| SONUS PHARMACEUTICALS INC ITEM 1A RISK FACTORS Governmental regulatory requirements are lengthy and expensive and failure to obtain necessary approvals will prevent us or our partners from commercializing a product |
| We are subject to uncertain governmental regulatory requirements and a lengthy approval process for our products prior to any commercial sales of our products |
| The development and commercial use of our products are regulated by the US Food and Drug Administration, or FDA, the European Medicines Evaluation Agency, or EMEA, and comparable regulatory agencies in other countries |
| The regulatory approval process for new products is lengthy and expensive |
| Before we can submit an application to the FDA and comparable international agencies, the product candidate must undergo extensive testing, including animal studies and human clinical trials that can take many years and require substantial expenditures |
| Data obtained from such testing may be susceptible to varying interpretations, which could delay, limit or prevent regulatory approval |
| In addition, changes in regulatory policy for product approval may cause additional costs in our efforts to secure necessary approvals |
| Our product candidates are subject to significant uncertainty because they are in both early to late stages of development and are subject to regulatory approval |
| The results of preclinical and clinical testing of our products are uncertain and regulatory approval of our products may take longer or be more expensive than anticipated, which could have a material adverse effect on our business, financial condition and results of operations |
| The FDA has indicated to Sonus that NDA approval under 505(b)(2) will require either (i) demonstration of superior efficacy of TOCOSOL Paclitaxel as compared to Taxol; or (ii) demonstration of non-inferior efficacy of TOCOSOL Paclitaxel as compared to Taxol, and either a change of the approved label for Taxol and generic equivalents to include a weekly dosing schedule or availability of reviewable data from a Phase 3 trial comparing the efficacy of Taxol using a weekly dosing schedule to that of Taxol using the currently approved three-weekly dosing schedule |
| 12 ______________________________________________________________________ We do not currently believe that the timing or cost of the Phase 3 trial or the NDA submission will be adversely affected by these requirements |
| The clinical trial Protocol and Statistical Analysis Plan approved under the SPA provide for sequential superiority analyses for efficacy of TOCOSOL Paclitaxel compared to Taxol, provided that we first demonstrate a non-inferior objective response rate; however, there can be no assurance that the Phase 3 clinical trial data will demonstrate that TOCOSOL Paclitaxel has efficacy that is non-inferior or superior to Taxol |
| Further, there can be no assurance that the approved label for Taxol or generics will be changed to provide for weekly dosing, although we do believe, based on repeated discussions with the FDA, that they are pursuing this change |
| Large Phase 3 clinical trials have been conducted by third parties, utilizing Taxol on a weekly versus a three-weekly basis, and data from those studies may be available for submission to the FDA in support of our NDA However, there can be no assurance that Sonus will have right of reference to the data from such trials |
| If Sonus is required to conduct an additional Phase 3 trial of Taxol given weekly versus three-weekly, substantial additional costs and time would be required before the NDA submission for TOCOSOL Paclitaxel |
| In addition, there is pending litigation attacking the utilization of the 505(b)(2) regulatory strategy generally |
| There can be no assurance that such litigation will not be successful |
| A 505(b)(2) application permits us to rely upon the FDA’s findings of safety and efficacy for a previously approved drug product without requiring us to obtain a right of reference from the original applicant |
| In addition to permitting reliance upon the FDA’s prior findings of safety and effectiveness for previously approved drugs, section 505(b)(2) continues to allow reliance on third party data that is available in published literature and which establishes the safety and effectiveness of a drug |
| However, we are required to provide any additional clinical data necessary to demonstrate the safety and effectiveness of differences between the original drug and the 505(b)(2) drug, so while unnecessary duplication of preclinical and certain human studies is avoided, specific studies may be required to establish the relevance and applicability of prior findings for our particular product formulation |
| We cannot predict if or when any of our products under development will be commercialized |
| We will need additional capital in the future, and if it is not available on terms acceptable to us, or at all, we would have to scale back our expenditures and our development and commercialization activities |
| We expect that our cash requirements will continue to increase in future periods due to development costs associated with TOCOSOL Paclitaxel and other product candidates |
| We estimate that existing cash, cash equivalents and marketable securities, in addition to payments pending and cost sharing arrangements under our Collaboration and License Agreement with Schering AG, will be sufficient to fund operations through at least the end of the first quarter of 2007 |
| We will need additional capital to complete the development of TOCOSOL Paclitaxel, fund our obligations under the collaborative license agreement with Schering, fund the development of other product candidates and support our continuing operations |
| In addition to the supportive trials Sonus plans to conduct, it is anticipated that we will collaborate with Schering on additional studies |
| Under the terms of the Collaboration and License Agreement with Schering, we are also obligated to fund 50prca of the costs of certain studies conducted by Schering for the US The exact cost and timing of these studies is yet to be finalized |
| Our current estimate for the total cost of the Phase 3 trial is between dlra45 million and dlra50 million |
| However, the scope, timing and costs of the Phase 3 clinical trial are difficult to determine with accuracy and these costs may vary significantly depending upon regulatory and other matters that are not within our control |
| Should our clinical data support an NDA submission based on the primary endpoint of objective response rate, we anticipate that the NDA could be submitted within 12 months after conclusion of patient enrollment |
| Our future capital requirements depend on many factors including: • our ability to obtain and timing of payments under corporate partner agreements; • our ability to obtain and timing of capital funding under equity or debt financing agreements; • timing and costs of preclinical development, clinical trials and regulatory approvals; • timing and amount of costs to support our obligations under the Collaboration and License Agreement with Schering AG; • entering into new collaborative or product license agreements; • timing and costs of technology transfer associated with manufacturing and supply agreements; and • costs related to obtaining, defending and enforcing patents |
| 13 ______________________________________________________________________ Any future debt or equity financing, if available, may result in substantial dilution to existing stockholders, and debt financing, if available, may include restrictive covenants |
| If we are unable to raise additional financing by the end of the first quarter of 2007, we will have to reduce our expenditures and scale back the development of our products and new product research and development |
| In addition, we may not be able to fund our obligations under the Collaboration and License Agreement with Schering, in which case we could be in default under the agreement which could cause us to incur penalties or the agreement to be terminated |
| If we fail to develop new products, then we may never realize revenue from product commercialization |
| A key element of our business strategy is to utilize our technologies for the development and commercialization of products that utilize our proprietary TOCOSOL technology |
| Most of our attention and resources are directed to the development of our proprietary TOCOSOL technology, a technology that provides a novel approach to the formulation of water insoluble compounds for therapeutic applications |
| Significant expenditures in additional research and development, clinical testing, regulatory, manufacturing, and sales and marketing activities will be necessary in order for us to demonstrate the efficacy of our products, or commercialize any products developed with our technology |
| There can be no assurance that product candidates under development or any future products will be safe or efficacious |
| If the product candidates under development are ultimately ineffective in treating cancer, do not receive the necessary regulatory approvals or do not obtain commercial acceptance, we will incur additional losses, our accumulated deficit will increase and our business will be materially adversely affected |
| Even if we are successful in developing our products, there is no assurance that such products will receive regulatory approval or that a commercially viable market will develop |
| We have a history of operating losses which we expect will continue and we may never become profitable |
| We have experienced significant accumulated losses since our inception, and are expected to incur net losses for the foreseeable future |
| These losses have resulted primarily from expenses associated with our research and development activities, including nonclinical and clinical trials, and general and administrative expenses |
| We anticipate that our operating losses will continue as we further invest in research and development for our products |
| We will not generate the majority of milestone or royalty revenues under our collaboration and license agreement with Schering AG unless and until we receive regulatory approvals, which are not likely to occur until 2008 and beyond |
| Even if we generate milestone and royalty revenues, there can be no assurance that we will be able to achieve or sustain profitability |
| Our results of operations have varied and will continue to vary significantly and depend on, among other factors: • timing of payments, under our Collaboration and License Agreement with Schering or our ability to obtain other corporate partner agreements or other financing; • timing and costs of preclinical development, clinical trials and regulatory approvals; • timing and amount of costs to support our obligations under the Collaboration and License Agreement with Schering; • drug discovery and research and development; • timing and costs of technology transfer associated with manufacturing and supply agreements; and • costs related to obtaining, defending and enforcing patents |
| We depend on third parties for funding, clinical development, manufacturing and distribution of TOCOSOL Paclitaxel |
| We are dependent, and may in the future be dependent, on third parties for funding or performance of a variety of key activities including research, clinical development, manufacturing, marketing, sales and distribution of our products |
| Our current business strategy is to enter into agreements with third parties both to license rights to our potential products and to develop and commercialize new products |
| We executed an agreement with Schering AG for TOCOSOL Paclitaxel in October 2005 |
| Under the Collaboration and License Agreement, 14 ______________________________________________________________________ Schering has a worldwide exclusive license to market and promote TOCOSOL Paclitaxel and is responsible for clinical development and regulatory activities outside of the US If these arrangements with Schering or other third parties are terminated or the collaborations are not successful, we will be required to identify alternative sources of funding to finance research, clinical development, manufacturing, marketing, sales and/or distribution |
| Our inability to secure additional funding would have a material adverse effect on our business, financial condition and results of operations |
| Our success depends in part upon the performance by these collaborators of their responsibilities under these arrangements |
| We have no control over the resources that our partners may devote to the development and commercialization of products under these collaborations and our partners may fail to conduct their collaborative activities successfully or in a timely manner |
| If we lose our key personnel or are unable to attract and retain qualified scientific and management personnel, we may be unable to become profitable |
| We are highly dependent on our key executives, including Michael A Martino, President & Chief Executive Officer, Michael B Stewart, Senior Vice President & Chief Medical Officer and Alan Fuhrman, Senior Vice President & Chief Financial Officer |
| We do not have employment agreements in place with these key executives nor do we maintain any key person life insurance coverage on these persons |
| The loss of any of these key executives or the inability to recruit and retain qualified scientific personnel to perform research and development and qualified management personnel could have a material adverse effect on our business, financial condition and results of operations |
| There can be no assurance that we will be able to attract and retain such personnel on acceptable terms, if at all, given the competition for experienced scientists and other personnel among numerous medical and pharmaceutical companies, universities and research institutions |
| Future US or international legislative or administrative actions also could prevent or delay regulatory approval of our products |
| Even if regulatory approvals are obtained, they may include significant limitations on the indicated uses for which a product may be marketed |
| A marketed product also is subject to continual FDA, EMEA and other regulatory agency review and regulation |
| Later discovery of previously unknown problems or failure to comply with the applicable regulatory requirements may result in restrictions on the marketing of a product or withdrawal of the product from the market, as well as possible civil or criminal sanctions |
| In addition, if marketing approval is obtained, the FDA, EMEA or other regulatory agency may require post-marketing testing and surveillance programs to monitor the product’s efficacy and side effects |
| Results of these post-marketing programs may prevent or limit the further marketing of a product |
| The development of pharmaceutical products in general and the development of paclitaxel reformulations in particular is extremely competitive, and if we fail to compete effectively, it would negatively impact our business |
| Competition in the development of pharmaceutical products is intense and expected to increase |
| We also believe that other medical and pharmaceutical companies will compete with us in the areas of research and development, acquisition of products and technology licenses, and the manufacturing and marketing of our products |
| Success of products in these fields will be based primarily on: • efficacy; • safety; • price; • ease of administration; • breadth of approved indications; and • physician, healthcare payor and patient acceptance |
| Several other companies are developing paclitaxel reformulations with a goal of delivering a more effective and tolerable therapy than the approved paclitaxel products |
| Some of these products are further in development than TOCOSOL Paclitaxel and may achieve regulatory approval before our product |
| On January 7, 2005, American Pharmaceutical Partners obtained FDA approval to market its paclitaxel-based product, ABRAXANE (paclitaxel protein-bound particles for injectible suspension) |
| In addition, Sanofi-aventis has a taxane product, 15 ______________________________________________________________________ Taxotere (docetaxel), which is similar to paclitaxel and is marketed for the treatment of breast, non-small cell lung and prostate cancers |
| There are also a number of generic paclitaxel products, identical to Taxol, currently on the market |
| As a result of the increased competition, the price for paclitaxel products has been under pressure and may drop significantly even if we achieve regulatory approval |
| Many of our competitors and potential competitors, including large pharmaceutical, chemical and biotechnology concerns and universities and other research institutions, have substantially greater financial, technical and human resources than we do and have substantially greater experience in developing products, obtaining regulatory approvals and marketing and manufacturing medical products |
| Accordingly, these competitors may succeed in obtaining FDA approval for their products more rapidly than we do |
| In addition, other technologies or products may be developed that have an entirely different approach that would render our technology and products noncompetitive or obsolete |
| If we fail to compete effectively, it would have a material adverse effect on our business, financial condition and results of operations |
| We rely on third party suppliers and manufacturers to produce products that we develop and failure to retain such suppliers and manufacturers would adversely impact our ability to commercialize our products |
| We currently rely on third parties to supply the chemical ingredients necessary for our drug product candidates |
| We have entered into supply agreements for the supply of GMP grade paclitaxel, which is the active pharmaceutical ingredient in TOCOSOL Paclitaxel |
| The chemical ingredients for our products are manufactured by a limited number of vendors |
| The inability of these vendors to supply medical-grade materials to us could delay the manufacturing of, or cause us to cease the manufacturing of our products |
| We also rely on third parties to manufacture our products for research and development and clinical trials |
| TEVA Pharmaceuticals USA (TEVA) is our primary manufacturer of TOCOSOL Paclitaxel for clinical studies and has also agreed to manufacture TOCOSOL Paclitaxel for commercialization |
| The TEVA agreement has an initial term of five years after market introduction of TOCOSOL Paclitaxel, provided that market introduction occurs before June 2009, and is not terminable at will |
| We previously manufactured clinical supplies of TOCOSOL Paclitaxel at other GMP certified contract laboratories |
| Suppliers and manufacturers of our products must operate under GMP regulations, as required by the FDA, and there are a limited number of contract manufacturers that operate under GMP regulations |
| GMP are enumerated in FDA regulations and guidance documents |
| The facilities, procedures, and operations of our contract manufacturers must be determined to be adequate by the FDA before approval of product manufacturing |
| Manufacturing facilities are subject to inspections by the FDA for compliance with GMP, licensing specifications, and other FDA regulations |
| Failure to comply with FDA and other governmental regulations can result in fines, unanticipated compliance expenditures, recall or seizure of products, total or partial suspension of production and/or distribution, suspension of the FDA’s review of NDAs, injunctions and criminal prosecution |
| Our reliance on independent manufacturers involves a number of other risks, including the absence of adequate capacity, the unavailability of, or interruptions in, access to necessary manufacturing processes and reduced control over delivery schedules |
| If our manufacturers are unable or unwilling to continue manufacturing our products in required volumes or have problems with commercial scale-up, we will have to identify acceptable alternative manufacturers |
| The use of a new manufacturer may cause significant interruptions in supply if the new manufacturer has difficulty manufacturing products to our specifications |
| Further, the introduction of a new manufacturer may increase the variation in the quality of our products |
| If we fail to secure adequate intellectual property protection or become involved in an intellectual property dispute, it could significantly harm our financial results and ability to compete |
| Our success will depend, in part, on our ability to obtain and defend patents and protect trade secrets |
| As of December 31, 2005, we held seven United States patents and four patents outside the US, one each in Canada, Taiwan, Mexico and India pertaining to our proprietary TOCOSOL technology |
| We hold one additional United States patent directed to other technologies |
| Additional patent applications are pending in the United States and counterpart filings have been made in Europe, Canada and key countries in Asia and Latin America |
| The patent position of medical and pharmaceutical companies is highly uncertain and involves complex legal and factual questions |
| There can be no assurance that any claims which are included in pending or future patent applications will be issued, that any issued patents will provide us with competitive advantages or will not be challenged by 16 ______________________________________________________________________ third parties, or that the existing or future patents of third parties will not have an adverse effect on our ability to commercialize our products |
| Furthermore, there can be no assurance that other companies will not independently develop similar products, duplicate any of our products or design around patents that may be issued to us |
| Litigation may be necessary to enforce any patents issued to us or to determine the scope and validity of others’ proprietary rights in court or administrative proceedings |
| Any litigation or administrative proceeding could result in substantial costs to us and distraction of our management |
| An adverse ruling in any litigation or administrative proceeding could have a material adverse effect on our business, financial condition and results of operations |
| Our commercial success will depend in part on not infringing patents issued to competitors |
| There can be no assurance that patents belonging to competitors will not require us to alter our products or processes, pay licensing fees or cease development of our current or future products |
| Any litigation regarding infringement could result in substantial costs to us and distraction of our management, and any adverse ruling in any litigation could have a material adverse effect on our business, financial condition and results of operations |
| Further, there can be no assurance that we will be able to license other technology that we may require at a reasonable cost or at all |
| Failure by us to obtain a license to any technology that we may require to commercialize our products could result in the termination of the Collaboration and License Agreement with Schering and would have a material adverse effect on our business, financial condition and results of operations |
| In addition, to determine the priority of inventions and the ultimate ownership of patents, we may participate in interference, reissue or re-examination proceedings conducted by the US Patent and Trademark Office or in proceedings before international agencies with respect to any of our existing patents or patent applications or any future patents or applications, any of which could result in loss of ownership of existing, issued patents, substantial costs to us and distraction of our management |
| Reimbursement procedures and future healthcare reform measures are uncertain and may adversely impact our ability to successfully sell pharmaceutical products |
| Our ability to successfully sell any pharmaceutical products will depend in part on the extent to which government health administration authorities, private health insurers and other organizations will reimburse patients for the costs of future pharmaceutical products and related treatments |
| In the United States, government and other third-party payors have sought to contain healthcare costs by limiting both coverage and the level of reimbursement for new pharmaceutical products approved for marketing by the FDA In some cases, these payors may refuse to provide any coverage for uses of approved products to treat medical conditions even though the FDA has granted marketing approval |
| Healthcare reform may increase these cost containment efforts |
| We believe that managed care organizations may seek to restrict the use of new products, delay authorization to use new products or limit coverage and the level of reimbursement for new products |
| Internationally, where national healthcare systems are prevalent, little if any funding may be available for new products, and cost containment and cost reduction efforts can be more pronounced than in the United States |
| If our products are not accepted by the medical community our business will suffer |
| Commercial sales of our proposed products will substantially depend upon the products’ efficacy and on their acceptance by the medical community |
| Widespread acceptance of our products will require educating the medical community as to the benefits and reliability of the products |
| Our proposed products may not be accepted, and, even if accepted, we are unable to estimate the length of time it would take to gain such acceptance |
| The businesses in which we engage have a risk of product liability, and in the event of a successful suit against us, our business could be severely harmed |
| The testing, marketing and sale of pharmaceutical products entails a risk of product liability claims by consumers and others |
| We currently maintain product liability insurance for our clinical trials with limits of dlra10 million per claim and in the aggregate, which we believe to be adequate for current non-commercial and Phase 3 applications of our products |
| In the event of a successful suit against us, the lack or insufficiency of insurance coverage could have a material adverse effect on our business and financial condition |
| 17 ______________________________________________________________________ Since we use hazardous materials in our business, we may be subject to claims relating to improper handling, storage or disposal of these materials |
| Our research and development activities involve the controlled use of hazardous materials, chemicals and various radioactive compounds |
| We are subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of such materials and certain waste products |
| Although we believe that our safety procedures for handling and disposing of such materials comply with the standards prescribed by state and federal regulations, the risk of accidental contamination or injury from these materials cannot be eliminated completely |
| In the event of such an accident, we could be held liable for any damages that result and any such liability not covered by insurance could exceed our resources |
| Compliance with environmental laws and regulations may be expensive, and current or future environmental regulations may impair our research, development or production efforts |
| Market volatility may affect our stock price and the value of an investment in our common stock may be subject to sudden decreases |
| The trading price for our common stock has been, and we expect it to continue to be, volatile |
| The price at which our common stock trades depends upon a number of factors, including our historical and anticipated operating results, preclinical and clinical trial results, market perception of the prospects for biotechnology companies as an industry sector and general market and economic conditions, some of which are beyond our control |
| Factors such as fluctuations in our financial and operating results, changes in government regulations affecting product approvals, reimbursement or other aspects of our or our competitors’ businesses, FDA review of our product development activities, the results of preclinical studies and clinical trials, announcements of technological innovations or new commercial products by us or our competitors, developments concerning key personnel and our intellectual property rights, significant collaborations or strategic alliances and publicity regarding actual or potential performance of products under development by us or our competitors could also cause the market price of our common stock to fluctuate substantially |
| In addition, the stock market has from time to time experienced extreme price and volume fluctuations |
| These broad market fluctuations may lower the market price of our common stock |
| Moreover, during periods of stock market price volatility, share prices of many biotechnology companies have often fluctuated in a manner not necessarily related to the companies’ operating performance |
| Also, biotechnology or pharmaceutical stocks may be volatile even during periods of relative market stability |
| Accordingly, our common stock may be subject to greater price volatility than the stock market as a whole |
| Failure to satisfy Nasdaq National Market Listing requirements may result in our common stock being delisted from The Nasdaq National Market |
| Our common stock is currently listed on The Nasdaq National Market under the symbol “SNUS” For continued inclusion on The Nasdaq National Market, we must maintain among other requirements stockholders’ equity of at least dlra10dtta0 million, a minimum bid price of dlra1dtta00 per share and a market value of our public float of at least dlra5dtta0 million; or market capitalization of at least dlra50 million, a minimum bid price of dlra1dtta00 per share and a market value of our public float of at least dlra15dtta0 million |
| As of December 31, 2005, we had stockholders’ equity of approximately dlra35dtta3 million |
| In the event that we fail to satisfy the listing standards on a continuous basis, our common stock may be removed from listing on The Nasdaq National Market |
| If our common stock were delisted from The Nasdaq National Market, our common stock may be transferred to the Nasdaq SmallCap Market if we satisfy the listing criteria for the Nasdaq SmallCap Market or trading of our common stock, if any, may be conducted in the over-the-counter market in the so-called “pink sheets” or, if available, the National Association of Securities Dealer’s “Electronic Bulletin Board |
| ” In addition, delisting from Nasdaq may subject our common stock to so-called “penny stock” rules |
| These rules impose additional sales practice and market making requirements on broker-dealers who sell and/or make a market in such securities |
| Consequently, broker-dealers may be less willing or able to sell and/or make a market in our common stock |
| Additionally, an investor would find it more difficult to dispose of, or to obtain accurate quotations for the price of, our common stock |
| As a result of a delisting, it may become more difficult for us to raise funds through the sale of our securities |