, a number of organizations are conducting clinical trials of neuroprotectant drug candidates which, if approved and commercialized, would compete with NXY-059 |
| Competitors developing such products include Astellas Pharma, Inc, D-Pharm Ltd, IVAX Pharmaceuticals, Inc, Paion AG, Ferrer Grupo and Vertex Pharmaceuticals Incorporated |
| Most of our competitors have substantially greater capital resources, research and development staffs, facilities and experience in conducting clinical trials and obtaining regulatory approvals, as well as in manufacturing and marketing pharmaceutical products |
| As a result, they may achieve product commercialization or patent protection earlier than we can, if at all |
| Hospitals, physicians, patients or the medical community in general may not accept and use any products that we may develop |
| 19 ______________________________________________________________________ [43]Table of Contents We have no experience selling, marketing or distributing products and no internal capability to do so |
| If we receive regulatory approval to commence commercial sales of any of our product candidates for which we have retained marketing rights, we will have to establish a sales and marketing organization with appropriate technical expertise and supporting distribution capability |
| At present, we have no sales or marketing personnel |
| Factors that may inhibit our efforts to commercialize our products without strategic partners or licensees include: • our inability to recruit and retain adequate numbers of effective sales and marketing personnel; • the inability of sales personnel to obtain access to or persuade adequate numbers of physicians to prescribe our products; • the lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage against companies with broader product lines; and • unforeseen costs associated with creating an independent sales and marketing organization |
| As an alternative to establishing our own sales and marketing organization, we may engage a pharmaceutical or other healthcare company with an existing distribution system and direct sales organization to assist us |
| We may not be able to successfully establish sales and distribution capabilities either on our own or in collaboration with third parties or gain market acceptance for our products |
| To the extent we enter co-promotion or other licensing arrangements, any revenues we receive will depend on the efforts of third parties and we may not succeed |
| If our partners, licensees or contract manufacturers of our products fail to devote sufficient time and resources to our concerns, or if their performance is substandard, our clinical trials and product introductions may be delayed and our costs may rise |
| We have no manufacturing facilities, and we have no experience in the commercial manufacturing of drugs and no experience in designing drug manufacturing processes |
| We depend on our partners, licensees and contract manufacturers to produce our product candidates for clinical trials and to manufacture, supply, store and distribute any resulting products |
| While we have not experienced problems with our partners, licensees or contract manufacturers to date, our reliance on these third parties exposes us to the following risks, any of which could delay or prevent the completion of our clinical trials, the approval of our product candidates by the FDA or other regulatory agencies, or the commercialization of our products, result in higher costs, or deprive us of potential product revenues: • Drug manufacturers are obliged to operate in accordance with FDA-mandated current good manufacturing practices, or cGMPs |
| A failure of any of our partners, licensees or contract manufacturers to establish and follow cGMPs and to document their adherence to such practices may lead to significant delays in the availability of material for clinical trials and may delay or prevent filing or approval of marketing applications for our products |
| • Changing contract manufacturers may be difficult and the number of potential manufacturers is limited |
| Changing manufacturers may require re-validation of the manufacturing processes and procedures in accordance with FDA-mandated cGMPs |
| Such re-validation may be costly and time-consuming |
| It may be difficult or impossible for us to find replacement manufacturers on acceptable terms quickly, or at all |
| Drug manufacturers are subject to ongoing periodic unannounced inspections by the FDA and corresponding state and foreign agencies to ensure strict compliance with cGMPs, other government regulations and corresponding foreign standards |
| We are not aware of any violations by our partners, licensees or contract manufacturers of any of these regulations or standards |
| While we are obligated to audit the performance of our contractor manufacturers, we do not have control over their compliance with these regulations and standards |
| Failure by our partners, licensees, contract manufacturers or us to comply with applicable regulations could result 20 ______________________________________________________________________ [44]Table of Contents in sanctions that would have a material adverse effect on our business, including fines, injunctions, civil penalties, failure of the government to grant premarket approval of drugs, delays, suspension or withdrawal of approvals, seizures or recalls of product, operating restrictions and criminal prosecutions |
| We or our strategic partners or licensees may not be able to manufacture our product candidates in commercial quantities, which would prevent us from commercializing our product candidates |
| To date, our product candidates have been manufactured in small quantities for preclinical and clinical trials |
| If any of these product candidates are approved by the FDA or other regulatory agencies for commercial sale, they will need to be manufactured in larger quantities |
| We or our strategic partners or licensees, as applicable, may not be able to successfully increase the manufacturing capacity, whether in collaboration with contract manufacturers or independently, for any of our product candidates in a timely or economic manner, or at all |
| Significant scale-up of manufacturing may require additional validation studies, which the FDA must review and approve |
| If we or our strategic partners or licensees are unable to successfully increase the manufacturing capacity for a product candidate, the regulatory approval or commercial launch of that product candidate may be delayed or there may be a shortage in supply |
| Our product candidates require precise, high quality manufacturing |
| Failure to achieve and maintain these high manufacturing standards, including the incidence of manufacturing errors, could result in patient injury or death, product recalls or withdrawals, delays or failures in product testing or delivery, cost overruns or other problems that could seriously hurt our business |
| If we are unable to retain and recruit qualified scientists or if any of our key executives, key employees or key consultants discontinues his or her employment or consulting relationship with us, it may delay our development efforts or otherwise harm our business |
| We are highly dependent on the key members of our management and scientific staff, especially our chief executive officer, Corey Goodman, Ph |
| D The loss of any of our key employees or key consultants could impede the achievement of our research and development objectives |
| Furthermore, recruiting and retaining qualified scientific personnel to perform research and development work in the future is critical to our success |
| We may be unable to attract and retain personnel on acceptable terms given the competition among biotechnology, pharmaceutical and health care companies, universities and non-profit research institutions for experienced scientists |
| We maintain “key man” insurance on Dr |
| We do not maintain “key man” insurance policies on any of our other officers or employees |
| All of our employees are employed “at will” and, therefore, each employee may leave our employment at any time |
| We have a history of losses and we may never achieve sustained profitability |
| Since our inception, we have incurred significant net losses, including net losses of dlra32dtta0 million, dlra39dtta9 million, dlra41dtta9 million, dlra25dtta1 million, and dlra11dtta4 million, respectively, for the years ended December 31, 2005, 2004, 2003, 2002 and 2001 |
| As of December 31, 2005, our cumulative net loss was dlra154dtta0 million |
| None of our product candidates has completed development or received required regulatory approvals and, consequently, we have not generated revenues from the sale of products and do not expect to do so for at least the next several years |
| Even if one or more of our product candidates is commercialized, we expect to incur substantial losses for the foreseeable future |
| The development and sale of our products will require completion of clinical trials and significant additional research and development activities |
| We expect to continue to incur significant operating and capital expenditures and anticipate that our expenses will increase substantially in the foreseeable future as we: • expand our research and development programs; and • advance new product candidates into clinical development from our existing research programs |
| We also expect to experience negative cash flow for the foreseeable future as we fund our operating losses and capital expenditures |
| We will need to generate significant revenues to achieve profitability |
| Our ability to 21 ______________________________________________________________________ [45]Table of Contents generate revenues and achieve profitability depends on successful completion of clinical trials, our additional research and development efforts, our ability to successfully commercially introduce our products, market acceptance of our products, the competitive position of our products and the other risk factors set forth in this report |
| We may not be able to generate these revenues, and we may never achieve profitability |
| Our failure to achieve, sustain and/or increase profitability on a quarterly or annual basis could negatively impact the market price of our common stock |
| If we cannot raise additional capital on acceptable terms, we may be unable to complete planned clinical trials, obtain regulatory approvals or commercialize our product candidates |
| We believe that existing cash reserves will fund our planned activities for more than the next 12 months |
| However, we will require substantial future capital in order to continue to conduct the research and development, clinical and regulatory activities necessary to bring our product candidates to market and to establish commercial manufacturing, sales and marketing capabilities |
| During the year ended December 31, 2005, our net cash used in operating activities was dlra19dtta5 million and we had capital expenditures of dlra2dtta6 million |
| Our future capital requirements depend on many factors, including: • the progress of preclinical development and laboratory testing and clinical trials; • the time and costs involved in obtaining regulatory approvals; • delays that may be caused by evolving requirements of regulatory agencies; • the number of product candidates we pursue; • the costs involved in filing and prosecuting patent applications and enforcing or defending patent claims; • our plans to establish sales, marketing and/or manufacturing capabilities; • our ability to establish, enforce and maintain selected strategic alliances and activities required for product commercialization; • the acquisition of technologies or products and other business opportunities that require financial commitments; and • our revenues, if any, from successful development and commercialization of our products |
| We face intense competition from many other companies in the pharmaceutical and biotechnology industry for corporate collaborations, as well as for establishing relationships with academic and research institutions and for obtaining licenses to proprietary technology |
| If we are unable to attract and retain corporate partners to develop, introduce and market our products, our business may be materially and adversely affected |
| Our strategy and any reliance on corporate partners, if we are able to establish such collaborative relationships, are subject to additional risks |
| Our partners may not devote sufficient resources to the development, introduction and marketing of our products or may not pursue further development and commercialization of products resulting from collaborations with us |
| If a corporate partner elects to terminate its relationship with us, our ability to develop, introduce and market our products may be significantly impaired and we may be forced to discontinue the product altogether |
| The failure of any future collaboration efforts could have a material adverse effect on our ability to develop, introduce and market our products and, consequently, could have a material adverse effect on our business, results of operations and financial condition |
| In addition to strategic collaborations, we may seek funding through private or public sales of our securities, entering into credit arrangements or by licensing all or a portion of our technology |
| This funding may significantly dilute existing stockholders or may limit our rights to our technology |
| 22 ______________________________________________________________________ [46]Table of Contents We filed a registration statement on Form S-3 with the SEC to be able to sell from time to time up to dlra100 million worth of any combination of debt securities, common stock, preferred stock and warrants |
| The SEC declared this registration statement effective in May 2005 |
| The actual sale will be offered via prospectus in amounts, at prices and at terms determined at the time of an offering and may be sold directly by us to investors, through agents or through underwriters or dealers |
| In September 2005, we sold 4cmam000cmam000 shares of common stock to the public at dlra13dtta50 per share for gross proceeds of dlra54 million |
| As of December 31, 2005, dlra46 million remains available under this registration statement |
| We may not be able to obtain additional funding on reasonable terms, or at all |
| If we cannot obtain adequate funds, we may: • terminate or delay preclinical development or clinical trials for one or more of our product candidates; • delay establishment, or fail to establish, sales, marketing and/or manufacturing capabilities; • curtail significant product development programs that are designed to identify new product candidates; • not be in a position to acquire technologies or pursue other business opportunities that require financial commitments; and/or • relinquish rights to our technologies or product candidates |
| Risks Related to Our Industry Claims that we infringe a third-party’s intellectual property may give rise to burdensome litigation, result in potential liability for damages or stop our development and commercialization efforts |
| Third parties may assert patent or other intellectual property infringement claims against us or our strategic partners or licensees with respect to technologies used in our potential products |
| While we have conducted patent searches to determine whether the technologies used in our products infringe patents held by third parties, we expect that numerous patent applications are currently pending and may be filed in the future for technologies generally related to our technologies, including many patent applications that remain confidential after filing |
| Due to these factors and the inherent uncertainty in conducting patent searches, we may violate third-party patent rights that we have not yet identified |
| US and foreign patents have been issued to third parties in the same fields as some of our product candidates |
| There may also be patent applications filed by these or other parties in the United States and various foreign jurisdictions that are in the same fields as some of our product candidates |
| These patent applications, if issued, could subject us to infringement actions |
| Although we have received communications from a third party alleging that we may infringe certain patents held by the third party, we do not believe there is a reasonable basis for an action claiming that we are infringing any valid and enforceable patents of such third party |
| To date we have not been subject to any infringement actions |
| The owners or licensees of these and other patents may file one or more infringement actions against us |
| Patent litigation can involve complex factual and legal questions and its outcome is uncertain |
| Any claim relating to infringement of patents that is successfully asserted against us may cause us to pay substantial damages |
| Even if we were to prevail, any litigation could be costly and time-consuming and would divert the attention of our management and key personnel from our business operations |
| Furthermore, as a result of a patent infringement suit brought against us or our strategic partners or licensees, we or our strategic partners or licensees may be forced to stop or delay developing, manufacturing or selling potential products, including NXY-059, that are claimed to infringe a third party’s intellectual property unless that party grants us or our strategic partners or licensees rights to use its intellectual property |
| In such cases, we may be required to obtain licenses to patents or proprietary rights of others in order to continue to commercialize our products |
| However, we may not be able to obtain any licenses required under any patents or proprietary rights of third parties on acceptable terms, or at all |
| Even if our strategic partners, licensees or we were able to obtain rights to the third 23 ______________________________________________________________________ [47]Table of Contents party’s intellectual property, these rights may be non-exclusive, thereby giving our competitors access to the same intellectual property |
| Ultimately, we may be unable to commercialize some of our potential products or may have to discontinue development of a product candidate, such as NXY-059 or cease some of our business operations as a result of patent infringement claims, which could severely harm our business |
| We may be subject to damages resulting from claims that we or our employees have wrongfully used or disclosed alleged trade secrets of their former employers |
| Many of our employees were previously employed at universities or other biotechnology or pharmaceutical companies, including our competitors or potential competitors |
| Although no claims against us are currently pending, we may be subject to claims that these employees or we have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers |
| Litigation may be necessary to defend against these claims |
| Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management |
| If we fail in defending such claims, in addition to paying money claims, we may lose valuable intellectual property rights or personnel |
| A loss of key research personnel or their work product could hamper or prevent our ability to commercialize certain product candidates, which could severely harm our business |
| If we are unable to protect our intellectual property rights, our competitors may develop and market products with similar features that may reduce demand for our potential products |
| The following factors are important to our success: • receiving patent protection for our product candidates; • not infringing on the intellectual property rights of others; • preventing others from infringing our intellectual property rights; and • maintaining our patent rights and trade secrets |
| We will be able to protect our intellectual property rights in patents and trade secrets from unauthorized use by third parties only to the extent that such intellectual property rights are covered by valid and enforceable patents or are effectively maintained as trade secrets |
| We try to protect our proprietary position by filing US and foreign patent applications related to our proprietary technology, inventions and improvements that are important to the development of our business |
| Because the patent position of biotechnology and pharmaceutical companies involves complex legal and factual questions, the issuance, scope and enforceability of patents cannot be predicted with certainty |
| Patents, if issued, may be challenged, invalidated or circumvented |
| US patents and patent applications may also be subject to interference proceedings and US patents may be subject to reexamination proceedings in the US Patent and Trademark Office (and foreign patents may be subject to opposition or comparable proceedings in the corresponding foreign patent office), which proceedings could result in either loss of the patent or denial of the patent application or loss or reduction in the scope of one or more of the claims of the patent or patent application |
| In addition, such interference, reexamination and opposition proceedings may be costly |
| Thus, any patents that we own or license from others may not provide any protection against competitors |
| Our pending patent applications, those we may file in the future or those we may license from third parties may not result in patents being issued |
| If issued, they may not provide us with proprietary protection or competitive advantages against competitors with similar technology |
| Furthermore, others may independently develop similar technologies or duplicate any technology that we have developed |
| We rely on third-party payment services for the payment of foreign patent annuities and other fees |
| Non-payment or delay in payment of such fees, whether intentional or unintentional, may result in loss of patents or patent rights important to our business |
| Many countries, including certain countries in Europe, have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties (for example, the patent owner has failed to “work” the 24 ______________________________________________________________________ [48]Table of Contents invention in that country, or the third party has patented improvements) |
| In addition, many countries limit the enforceability of patents against government agencies or government contractors |
| In these countries, the patent owner may have limited remedies, which could materially diminish the value of the patent |
| Compulsory licensing of life-saving drugs is also becoming increasingly popular in developing countries either through direct legislation or international initiatives |
| Such compulsory licenses could be extended to include some of our product candidates, which could limit our potential revenue opportunities |
| Moreover, the legal systems of certain countries, particularly certain developing countries, do not favor the aggressive enforcement of patent and other intellectual property protection which makes it difficult to stop infringement |
| In addition, our ability to enforce our patent rights depends on our ability to detect infringement |
| It is difficult to detect infringers who do not advertise the compounds that are used in their products |
| Any litigation to enforce or defend our patent rights, even if we were to prevail, could be costly and time-consuming and would divert the attention of our management and key personnel from our business operations |
| We also rely on trade secrets, know-how and technology, which are not protected by patents, to maintain our competitive position |
| We try to protect this information by entering into confidentiality agreements with parties that have access to it, such as our strategic partners, collaborators, employees and consultants |
| Any of these parties may breach these agreements and disclose our confidential information or our competitors might learn of the information in some other way |
| If any trade secret, know-how or other technology not protected by a patent were to be disclosed to or independently developed by a competitor, our business, financial condition and results of operations could be materially adversely affected |
| Governmental and third-party payors may impose sales and pharmaceutical pricing restrictions or controls on our potential products that could limit our future product revenues and adversely affect profitability |
| The commercial success of our potential products is substantially dependent on whether third-party reimbursement is available for the ordering of our products by the medical profession for use by their patients |
| Medicare, Medicaid, health maintenance organizations and other third-party payors may not cover or provide adequate payment for our potential products |
| They may not view our potential products as cost-effective and reimbursement may not be available to consumers or may not be sufficient to allow our potential products to be marketed on a competitive basis |
| Likewise, legislative or regulatory efforts to control or reduce health care costs or reform government health care programs could result in lower prices or rejection of our potential products |
| Changes in reimbursement policies or health care cost containment initiatives that limit or restrict reimbursement for our products may cause our future product revenues, if any, to decline |
| Competition in the biotechnology and pharmaceutical industries is intense, and if we fail to compete effectively our financial results will suffer |
| Our business is characterized by extensive research efforts, rapid developments and intense competition |
| Our competitors may have or may develop superior technologies or approaches to the development of competing products, which may provide them with competitive advantages |
| Our potential products may not compete successfully |
| We believe that successful competition in our industry depends on product efficacy, safety, reliability, availability, timing, scope of regulatory approval, acceptance and price, among other things |
| Important factors to our success also include speed in developing product candidates, completing clinical development and laboratory testing, obtaining regulatory approvals and manufacturing and selling commercial quantities of potential products to the market |
| We expect competition to increase as technological advances are made and commercial applications broaden |
| In commercializing our initial product candidates and any additional product candidates, we will face substantial competition from pharmaceutical, biotechnology and other companies, universities and research institutions |
| 25 ______________________________________________________________________ [49]Table of Contents Many of our competitors have substantially greater capital resources, research and development staffs, facilities and experience in conducting clinical trials and obtaining regulatory approvals, as well as in manufacturing and marketing pharmaceutical products |
| Many of our competitors may achieve product commercialization or patent protection earlier than we achieve commercialization or patent protection, if at all |
| Furthermore, we believe that some of our competitors have used, and may continue to use, litigation to gain a competitive advantage |
| Rapid technological change could make our products obsolete |
| Biopharmaceutical technologies have undergone rapid and significant change and we expect that they will continue to do so |
| Any compounds, products or processes that we or our strategic partners or licensees develop may become obsolete or uneconomical before achieving significant revenues |
| Rapid technological change could also make our products obsolete or uneconomical |
| We face potential product liability exposure far in excess of our limited insurance coverage |
| The use of any of our product candidates in clinical trials, and the sale of any approved products, may expose us to product liability claims |
| These claims might be made directly by consumers, health care providers, pharmaceutical companies or others selling our products |
| We have obtained limited product liability insurance coverage for our clinical trials in the amount of dlra5 million per occurrence and dlra5 million in the aggregate |
| However, our insurance may not reimburse us or may not be sufficient to reimburse us for expenses or losses we may suffer |
| Moreover, insurance coverage is becoming increasingly expensive, and we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to liability |
| If we obtain marketing approval for any of our product candidates in development, we intend to expand our insurance coverage to include the sale of commercial products, but we may be unable to obtain commercially reasonable product liability insurance for any products approved for marketing |
| On occasion, juries have awarded large judgments in class action lawsuits based on drugs that had unanticipated side effects |
| In addition, the pharmaceutical and biotechnology industries, in general, have been subject to significant medical malpractice litigation |
| A successful product liability claim or series of claims brought against us would decrease our cash reserves and could cause our stock price to fall |
| Our activities involve hazardous materials and we may be liable for any resulting contamination or injuries |
| Our research activities involve the use of hazardous materials |
| We cannot eliminate the risk of accidental contamination or injury from these materials |
| If an accident occurs, we may be liable for any resulting damages, which may decrease our cash reserves and could cause our stock price to fall |
| If we are unable to complete our assessment as to the adequacy of our internal control over financial reporting within the required time periods as required by Section 404 of the Sarbanes-Oxley Act of 2002, or in the course of such assessments identify and report material weaknesses in our controls, our investors could lose confidence in the reliability of our financial statements, which could result in a decrease in the value of our common stock |
| As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the Securities and Exchange Commission adopted rules requiring public companies to include a report of management on the company’s internal controls over financial reporting in their Annual Reports on Form 10-K This report is required to contain an assessment by management of the effectiveness of the company’s internal controls over financial reporting |
| In addition, the independent registered public accounting firm auditing a public company’s financial statements must attest to and report on management’s assessment of the effectiveness of the company’s internal controls over financial reporting |
| Although our management has determined, and our independent registered public accounting firm has attested, that our internal control over financial reporting was effective as of December 31, 2005, and we intend to continue to diligently and vigorously review our internal controls over financial reporting in order to ensure 26 ______________________________________________________________________ [50]Table of Contents compliance with the Section 404 requirements if our independent registered public accounting firm is not satisfied in the future with our internal controls over financial reporting or the level at which these controls are documented, designed, operated or reviewed, or if said firm interprets the requirements, rules or regulations differently from us, then they may decline to attest to management’s assessment or may issue a report that is qualified or has a scope limitation |
| We anticipate to continue expend resources in developing the necessary documentation and testing procedures required by SOX 404; however, there is a risk that in the future we will not comply with all of the requirements imposed by Section 404 |
| In addition, the very limited sized of our organization could lead to conditions that could be considered material weaknesses, such as those related to segregation of duties that is possible in larger organizations but significantly more difficult in smaller organizations |
| Also, controls related to our general information technology infrastructure may not be as comprehensive as in the case of a larger organization with more sophisticated capabilities and more extensive resources |
| It is not clear how such circumstances could be interpreted in the future in the context of an assessment of internal controls over financial reporting |
| If we fail to implement required new or improved controls, we may be unable to comply with the requirements of Section 404 in in the future |
| This could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements, which could cause the market price of our common stock to decline or could limit our ability to obtain additional financing |
| Risks Related to Our Common Stock We expect that our stock price will fluctuate significantly |
| An active public market for our common stock may not develop or be sustained |
| The stock market, particularly in recent years, has experienced significant volatility particularly with respect to pharmaceutical and biotechnology stocks |
| The volatility of pharmaceutical and biotechnology stocks often does not relate to the operating performance of the companies represented by the stock |
| Factors that could cause this volatility in the market price of our common stock include: • the results from our clinical trial programs, including the clinical trials involving NXY-059 and any future trials we may conduct; • FDA or international regulatory actions; • failure of any of our product candidates, if approved, to achieve commercial success; • announcements of the introduction of new products by us or our competitors; • market conditions in the pharmaceutical and biotechnology sectors; • developments concerning intellectual property rights; • litigation or public concern about the safety of our potential products; • comments by securities analysts; • actual and anticipated fluctuations in our quarterly operating results; • deviations in our operating results from the estimates of securities analysts; • rumors relating to us or our competitors; • additions or departures of key personnel; • third party reimbursement policies; and • developments concerning current or future strategic alliances |
| These and other external factors may cause the market price and demand for our common stock to fluctuate substantially, which may limit or prevent investors from readily selling their shares of common stock and may 27 ______________________________________________________________________ [51]Table of Contents otherwise negatively affect the liquidity of our common stock |
| In addition, in the past, when the market price of a stock has been volatile, holders of that stock have instituted securities class action litigation against the company that issued the stock |
| If any of our stockholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit |
| Such a lawsuit could also divert the time and attention of our management |
| Future sales of common stock by our existing stockholders may cause our stock price to fall |
| The market price of our common stock could decline as a result of sales by our existing stockholders of shares of common stock in the market, or the perception that these sales could occur |
| These sales might also make it more difficult for us to sell equity securities at a time and price that we deem appropriate |
| Our directors and management exercise significant control over our company |
| If acting together, our directors and executive officers and their affiliates can influence our management and affairs and all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions |
| This concentration of ownership may have the effect of delaying or preventing a change in control of our company and might affect the market price of our common stock |
| Provisions of Delaware law or our charter documents and stockholder rights plan could delay or prevent an acquisition of our company, even if the acquisition would be beneficial to our stockholders, and could make it more difficult for stockholders to change management |
| Provisions of our certificate of incorporation and bylaws may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares |
| This is because these provisions may prevent or frustrate attempts by stockholders to replace or remove our current management |
| These provisions include: • a classified board of directors; • a prohibition on stockholder action through written consent; • a requirement that special meetings of stockholders be called only by (i) the Chairman of the Board of Directors, (ii) the Chief Executive Officer, or (iii) the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors; • advance notice requirements for stockholder proposals and nominations; • a requirement of approval of not less than 66^ 2/3prca of all outstanding shares of our capital stock entitled to vote to amend any bylaws by stockholder action, or to amend certain provisions of our certificate of incorporation; and • the authority of the Board of Directors to issue preferred stock with such terms as the Board of Directors may determine |
| As a result, these provisions and others available under Delaware law could limit the price that investors are willing to pay in the future for shares of our common stock |
| In addition, in March 2005, we adopted a stockholder rights plan |
| Although the rights plan will not prevent a takeover, it is intended to encourage anyone seeking to acquire our company to negotiate with our board prior to attempting a takeover by potentially significantly diluting an acquirer’s ownership interest in our outstanding capital stock |
| The existence of the rights plan may also discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our common stock |
| 28 ______________________________________________________________________ [52]Table of Contents We have never paid dividends on our capital stock, and we do not anticipate paying any cash dividends in the foreseeable future |
| We are prohibited from paying dividends, other than dividends payable solely in common stock, by the covenants contained in loan agreements with GATX Ventures, Inc, and Transamerica Commercial Finance Corporation |
| We have paid no cash dividends on any of our classes of capital stock to date and we currently intend to retain our future earnings, if any, to fund the development and growth of our businesses |
| In addition, the terms of existing debts preclude us from paying these dividends |
| As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future |