| ISOLAGEN INC Item 1A Risk Factors Potential investors should carefully consider the following risk factors prior to making any investment decisions regarding our securities |
| We may be unable to successfully commercialize our Isolagen Process or any of our product candidates currently under development |
| Before we can commercialize our Isolagen Process or any of our product candidates in the United States, we will need to: · conduct substantial additional research and development; · successfully complete lengthy and expensive pre-clinical and clinical testing, including the confirmatory pivotal Phase III clinical trial for our lead product candidate; · successfully improve and/or automate our manufacturing process; and · obtain US Food and Drug Administration, or FDA, approvals |
| Commercialization of our Isolagen Process involves a high degree of risk and may take several years |
| Favorable results in pre-clinical or earlier stage clinical trials do not ensure that the results of later stage and pivotal trials will also be favorable or adequate to demonstrate the safety or efficacy of the product candidate or to obtain FDA approval |
| Our product development efforts may fail for many reasons, including: · failures in pre-clinical studies; · insufficient clinical trial data to support the safety or efficacy of our product candidates; · failure to successfully implement improved and/or automated manufacturing systems; or · failure to obtain the required FDA approvals |
| Even if our product development efforts are successful, we cannot assure you that we will be able to commercialize our Isolagen Process or any of our product candidates currently under development |
| In that event, we will be unable to generate significant revenue, and our business will fail |
| 20 ______________________________________________________________________ We have not generated significant revenue from commercial sales of our products to date, and we do not know whether we will ever generate significant revenue |
| We are focused on product development and have not generated significant revenue from commercial sales of our products to date |
| We have incurred operating losses since our inception |
| Our revenue for the years ended December 31, 2005 2004 and 2003 was dlra8dtta75 million, dlra4dtta18 million and dlra0dtta45 million, respectively |
| Our net loss for the years ended December 31, 2005, 2004 and 2003 was dlra35dtta8 million, dlra21dtta5 million and dlra11dtta3 million, respectively |
| As of December 31, 2005, we had an accumulated development stage net loss attributable to common shareholders of dlra91dtta3 million |
| We currently have no product candidates for sale in the United States, and we cannot guarantee that we will ever have marketable products in the United States |
| We must demonstrate that our product candidates satisfy rigorous standards of safety and efficacy before the FDA and other regulatory authorities in the United States and abroad will approve the products for commercial marketing |
| We will need to conduct significant additional research, preclinical testing and clinical testing before we can file applications with the FDA for approval of our product candidates |
| We must also develop, validate and obtain FDA approval of any improved and/or automated manufacturing process |
| In addition, to compete effectively our future products must be easy to use, cost-effective and economical to manufacture on a commercial scale |
| We may not achieve any of these objectives |
| We expect to continue to incur losses as we research, develop and seek regulatory approvals for our product candidates |
| If our product candidates fail in clinical trials or do not gain regulatory approval, if our product candidates do not achieve market acceptance, or if we do not succeed in effectively and efficiently implementing manufacturing process and technology improvements to make our product commercially viable, we will not be profitable |
| If we fail to become and remain profitable, or if we are unable to fund our continuing losses, our business may fail |
| Obtaining FDA and other regulatory approvals is complex, time consuming and expensive, and the outcomes are uncertain |
| The process of obtaining FDA and other regulatory approvals is time consuming, expensive and difficult to design and implement |
| Clinical trials are required and the marketing and manufacturing of our product candidates are subject to rigorous testing procedures |
| We have commenced initial preparations related to our confirmatory pivotal Phase III clinical trial for our lead product candidate |
| Our other product candidates will require additional clinical trials |
| The commencement and completion of clinical trials for our Isolagen Process or any of our product candidates could be delayed or prevented by a variety of factors, including: · delays in obtaining regulatory approvals to commence a study; · delays in identifying and reaching agreement on acceptable terms with prospective clinical trial sites; · delays in the enrollment of subjects; · lack of efficacy during clinical trials; or · unforeseen safety issues |
| We do not know whether our clinical trials will need to be restructured or will be completed on schedule, if at all |
| Significant delays in clinical trials will impede our ability to commercialize our product candidates and generate revenue, and could significantly increase our development costs |
| 21 ______________________________________________________________________ Even if marketing approval from the FDA is received, the FDA may impose post-marketing requirements, such as: · labeling and advertising requirements, restrictions or limitations, including the inclusion of warnings, precautions, contra-indications or use limitations that could have a material impact on the future profitability of our product candidates; · testing and surveillance to monitor our future products and their continued compliance with regulatory requirements; · submitting products for inspection and, if any inspection reveals that the product is not in compliance, prohibiting the sale of all products; · suspending manufacturing; or · withdrawing marketing clearance |
| Our ability to effectively commercialize our dermal product and our product candidates depends on our ability to improve our manufacturing process and to satisfactorily validate the cellular expansion and harvesting process |
| We must obtain FDA approval of our validated manufacturing process before we can commercially manufacture our product candidates in the United States |
| In addition, we must pass a pre-approval inspection of our manufacturing facility before we can obtain marketing approval for our product candidates |
| We intend to seek FDA approval of our cellular expansion manufacturing process as a component of the BLA application and approval process |
| In order to obtain approval, all of our manufacturing methods, equipment and processes must comply with the FDA’s current Good Manufacturing Practices, or cGMP, requirements |
| We will also need to perform extensive audits of our suppliers, vendors and contract laboratories |
| The cGMP requirements govern all areas of recordkeeping, production processes and controls, personnel and quality control |
| To ensure that we meet these requirements, we will expend significant time, money and effort |
| Due to the unique nature of our Isolagen Process, we cannot predict the likelihood that the FDA will approve our facility as compliant with cGMP requirements even if we believe that we have taken the steps necessary to achieve compliance |
| Large-scale improvements in capacity and operating margins depend on the successful implementation of improved manufacturing processes |
| We hope to eliminate several of the steps and materials involved in our current system, which we expect will lead to significant cost reductions in both skilled labor and materials and will enable scalable mass production in the future |
| However, the commercial viability of improved manufacturing processes under consideration are uncertain, and we do not know whether we will be successful in implementing such improved manufacturing processes, validating the safety and efficacy of these processes, obtaining the required scalability, achieving cost savings or obtaining FDA approval of these processes |
| Our previous and current clinical trials are conducted using a manual process, rather than a more automated manufacturing process |
| The FDA, in its regulatory discretion, may require us to undergo additional clinical trials with respect to any new or improved manufacturing process we develop or utilize, in the future, if any |
| This could delay or prevent approval of our product candidates |
| If we fail to comply with cGMP requirements, pass an FDA pre-approval inspection or obtain FDA approval of our manufacturing process, we would not receive FDA approval and would be subject to possible regulatory action |
| The failure to successfully implement our manufacturing process may delay or prevent our future profitability |
| 22 ______________________________________________________________________ Our inability to comply with regulatory requirements in the United Kingdom will limit or delay our ability to attain profitability |
| We began limited commercialization of our dermal product in the United Kingdom in late 2003 |
| Our facility in the United Kingdom was primarily designed to demonstrate the efficacy of our Isolagen Process, and has limited capacity |
| In light of the European Directive 2004/23/EC, we may be required to expend significant additional funds to make our UK operations compliant |
| This includes the addition of personnel, introduction of systems enhancements, and possibly the establishment of new facilities |
| Our inability to meet the regulatory requirements in the United Kingdom may limit our ability to supply product and to maximize this market opportunity |
| In order to implement the changes in the facility needed to comply with the new Directive, it may be necessary for Isolagen to decrease capacity, or stop production from the United Kingdom facility |
| Our dermal product and our product candidates are all derived from our Isolagen Process |
| If our Isolagen Process is found to be unsafe or ineffective, our business would be materially harmed |
| Our dermal product that is sold in the United Kingdom and our dermal candidate undergoing clinical testing in the United States, and our dental product, are all derived from our proprietary Isolagen Process |
| In addition, we expect to utilize our Isolagen Process in the development of any future products we market |
| If these current or future products are found to be unsafe or ineffective, we may have to modify or cease production of the products |
| As our dermal product and all of our product candidates utilize or will utilize our Isolagen Process, any defects with this technology would severely harm our business operations, since all of our primary revenue sources would be negatively affected by the defects |
| Our ability to expand our operations to support the full-scale commercialization of our Isolagen Process is dependent on our ability to establish new manufacturing facilities |
| None of our facilities were designed or have the capacity to support the full-scale commercialization of all of our product candidates |
| Our manufacturing facility in the United Kingdom was designed primarily to enable us to demonstrate the efficacy of our Isolagen Process, and to provide a platform for the future development of our manufacturing processes and our information and other support systems |
| While we have expanded our capacity at that facility, the limited size of that facility represents an inherent limitation of our capacity |
| The UK facility may not be able to meet the ongoing demand for our dermal product in the United Kingdom, even if our efforts to improve the manufacturing process are effectively and timely implemented |
| The failure to timely establish full-scale commercial manufacturing facilities may delay or prevent our future profitability |
| We plan to operate a single manufacturing facility in the United States |
| As a result, if we obtain FDA approval of our lead product candidate, all of the commercial manufacturing for the US market will take place at a single US facility |
| If regulatory, manufacturing or other problems require us to discontinue production at that facility, we will not be able to supply product in the United States, which would adversely impact our business |
| Our recent issuance of notes or of other indebtedness in the future may impact our financial condition and results of operations |
| In November 2004, we completed a note offering in which we issued dlra90dtta0 million of indebtedness pursuant to an indenture |
| We may incur additional indebtedness in the future, and the indenture does not restrict our future incurrence of indebtedness |
| Our level of indebtedness will have several significant effects on our future operations, including the following: · we will be required to use a portion of our cash for the payment of any principal or interest due on our outstanding indebtedness, including the recently issued notes; 23 ______________________________________________________________________ · our outstanding indebtedness and leverage will increase the impact of negative changes in general economic and industry conditions, as well as competitive pressures; and · the level of our outstanding debt may affect our ability to obtain additional financing for working capital, capital expenditures or general corporate purposes |
| General economic conditions, industry cycles and financial, business and other factors affecting our operations, many of which are beyond our control, may affect our future performance |
| As a result, these and other factors may affect our ability to make principal and interest payments on our indebtedness |
| If we cannot generate sufficient cash flow from operations in the future to service our debt, we may, among other things: · seek additional financing in the debt or equity markets; · refinance or restructure all or a portion of our indebtedness; · sell selected assets; · reduce or delay planned capital expenditures; or · reduce or delay planned research and development expenditures |
| These measures might not be sufficient to enable us to service our indebtedness |
| In addition, any financing, refinancing or sale of assets might not be available, or available on economically favorable terms |
| We may need to raise substantial additional capital to fund our operations in the future, and we do not have any future commitments for capital |
| We believe our cash resources will be sufficient to fund our planned operations for at least 18 months from December 31, 2005 |
| We are focused on research and development, are incurring losses from operations, have limited capital resources, and do not have access to a line of credit or other debt facility |
| We may need additional capital in the future to execute our business strategy, and if we are unsuccessful in raising such additional capital we may be unable to fully execute our business strategy on a timely basis, if at all |
| If we raise additional capital through the issuance of debt securities, the interests of our stockholders would be subordinated to the interests of our debt holders and any interest payments would reduce the amount of cash available to operate and grow our business |
| If we raise additional capital through the sale of equity securities, the ownership of our current stockholders would be diluted |
| Additionally, we do not know whether any financing, if obtained, will be adequate to meet our capital needs and to support our growth |
| If adequate capital cannot be obtained on satisfactory terms, we may terminate or delay regulatory approval of one or more of our product candidates, curtail or delay the implementation of manufacturing process improvements or delay the expansion of our sales and marketing capabilities |
| If we terminate or delay regulatory approval, curtail or delay manufacturing improvements or delay the expansion of our sales and marketing capabilities, our business may fail |
| We have a limited operating history, and because of the emerging nature of the markets in which we compete, our historical financial data is of limited value in estimating future operating expenses |
| Our budgeted expense levels are based in part on our expectations concerning future revenue |
| However, the size of future revenue depends on the choices and demand of individuals, which are difficult to forecast accurately |
| We may be unable to adjust our operations in a timely manner to compensate for any unexpected shortfall in revenue |
| Accordingly, a significant shortfall in demand for our products could have an immediate and material adverse effect on our business, results of operations and financial condition |
| 24 ______________________________________________________________________ Further, our fixed manufacturing costs and business development and marketing expenses will increase significantly as we expand our operations |
| To the extent that expenses precede or are not rapidly followed by increased revenue, our business, results of operations and financial condition may be materially adversely affected |
| Clinical trials may fail to demonstrate the safety and efficacy of our product candidates, which could prevent or significantly delay regulatory approval |
| Prior to receiving approval to commercialize any of our product candidates, we must demonstrate with substantial evidence from well-controlled clinical trials, and to the satisfaction of the FDA and other regulatory authorities in the United States and abroad, that our product candidates are both safe and effective |
| We will need to demonstrate our product candidates’ efficacy and monitor their safety throughout the process |
| We are conducting a confirmatory pivotal Phase III clinical trial related to our lead dermal product candidate |
| The success of prior pre-clinical or clinical trials does not ensure the success of these trials, which are being conducted in populations with different racial and ethnic demographics than our previous trials |
| If these trials or future clinical trials are unsuccessful, our business and reputation would be harmed and our stock price would be adversely affected |
| All of our product candidates are prone to the risks of failure inherent in biologic development |
| The results of early-stage clinical trials of our product candidates do not necessarily predict the results of later-stage clinical trials |
| Product candidates in later-stage clinical trials may fail to show desired safety and efficacy traits despite having progressed through initial clinical testing |
| Even if we believe the data collected from clinical trials of our product candidates is promising, this data may not be sufficient to support approval by the FDA or any other US or foreign regulatory approval |
| Preclinical and clinical data can be interpreted in different ways |
| Accordingly, FDA officials could interpret such data in different ways than we do, which could delay, limit or prevent regulatory approval |
| The FDA, other regulatory authorities, our Institutional Review Boards or we may suspend or terminate clinical trials at any time |
| Any failure or significant delay in completing clinical trials for our product candidates, or in receiving regulatory approval for the sale of any products resulting from our product candidates, may severely harm our business and reputation |
| Our operating results may fluctuate significantly in the future, which may cause our results to fall below the expectations of securities analysts, stockholders and investors |
| Our operating results may fluctuate significantly in the future as a result of a variety of factors, many of which are outside of our control |
| These factors include: · the level of demand for our Isolagen Process and future products that we may develop; · the timely and successful implementation of improved manufacturing processes; · our ability to attract and retain personnel with the necessary strategic, technical and creative skills required for effective operations; · the amount and timing of expenditures by practitioners and their patients; · introduction of new technologies; · product liability litigation, class action and derivative action litigation; · the amount and timing of capital expenditures and other costs relating to the expansion of our operations; · government regulation and legal developments regarding our Isolagen Process in the United States and in the foreign countries in which we operate; and 25 ______________________________________________________________________ · general economic conditions |
| As a strategic response to changes in the competitive environment, we may from time to time make pricing, service, technology or marketing decisions or business or technology acquisitions that could have a material adverse effect on our operating results |
| Due to any of these factors, our operating results may fall below the expectations of securities analysts, stockholders and investors in any future period, which may cause our stock price to decline |
| Losses may continue to increase from current levels and we will continue to experience negative cash flow as we expand our operations, which may limit or delay our ability to become profitable |
| We have expended significant resources on hiring of personnel, research and development, advertising and expansion, and we expect these costs to continue or rise in the future |
| As a result, we have incurred losses since our inception and expect to experience operating losses and negative cash flow as we expand our operations |
| We have had limited revenue to date and losses from operations, therefore, we expect to continue to incur significant additional costs and expenses related to: · FDA clinical trials and regulatory approvals; · expansion of laboratory and manufacturing operations; · research and development; · promotional and marketing activities; · brand development; · personnel costs; · development of relationships with strategic business partners, including physicians who might use our future products; and · interest expense related to the notes we recently offered |
| If we cannot adequately manage our costs and expenses, we will continue to experience operating losses and negative cash flow |
| In particular, the costs to improve our manufacturing process and to obtain regulatory approvals has been and will be considerable and the failure to improve our manufacturing process, or to obtain, or delays in obtaining, any regulatory approvals could materially adversely affect our business performance and financial results |
| We are party to securities and derivative litigation that distracts our management, is expensive to conduct and seeks a damage award against us |
| We and certain of our current and former officers have been named as defendants in several putative shareholder class action lawsuits in the United States District Court for the Southern District of Texas and the United States District Court for the Eastern District of Pennsylvania |
| The complaints purport to seek unspecified damages on behalf of an alleged class of persons who purchased our common stock between March 3, 2004 and August 1, 2005 |
| The complaints allege that we and our officers violated Section 10(b) and Rule 10b-5 of the Exchange Act by making certain false statements and omissions to the investing public regarding our business operations, management, and intrinsic value of our publicly traded securities |
| The complaints also allege liability against the individual defendants under Section 20(a) of the Exchange Act |
| In addition, two stockholders have filed derivative actions in the state court in Texas seeking recovery on behalf of Isolagen against certain of our current and former officers and directors, alleging, among other things, breach of fiduciary duties and other wrongful conduct by those individual defendants |
| While we have directors and officers liability insurance, it is uncertain whether the insurance will be sufficient to cover all damages, if any, that we may be required to pay |
| In addition, the securities and 26 ______________________________________________________________________ derivative lawsuits may distract the attention of our management, and are expensive to conduct |
| We have and may continue to incur substantial legal and other professional service costs in connection with the stockholder lawsuits |
| The amount of any future costs in this respect cannot be determined at this time |
| Our failure to comply with extensive governmental regulation may significantly affect our operating results |
| Even if we obtain regulatory approval for our product candidates, we will continue to be subject to extensive requirements by a number of foreign, national, state and local agencies |
| These regulations will impact many aspects of our operations, including testing, research and development, manufacturing, safety, efficacy, labeling, storage, quality control, adverse event reporting, record keeping, approval, advertising and promotion of our future products |
| The FDA enforces post-marketing regulatory requirements, including the cGMP requirements, through periodic unannounced inspections |
| We do not know whether we will pass any future FDA inspections |
| Failure to pass an inspection could disrupt, delay or shut down our manufacturing operations |
| Failure to comply with applicable regulatory requirements could, among other things, result in: · fines; · changes to advertising; · failure to obtain marketing approvals for our product candidates; · revocation or suspension of regulatory approvals of products; · product seizures or recalls; · delay, interruption or suspension of product manufacturing, distribution, marketing and sales; or · civil or criminal sanctions |
| The discovery of previously unknown problems with our future products may result in restrictions of the products, including withdrawal from manufacture |
| In addition, the FDA may revisit and change its prior determinations with regard to the safety or efficacy of our future products |
| If the FDA’s position changes, we may be required to change our labeling or cease to manufacture and market our future products |
| Even prior to any formal regulatory action, we could voluntarily decide to cease the distribution and sale or recall any of our future products if concerns about their safety or efficacy develop |
| In their regulation of advertising, the FDA and the FTC issue correspondence alleging that some advertising or promotional practices are false, misleading or deceptive |
| The FDA may impose a wide array of sanctions on companies for such advertising practices, which could result in any of the following: · incurring substantial expenses, including fines, penalties, legal fees and costs to comply with the FDA’s requirements; · changes in the methods of marketing and selling products; · taking FDA mandated corrective action, which may include placing advertisements or sending letters to physicians rescinding previous advertisements or promotions; or · disruption in the distribution of products and loss of sales until compliance with the FDA’s position is obtained |
| If we become subject to any of the above requirements, it could be damaging to our reputation and restrict our ability to sell or market our future products, and our business condition could be adversely affected |
| 27 ______________________________________________________________________ Physicians may prescribe pharmaceutical or biologic products for uses that are not described in a product’s labeling or differ from those tested by us and approved by the FDA While such “off-label” uses are common and the FDA does not regulate physicians’ choice of treatments, the FDA does restrict a manufacturer’s communications on the subject of off-label use |
| Companies cannot promote FDA-approved pharmaceutical or biologic products for off-label uses, but under certain limited circumstances they may disseminate to practitioners articles published in peer-reviewed journals |
| To the extent allowed by law, we intend to disseminate peer-reviewed articles on our future products to practitioners |
| If, however, our activities fail to comply with the FDA’s regulations or guidelines, we may be subject to warnings from, or enforcement action by, the FDA Legislative or regulatory reform of the healthcare system may affect our ability to sell our future products profitably |
| In both the United States and a number of foreign jurisdictions, there have been legislative and regulatory proposals to change the healthcare system in ways that could impact our ability to sell our future products profitably |
| The FDA’s policies may change and additional government regulations may be enacted, which could prevent or delay regulatory approval of our product candidates |
| We cannot predict the likelihood, nature or extent of adverse government regulation that may arise from future legislation or administrative action, either in the United States or abroad |
| If we are not able to maintain regulatory compliance, we might not be permitted to market our future products and our business could suffer |
| We conduct business in foreign markets, and we are subject to a variety of regulations in those foreign markets that could have a material adverse effect on our business in a particular market or in general |
| We presently have foreign operations in the United Kingdom |
| In addition, we intend to expand our operations into other foreign markets |
| We are already subject to a variety of regulations in foreign markets, and as we expand our operations, we will become subject to even more foreign regulations |
| Our failure to comply, or assertions that we fail to comply, with these regulations could have a material adverse effect on our business in a particular market or in general |
| To the extent we decide to commence or expand operations in additional countries, government regulations in those countries may prevent or delay entry into, or expansion of operations in, those markets |
| Government regulations in international markets could delay or prevent the introduction, or require the reformulation or withdrawal, of some of our future products |
| Our foreign operations are exposed to risks associated with exchange rate fluctuations, trade restrictions and political, economic and social instability |
| We are subject to the risks of doing business abroad, including: · unexpected changes in regulatory requirements; · export and import restrictions, tariffs and other trade barriers; · difficulties in staffing and managing foreign operations; · longer payment cycles and problems in collecting accounts receivable; · potential adverse tax consequences; · exchange rate fluctuations; · increased risks of piracy and limits on our ability to enforce our intellectual property rights; · limits on repatriation of funds; and · political risks that may limit or disrupt international sales |
| 28 ______________________________________________________________________ A foreign government may impose trade or foreign exchange restrictions or increased tariffs, which could adversely affect our operations |
| Our operations in some markets also may be adversely affected by political, economic and social instability in foreign countries, including terrorism |
| As we continue to focus on expanding our existing international operations, these and other risks associated with international operations may increase |
| Any limitations or interruptions in our foreign operations could have a material adverse effect on our business |
| In addition, for financial reporting purposes, results of operations of our foreign subsidiaries are translated from local currency into US dollars based on average monthly exchange rates |
| We currently do not hedge our foreign currency transactions and are therefore subject to the risk of changes in exchange rates |
| Any future products that we develop may not be commercially successful |
| Even if we obtain regulatory approval for our product candidates in the United States and other countries, those products may not be accepted by the market |
| A number of factors may affect the rate and level of market acceptance of our products, including: · labeling requirements or limitations; · market acceptance by practitioners and their patients; · our ability to successfully improve and/or automate our manufacturing process to allow us to more cost-effectively produce our future products, thereby reducing the price at which we can offer our future products; · the effectiveness of our sales efforts and marketing activities; and · the success of competitive products |
| If our current or future product candidates fail to achieve market acceptance, our profitability and financial condition will suffer |
| Our competitors in the pharmaceutical, medical device and biotechnology industries may have superior products, manufacturing capabilities, financial resources or marketing position |
| The human healthcare products and services industry is extremely competitive |
| Our competitors include major pharmaceutical, medical device and biotechnology companies |
| Most of these competitors have more extensive research and development, marketing and production capabilities and greater financial resources than we do |
| Our future success will depend on our ability to develop and market effectively our future products against those of our competitors |
| If our future products receive marketing approval but cannot compete effectively in the marketplace, our results of operations and financial position will suffer |
| Difficulties managing growth could adversely affect our business, operating results and financial condition |
| If we achieve growth in our operations in the next few years, such growth could place a strain on our management, and our administrative, operational and financial infrastructure |
| We would need to hire additional management, financial, sales and marketing personnel to manage our operations |
| In addition, our ability to manage our future operations and growth would require the continued improvement of operational, financial and management controls, reporting systems and procedures |
| If we are unable to manage our growth effectively or if we are unable to attract additional highly qualified personnel, our business, operating results and financial condition may be materially adversely affected |
| 29 ______________________________________________________________________ We are dependent on our key scientific and other management personnel, and the loss of any of these individuals could harm our business |
| We are dependent on the efforts of our key management and scientific staff |
| The loss of any of these individuals, or our inability to recruit and train additional key personnel in a timely manner, could materially and adversely affect our business and our future prospects |
| A loss of one or more of our current officers or key personnel could severely and negatively impact our operations |
| We have employment agreements with most of our key management personnel, but some of these people are employed “at-will” and any of them may elect to pursue other opportunities at any time |
| We have no present intention of obtaining key man life insurance on any of our executive officers or key management personnel |
| We will need to attract, train and retain additional highly qualified senior executives and technical and managerial personnel in the future |
| We are in the process of seeking additional senior executives, as well as technical and managerial staff members |
| There is a high demand for highly trained executive, technical and managerial personnel in our industry |
| We do not know whether we will be able to attract, train and retain highly qualified technical and managerial personnel in the future, which could have a material adverse effect on our business, financial condition and results of operations |
| If we are unable to effectively promote our brand and establish a leading position in the marketplace, our business may fail |
| We believe that the importance of brand recognition will increase over time |
| In order to gain brand recognition, we may increase our marketing and advertising budgets to create and maintain brand loyalty |
| We do not know whether these efforts will lead to greater brand recognition |
| If we are unable to effectively promote our brand and establish a leading position in the marketplace, our operations will suffer |
| Our ability to achieve commercial success will depend in part on obtaining and maintaining patent protection and trade secret protection of our technology and future products, as well as successfully defending these patents against third party challenges |
| If we are unable to obtain and maintain protection for our intellectual property and proprietary technology, the value of our technology and future products will be adversely affected, and we will not be able to protect our technology from unauthorized use by third parties |
| Our long-term success largely depends on our ability to market technologically competitive future products and to protect those technological creations |
| In order to do so we must: · obtain and protect commercially valuable patents or the rights to patents both domestically and abroad; · operate without infringing upon the proprietary rights of others; and · prevent others from successfully challenging or infringing our proprietary rights |
| As of December 31, 2005, we had 6 issued US patents, 9 pending US patent applications, 27 foreign patents and 50 pending foreign patent applications |
| If we fail to obtain or maintain these protections, we may not be able to prevent third parties from using our proprietary rights |
| We will be able to protect our proprietary rights from unauthorized use only to the extent that these rights are covered by valid and enforceable patents or are effectively maintained as trade secrets |
| The patent situation in the markets in which we compete is highly uncertain and involves complex legal and scientific questions |
| It may be difficult to obtain additional patents relating to our technology |
| 30 ______________________________________________________________________ Furthermore, any changes in, or unexpected interpretations of, the patent laws may adversely affect our ability to enforce our patent position |
| Other risks and uncertainties that we face with respect to our patents and other proprietary rights include the following: · the inventors of the inventions covered by each of our pending patent applications might not have been the first to make such inventions; · because the information contained in patent applications is generally not publicly available, we might not have been the first to file patent applications for these inventions or similar technology; · the future and pending applications we will file or have filed, or to which we will or do have exclusive rights, may not result in issued patents or may take longer than we expect to result in issued patents; · the claims of any patents that are issued may not provide meaningful protection; · our issued patents may not provide a basis for commercially viable products or may not be valid or enforceable; · we might not be able to develop additional proprietary technologies that are patentable; · the patents licensed or issued to us may not provide a competitive advantage; · patents issued to other companies, universities or research institutions may harm our ability to do business; · other companies, universities or research institutions may independently develop similar or alternative technologies or duplicate our technologies and commercialize discoveries that we attempt to patent; · other companies, universities or research institutions may design around technologies we have licensed, patented or developed; and · many of our patent claims are method, rather than composition of matter, claims |
| Generally, composition of matter claims are easier to enforce and are more difficult to circumvent |
| We have obtained some of our rights from third parties |
| If our agreements with these parties do not appear as we anticipate our business may be adversely affected |
| The rights to some of our patent applications were obtained in a purchase agreement with a third party |
| If this purchase agreement is found invalid or there are otherwise disputes regarding the invention and corresponding ownership rights in the invention, we may not be able to market future products covered by the license |
| We may enter into collaboration and cooperation agreements with third parties from time to time to develop new technologies |
| We may not be able to use and claim proprietary rights to the technology resulting from collaboration and cooperation agreements, which may adversely affect our business |
| Our business may be harmed, and we may incur substantial costs as a result of litigation or other proceedings relating to patent and other intellectual property rights |
| A third party may assert that we, one of our subsidiaries or one of our strategic collaborators has infringed his, her or its patents and proprietary rights or challenge the validity of our patents and proprietary rights |
| Likewise, we may need to resort to litigation to enforce our patent rights or to determine the scope and validity of a third party’s proprietary rights |
| 31 ______________________________________________________________________ The outcome of these proceedings is uncertain and could significantly harm our business |
| If we do not prevail in this type of litigation, we or our strategic collaborators may be required to: · pay monetary damages; · expend time and funding to redesign our Isolagen Process so that it does not infringe others’ patents while still allowing us to compete in the market with a substantially similar product; · obtain a license in order to continue manufacturing or marketing the affected products or services, and pay license fees and royalties |
| This license may be non-exclusive, giving our competitors access to the same intellectual property, or the patent owner may require that we grant a cross-license to our patented technology; or · stop research and commercial activities relating to the affected products or services if a license is not available on acceptable terms, if at all |
| Any of these events could adversely affect our business strategy and the value of our business |
| In addition, the defense and prosecution of intellectual property suits, interferences, oppositions and related legal and administrative proceedings in the United States and elsewhere, even if resolved in our favor, could be expensive and time consuming and could divert financial and managerial resources |
| Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater financial resources |
| We may not be successful in our efforts to develop commercial-scale manufacturing technology and methods |
| Primarily through internal research, we are seeking to develop a commercially viable design and production process for our future products, as well as new areas of application for our Isolagen Process |
| If we are unable to develop suitable techniques to produce and manufacture our technology for the commercial market or additional areas of application for our Isolagen Process, our business prospects will suffer |
| We may be liable for product liability claims not covered by insurance |
| Physicians that use our dermal product, or any of our future products, and patients who have been treated by our dermal product, or any of our future products, may bring product liability claims against us |
| While we have taken, and continue to take, what we believe are appropriate precautions, we may be unable to avoid significant liability exposure |
| We currently intend to obtain and keep in force product liability insurance |
| Any insurance we obtain may not provide adequate coverage against any asserted claims |
| In addition, regardless of merit or eventual outcome, product liability claims may result in: · diversion of management’s time and attention; · expenditure of large amounts of cash on legal fees, expenses and payment of damages; · decreased demand for our products or any of our future products and services; or · injury to our reputation |
| If we are unable to keep up with rapid technological changes, our future products may become obsolete or unmarketable |
| Our industry is characterized by significant and rapid technological change |
| Although we attempt to expand our technological capabilities in order to remain competitive, research and discoveries by others 32 ______________________________________________________________________ may make our future products obsolete |
| If we cannot compete effectively in the marketplace, our potential for profitability and financial position will suffer |
| Our acquisitions of companies or technologies may result in disruptions in business and diversion of management attention |
| We may make acquisitions of complementary companies, products or technologies |
| Any acquisitions will require the assimilation of the operations, products and personnel of the acquired businesses and the training and motivation of these individuals |
| Acquisitions may disrupt our operations and divert management’s attention from day-to-day operations, which could impair our relationships with current employees, customers and strategic partners |
| We may also have to, or we may choose to, incur debt or issue equity securities to pay for any future acquisitions |
| The issuance of equity securities for an acquisition could be substantially dilutive to our stockholders |
| In addition, our results of operations may suffer because of acquisition-related costs or amortization or impairment costs for acquired goodwill and other intangible assets |
| If management is unable to fully integrate acquired businesses, products, technologies or personnel with existing operations, we may not receive the intended benefits of the acquisitions |
| As of the date of this report, we are not party to any agreements, written or oral, for the acquisition of any company, product or technology |
| Our business, which depends on a small number of facilities, is vulnerable to natural disasters, telecommunication and information systems failures, terrorism and similar problems, and we are not fully insured for losses caused by all of these incidents |
| We currently conduct operations in three main facilities located in Exton, Pennsylvania, Houston, Texas and London, England |
| We also purchased land and two buildings located in Switzerland in April 2005 |
| The majority of this acquisition is currently under construction and is not considered fully operational |
| Our facilities could be damaged by fire, floods, power loss, telecommunication and information systems failures or similar events |
| Our insurance policies have limited coverage levels for loss or damages in these events and may not adequately compensate us for any losses that may occur |
| In addition, terrorist acts or acts of war may cause harm to our employees or damage our facilities |
| The potential for future terrorist attacks, the national and international responses to terrorist attacks or perceived threats to national security, and other acts of war or hostility have created many economic and political uncertainties that could adversely affect our business and results of operations in ways that we cannot predict, and could cause our stock price to fluctuate or decline |
| Our stock price has been volatile and could experience substantial declines |
| The market price of our common stock has experienced, and may continue to experience, significant volatility |
| The value of our common stock may decline regardless of our operating performance or prospects |
| Factors affecting our market price include, but are not limited to: · the success or failure of our product development efforts, especially those related to obtaining regulatory approvals domestically and internationally; · the implementation of improved and/or automated manufacturing processes; · technological innovations developed by us or our competitors; · variations in our operating results and the extent to which we achieve our key business targets; · differences between our reported results and those expected by investors and securities analysts; 33 ______________________________________________________________________ · market reaction to any acquisitions or joint ventures announced by us or our competitors; and · developments with respect to the class and derivative action litigation of which we are currently defendants |
| In addition, in recent years, the stock market in general, and the market for life sciences companies in particular, have experienced significant price and volume fluctuations |
| This volatility has affected the market prices of securities issued by many companies, often for reasons unrelated to their operating performance, and it may adversely affect the price of our common stock |
| In the past, securities class action litigation has often been instituted following periods of volatility in the market price of a company’s securities |
| The current class and derivative action suits or a future securities class action suit against us could result in potential liabilities, substantial costs and the diversion of management’s attention and resources, regardless of whether we win or lose |
| We have not declared any dividends on our common stock to date, and we have no intention of declaring dividends in the foreseeable future |
| The decision to pay cash dividends on our common stock rests with our Board of Directors and will depend on our earnings, unencumbered cash, capital requirements and financial condition |
| We do not anticipate declaring any dividends in the foreseeable future, as we intend to use any excess cash to fund our operations |
| Investors in our common stock should not expect to receive dividend income on their investment, and investors will be dependent on the appreciation of our common stock to earn a return on their investment |
| Provisions in our charter documents could prevent or delay stockholders’ attempts to replace or remove current management |
| Our charter documents provide for staggered terms for the members of our Board of Directors |
| Our Board of Directors is divided into three staggered classes, and each director serves a term of three years |
| At stockholders’ meetings only those directors comprising one of the three classes will have completed their term and be subject to re-election or replacement |
| In addition, our Board of Directors is authorized to issue “blank check:” preferred stock, with designations, rights and preferences as they may determine |
| Accordingly, our Board of Directors may, without stockholder approval, issue shares of preferred stock with dividend, liquidation, conversion, voting or other rights that could adversely affect the voting power or other rights of the holders of our common stock |
| This type of preferred stock could also be issued to discourage, delay or prevent a change in our control |
| The use of a staggered Board of Directors and the ability to issue “blank check” preferred stock are traditional anti-takeover measures |
| These provisions in our charter documents make it difficult for a majority stockholder to gain control of the Board of Directors and of our company |
| These provisions may be beneficial to our management and our Board of Directors in a hostile tender offer and may have an adverse impact on stockholders who may want to participate in such a tender offer, or who may want to replace some or all of the members of our Board of Directors |
| Provisions in our bylaws provide for indemnification of officers and directors, which could require us to direct funds away from our business and future products |
| Our bylaws provide for the indemnification of our officers and directors |
| We may be required to advance costs incurred by an officer or director and to pay judgments, fines and expenses incurred by an officer or director, including reasonable attorneys’ fees, as a result of actions or proceedings in which our officers and directors are involved by reason of being or having been an officer or director of our company |
| 34 ______________________________________________________________________ Funds paid in satisfaction of judgments, fines and expenses may be funds we need for the operation of our business and the development of our product candidates, thereby affecting our ability to attain profitability |
| Future sales of our common stock may depress our stock price |
| The market price of our common stock could decline as a result of sales of substantial amounts of our common stock in the public market, or as a result of the perception that these sales could occur |
| In addition, these factors could make it more difficult for us to raise funds through future offerings of common stock |
| As of December 31, 2005, there are 34cmam260cmam383 shares of common stock issued and 30cmam260cmam383 outstanding |
| All of our outstanding shares are freely transferable without restriction or further registration under the Securities Act |
| There is a limited public trading market for our common stock |
| Without an active trading market, there can be no assurance of any liquidity or resale value of our common stock, and stockholders may be required to hold shares of our common stock for an indefinite period of time |
| As a public company, our business is subject to numerous reporting requirements that are currently and continuously evolving and could substantially increase our operating expenses and divert management’s attention from the operation of our business |
| The Sarbanes-Oxley Act of 2002, which became law in July 2002, has required changes in some of our corporate governance, securities disclosure and compliance practices |
| In response to the requirements of that Act, the SEC and the American Stock Exchange have promulgated new rules and listing standards covering a variety of subjects |
| Compliance with these new rules and listing standards has significantly increased our legal and financial and accounting costs, and we expect these increased costs to continue |
| In addition, the requirements have taxed a significant amount of management’s and the Board of Directors’ time and resources |
| Likewise, these developments may make it more difficult for us to attract and retain qualified members of our board of directors, particularly independent directors, or qualified executive officers |
| As directed by Section 404 of the Sarbanes-Oxley Act, the SEC 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 that contains an assessment by management of the effectiveness of the company’s internal controls over financial reporting |
| In addition, the public accounting firm auditing the 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 |
| This requirement is applicable to our current annual report on Form 10-K and for all future annual reports |
| Lack of effectiveness of internal controls over financial reporting could adversely affect the value of our securities |
| Ineffective internal controls over our financial reporting have occurred in the past and may arise in the future |
| As a consequence, our investors could lose confidence in the reliability of our financial statements, which could result in a decrease in the value of our securities |