| LA JOLLA PHARMACEUTICAL CO Item 1A Risk Factors I Risk Factors Relating To La Jolla Pharmaceutical Company And The Industry In Which We Operate Results from our clinical trials may not be sufficient to obtain approval to market Riquent or our other drug candidates in the United States or Europe on a timely basis, or at all |
| Our drug candidates are subject to extensive government regulations related to development, clinical trials, manufacturing and commercialization |
| In order to sell any product that is under development, we must first receive regulatory approval |
| To obtain regulatory approval, we must conduct clinical trials and toxicology studies that demonstrate that our drug candidates are safe and effective |
| The process of obtaining FDA and other regulatory approvals is costly, time consuming, uncertain and subject to unanticipated delays |
| The FDA and foreign regulatory authorities have substantial discretion in the approval process and may not agree that we have demonstrated that Riquent is safe and effective |
| If Riquent is ultimately not found to be safe and effective, we would be unable to obtain regulatory approval to manufacture, market and sell Riquent |
| Although we have received an approvable letter from the FDA, the analysis of the data from our Phase 3 trial of Riquent showed that the 29 _________________________________________________________________ [83]Table of Contents trial did not reach statistical significance with respect to its primary endpoint, time to renal flare, or with respect to its secondary endpoint, time to treatment with high-dose corticosteroids or cyclophosphamide |
| We can provide no assurances that the FDA or foreign regulatory authorities will ultimately approve Riquent or, if approved, what the indication for Riquent will be |
| Because Riquent is our only drug candidate for which we have completed a Phase 3 clinical trial, and because there is no guarantee that we would be able to develop an alternate drug candidate, our inability to obtain regulatory approval of Riquent would have a severe negative effect on our business, and, in the future, we may not have the financial resources to continue research and development of Riquent or any other potential drug candidates |
| In order to complete our ongoing clinical trial of Riquent, we will need to enroll a sufficient number of patients who meet the trial criteria |
| If we are unable to successfully complete the trial, our business will be adversely affected and it may be difficult or impossible for us to continue to operate |
| We expect that the ongoing Phase 3 clinical benefit trial of Riquent will involve approximately 600 patients, which is significantly more than were involved in our previous Phase 3 trial |
| We may have difficulty enrolling patients because, among other matters, there are specific limitations on the medications that a patient may be taking upon entry into the trial |
| If we are unable to timely enroll a sufficient number of patients, we will not be able to complete successfully the ongoing trial |
| As a result, it may be difficult or impossible for us to continue to operate |
| Current and future clinical trials of Riquent, trials of drugs related to Riquent, or clinical trials of other drug candidates may be delayed or halted |
| For example, in 2005, we limited patient enrollment in our ongoing clinical benefit trial in an effort to reduce costs |
| In addition, our Phase 2/3 clinical trial of Riquent was terminated before planned patient enrollment was completed |
| Current and future trials may be delayed or halted for various reasons, including: • supplies of drug product are not sufficient to treat the patients in the studies; • patients do not enroll in the studies at the rate we expect; • insufficient financial resources; • the products are not effective; • patients experience negative side effects or other safety concerns are raised during treatment; • the trials are not conducted in accordance with applicable clinical practices; or • the impact of political unrest or natural disasters at foreign clinical sites |
| If any current or future trials are delayed or halted, we may incur significant additional expenses, and our potential approval of Riquent may be delayed, which could have a severe negative effect on our business |
| 30 _________________________________________________________________ [84]Table of Contents We may be required to design and conduct additional trials |
| We may be required to design and conduct additional studies to further demonstrate the safety and efficacy of our drug candidates, which may result in significant expense and delay |
| The FDA and foreign regulatory authorities may require new or additional clinical trials because of inconclusive results from current or earlier clinical trials (including the Phase 2/3 and Phase 3 trials of Riquent), a possible failure to conduct clinical trials in complete adherence to FDA good clinical practice standards and similar standards of foreign regulatory authorities, the identification of new clinical trial endpoints, or the need for additional data regarding the safety or efficacy of our drug candidates |
| It is possible that the FDA or foreign regulatory authorities may not ultimately approve Riquent or our other drug candidates for commercial sale in any jurisdiction, even if we believe future clinical results are positive |
| The technology underlying our products is uncertain and unproven |
| All of our product development efforts are based on unproven technologies and therapeutic approaches that have not been widely tested or used |
| To date, no products that use our technology have been commercialized |
| The FDA has not determined that we have proven Riquent to be safe and effective in humans, and the technology on which it is based has been used only in our pre-clinical tests and clinical trials |
| Application of our technology to antibody-mediated diseases other than lupus is in earlier research stages |
| Clinical trials of Riquent may be viewed as a test of our entire approach to developing therapies for antibody-mediated diseases |
| If Riquent does not work as intended, or if the data from our clinical trials indicates that Riquent is not safe and effective, the applicability of our technology for successfully treating antibody-mediated diseases will be highly uncertain |
| As a result, there is a significant risk that our therapeutic approaches will not prove to be successful, and there can be no guarantee that our drug discovery technologies will result in any commercially successful products |
| We are implementing a commercial scale manufacturing process for Riquent, but we have not yet manufactured an entire lot of Riquent at this commercial scale |
| If we are unable to manufacture Riquent in accordance with applicable FDA good manufacturing practices at this commercial scale, our ability to timely complete clinical trials of Riquent will be negatively affected |
| If we encounter delays or difficulties in establishing or maintaining relationships with manufacturing or distribution contractors, our ability to timely complete necessary clinical trials and potentially deliver commercial products may be negatively affected |
| We may enter into arrangements with contract manufacturing companies to expand our own production capacity in order to meet demand for our products or to attempt to improve manufacturing efficiency |
| If we choose to contract for manufacturing services, the FDA and comparable foreign regulators would have to approve the contract manufacturers prior to our use, and these contractors would be required to comply with strictly enforced manufacturing standards |
| We may also enter into agreements with contractors to prepare and distribute our drug candidates for use by patients in clinical trials or commercially |
| If we encounter delays or difficulties in establishing or maintaining relationships with contractors to produce, package or distribute our drug candidates, if they are unable to meet our needs, if they are not approved by the regulatory authorities, or if they fail to adhere to applicable manufacturing standards, our ability to timely complete necessary clinical trials and to introduce our products into the market would be negatively affected |
| 31 _________________________________________________________________ [85]Table of Contents Our limited manufacturing capabilities and experience could result in shortages of drugs for future sale, and our revenues and profit margin could be negatively affected |
| We have never operated a commercial manufacturing facility and we will be required to manufacture Riquent pursuant to applicable FDA good manufacturing practices |
| Our inexperience could result in manufacturing delays or interruptions and higher manufacturing costs |
| This could negatively affect our ability to supply the market on a timely and competitive basis |
| The sales of our products, if any, and our profit margins may also be negatively affected |
| In addition, substantial capital investment in the expansion and build-out of our manufacturing facilities and/or the engagement of third party contract manufacturers will be required to enable us to manufacture Riquent, if approved, in sufficient commercial quantities |
| We have limited manufacturing experience, and we may be unable to successfully transition to commercial production |
| Our suppliers may not be able to provide us with sufficient quantities of materials that we may need to manufacture our products |
| We rely on outside suppliers to provide us with specialized chemicals and reagents that we use to manufacture our drugs |
| In order to manufacture Riquent and our other drug candidates in sufficient quantities for our clinical trials and possible commercialization, our suppliers will be required to provide us with an adequate supply of chemicals and reagents |
| Our ability to obtain these chemicals and reagents is subject to the following risks: • our suppliers may not be able to increase their own manufacturing capabilities in order to provide us with a sufficient amount of material for our use; • some of our suppliers may be required to pass FDA inspections or validations or to obtain other regulatory approvals of their manufacturing facilities or processes, and they may be delayed or unable to do so; • the materials that our suppliers use to manufacture the chemicals and reagents that they provide us may be costly or in short supply; and • there are a limited number of suppliers that are able to provide us with the chemicals or reagents that we use to manufacture our drugs |
| If we are unable to obtain sufficient quantities of chemicals or reagents, our ability to produce products for clinical studies and, therefore, to introduce products into the market on a timely and competitive basis, will be impeded |
| The subsequent sales of our products, if any, and our profit margins may also be negatively affected |
| An interruption in the operation of our sole manufacturing facility could disrupt our operations |
| We have only one drug manufacturing facility |
| A significant interruption in the operation of this facility, whether as a result of a natural disaster or other causes, could significantly impair our ability to manufacture drugs for our clinical trials or possible commercialization |
| 32 _________________________________________________________________ [86]Table of Contents If we are to obtain regulatory approval of Riquent, we must validate our manufacturing facilities and processes |
| Although a successful pre-approval inspection was conducted by the FDA in July 2004, we have never operated a commercial manufacturing facility and we have not yet completed the validation of our manufacturing processes |
| If we are unable to maintain validated conditions at our manufacturing facilities or fail to successfully validate our manufacturing processes to the satisfaction of the regulatory authorities, they will not approve Riquent for commercial use |
| We are currently devoting nearly all of our resources to the development and approval of Riquent |
| Accordingly, our efforts with respect to other drug candidates have significantly diminished |
| We have currently budgeted only a limited amount of funds for the development of small molecules for the treatment of autoimmune diseases and acute and chronic inflammatory disorders |
| Substantial future development of these drug candidates may depend on our ability to obtain third party financing for this program |
| As a result, significant progress with respect to drug candidates other than Riquent, if any, will be significantly delayed and our success and ability to continue to operate depends on whether we obtain regulatory approval to market Riquent |
| Our operations depend on key employees |
| Losing these employees would have a negative effect on our product development and operations |
| We are highly dependent on the principal members of our scientific and management staff, the loss of whose services would delay the achievement of our research and development objectives |
| This is because our key personnel, including Steven Engle, Dr |
| Matthew Linnik, Dr |
| Paul Jenn and Dr |
| Andrew Wiseman, have been involved in the development of Riquent and other drug candidates for several years and have unique knowledge of our drug candidates and of the technology on which they are based |
| In addition, we will be required to rely on other key members of our senior management team to assist us with, among other matters, clinical development, manufacturing, regulatory, business development and potential commercialization activities |
| Retaining our current personnel and recruiting additional personnel will be critical to our success |
| Retaining our current key personnel to perform clinical development, manufacturing, regulatory, research and development, and business development activities will be critical to our near term success |
| We expect that recruiting additional qualified personnel to conduct clinical development, manufacturing, regulatory, research and development, business development, and marketing and sales activities will be required to successfully further develop Riquent and any additional drug candidates |
| Because competition for experienced clinical, manufacturing, regulatory, scientific, business development, and marketing and sales personnel among numerous pharmaceutical and biotechnology companies and research and academic institutions is intense, we may not be able to attract and retain these people |
| If we cannot attract and retain qualified people, our ability to conduct necessary clinical trials, manufacture drug, comply with regulatory requirements, enter into collaborative agreements and develop and sell potential products may be negatively affected because, for instance, the trials may not be conducted properly, or the 33 _________________________________________________________________ [87]Table of Contents manufacturing or sales of our products may be delayed |
| In addition, we rely on consultants and advisors to assist us in formulating our clinical, manufacturing, regulatory, research and development, business development, and marketing and sales strategies |
| All of our consultants and advisors have outside employment and may have commitments or consulting or advisory contracts with other entities that may limit their ability to contribute to our business |
| Our efforts to obtain approval to market Riquent in Europe may be delayed or unsuccessful |
| In order to obtain approval to market Riquent in Europe, we must submit an MAA to and pass inspections of the European health authority |
| Ultimately, a representative from each of the European Member States will vote on whether to approve the MAA Upon receiving the MAA, we expect that the Committee for Human Medicinal Products, a division of the EMEA, will review the MAA and respond to us with a number of questions |
| The approval process may be delayed because, among other matters: the answers to the questions posed by the EMEA may require additional tests to be conducted to obtain the answers to the questions posed; we, or one of our contract manufacturing facilities, may be unable to successfully pass an inspection by the European health authority; or the European health authority ultimately may not accept the data presented in the MAA in combination with our proposals for post-authorization commitments as adequate for approval under the EMEA “exceptional circumstances” regulation |
| The exceptional circumstances regulation is a path to approval in Europe that may be available when the comprehensive assessment of a product’s efficacy or safety is not possible at the time of filing because of the rarity of the indication, the state of scientific knowledge, or the means by which such information would be gathered is contrary to medical ethics |
| In addition, we must manufacture three consecutive lots of Riquent to validate our manufacturing process as part of our MAA If we encounter difficulties in successfully completing this component of the MAA, our application will not be complete and approval will not be granted |
| Even if we receive approval in Europe under the exceptional circumstances regulation, we will be required to complete several post-authorization commitments, including a long-term clinical efficacy study, the progress of which will be reviewed frequently by the European health authorities |
| If we fail to successfully complete these activities to the satisfaction of the European health authorities, our license to market Riquent in Europe, if any, could be revoked |
| We may not have sufficient financial resources to complete the ongoing Phase 3 clinical benefit trial of Riquent |
| We will need to successfully complete the ongoing Phase 3 clinical benefit study of Riquent prior to FDA approval |
| We expect that the ongoing Phase 3 clinical benefit trial will involve approximately 600 patients and take several years to complete |
| Although we recently raised net proceeds of approximately dlra62dtta3 million from the sale of common stock and warrants, the actual costs of completing the ongoing Phase 3 clinical benefit trial of Riquent may exceed our current cash resources |
| In that case, if we expend all of the funds that we recently raised and do not receive funding from a collaborative agreement with a corporate partner or obtain other financing, we would not have the financial resources to complete the ongoing Phase 3 clinical benefit trial or to continue the research and development of Riquent, and it would be difficult or impossible for us to continue to operate |
| We will need additional funds to support our operations |
| Our operations to date have consumed substantial capital resources |
| Before we can obtain FDA approval for Riquent, we will need to 34 _________________________________________________________________ [88]Table of Contents successfully complete the ongoing Phase 3 clinical benefit trial and possibly additional trials |
| Therefore, we expect to expend substantial amounts of capital resources for additional research, product development, pre-clinical testing and clinical trials of Riquent |
| We may also devote substantial additional capital resources to establish commercial-scale manufacturing capabilities and to market and sell potential products |
| These expenses may be incurred prior to or after any regulatory approvals that we may receive |
| Even with the net proceeds of approximately dlra62dtta3 million from our recent stock and warrant offering, we expect that we would need additional funds to finance our future operations |
| Our future capital requirements will depend on many factors, including: • the scope and results of our clinical trials; • our ability to manufacture sufficient quantities of drug to support clinical trials; • our ability to obtain regulatory approval for Riquent; • the time and costs involved in applying for regulatory approvals; • continued scientific progress in our research and development programs; • the size and complexity of our research and development programs; • the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims; • competing technological and market developments; • our ability to establish and maintain collaborative research and development arrangements; • our need to establish commercial manufacturing capabilities; and • our ability to develop effective marketing and sales programs |
| We expect to incur substantial losses each year for at least the next several years as we continue our planned clinical trial, manufacturing, regulatory, and research and development activities |
| If we ultimately receive regulatory approval for Riquent, or any of our other drug candidates, our manufacturing, marketing and sales activities are likely to substantially increase our expenses and our need for additional working capital |
| In the future, it is possible that we will not have adequate resources to support continuation of our business activities |
| We may need to sell stock or assets, enter into collaborative agreements, significantly reduce our operations, or merge with another entity to continue operations |
| Our business is highly cash-intensive and we expect that we will need a significant amount of additional cash to continue our operations |
| There can be no guarantee that additional financing will be available to us on favorable terms, or at all, whether through issuance of additional securities, entry into collaborative arrangements, or otherwise |
| If adequate funds are not available, we may delay, scale back or eliminate one or more of our research and 35 _________________________________________________________________ [89]Table of Contents development programs, which may include delaying or halting the ongoing Phase 3 clinical benefit trial of Riquent, reduce the size of our workforce, sell or license our technologies or obtain funds through other arrangements with collaborative partners or others that require us to relinquish rights to our technologies or potential products |
| We also may merge with another entity to continue our operations |
| Any one of these outcomes could have a negative impact on our ability to develop products or achieve profitability if our products are brought to market |
| If, and to the extent, we obtain additional funding through sales of securities, any investment in us will be diluted, and dilution can be particularly substantial when the price of our common stock is low |
| Our freedom to operate our business or profit fully from sales of our products may be limited if we enter into collaborative agreements |
| We may need to collaborate with other pharmaceutical companies to gain access to their financial, research, drug development, manufacturing, or marketing and sales resources |
| However, we may not be able to negotiate arrangements with any collaborative partners on favorable terms, if at all |
| Any collaborative relationships that we enter into may include restrictions on our freedom to operate our business or may limit our revenues from potential products |
| If a collaborative arrangement is established, the collaborative partner may discontinue funding any particular program or may, either alone or with others, pursue alternative technologies or develop alternative drug candidates for the diseases we are targeting |
| Competing products, developed by a collaborative partner or to which a collaborative partner has rights, may result in the collaborative partner withdrawing support as to all or a portion of our technology |
| Without collaborative arrangements, we must fund our own research, development, manufacturing, and marketing and sales activities, which accelerates the depletion of our cash and requires us to develop our own manufacturing and marketing and sales capabilities |
| Therefore, if the costs of completing the ongoing clinical benefit trial of Riquent significantly exceed our estimates and we are unable to establish and maintain collaborative arrangements and if other sources of cash are not available, we could experience a material adverse effect on our ability to develop products and, if developed and approved, to manufacture, market and sell them successfully |
| Our blood test to measure the binding affinity for Riquent has not been validated by independent laboratories and is likely to require regulatory review as part of the Riquent approval process |
| In 1998, we developed a blood test that we believe can identify the lupus patients who are most likely to respond to Riquent |
| The blood test is designed to measure the strength of the binding between Riquent and a patient’s antibodies |
| This affinity assay was used to identify, prospectively in the Phase 3 trial and retrospectively in the Phase 2/3 trial, the patients included in the efficacy analyses |
| Independent laboratories have not validated the assay, and the results of the affinity assay observed in our clinical trials of Riquent may not be observed in the broader lupus patient population |
| Although the FDA has reviewed the blood assay as part of the approval process of Riquent, the FDA’s review of the assay will not be complete until after Riquent is approved, if ever, and we and the FDA agree upon the label for Riquent |
| In addition, foreign regulatory authorities may require that the assay be reviewed as part of their approval process for Riquent |
| Even if Riquent and the assay are approved by the FDA or foreign regulatory authorities, we may have to conduct additional studies on the assay post-approval |
| The testing laboratory that will conduct the assay if Riquent is approved may also require additional regulatory approval |
| If the FDA or foreign regulatory authorities do not concur with the use of the 36 _________________________________________________________________ [90]Table of Contents assay to identify potential patients for treatment with Riquent, or if any of them requires additional studies on the assay or additional regulatory approval of the testing laboratory, the approval and possible commercialization of Riquent may be delayed or prevented, which would have a severe negative effect on our business |
| Any regulatory approvals that we may obtain for our product candidates may be limited and subsequent issues regarding safety or efficacy could cause us to remove products from the market |
| If the FDA or foreign regulatory authorities grant approval of any of our drug candidates, the approval may be limited to specific conditions or patient populations, or limited with respect to its distribution, including to specified facilities or physicians with special training or experience |
| The imposition of any of these restrictions or other restrictions on the marketing and use of Riquent could adversely affect any future sales of Riquent |
| Furthermore, even if a drug candidate is approved, it is possible that a subsequent issue regarding its safety or efficacy would require us to remove the drug from the market |
| Even if we receive regulatory approval for our product candidates, we will be subject to ongoing regulatory obligations and review |
| Following any regulatory approval of our product candidates, we will be subject to continuing regulatory obligations such as safety reporting requirements and additional post-marketing obligations, including regulatory oversight of the promotion and marketing of our products |
| In addition, we, and any third-party manufacturers, will be required to adhere to regulations setting forth current good manufacturing practices |
| These regulations cover all aspects of the manufacturing, testing, quality control and record keeping relating to our product candidates |
| Furthermore, we, and any third-party manufacturers, will be subject to periodic inspection by regulatory authorities |
| These inspections may result in compliance issues that would require the expenditure of significant financial or other resources to address |
| If we, or any third-party manufacturers that we may engage, fail to comply with applicable regulatory requirements, we may be subject to fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions and criminal prosecution |
| The size of the market for our potential products is uncertain |
| We estimate that the number of people who suffer from lupus in the United States and Europe is potentially more than 1cmam000cmam000 and those with renal impairment, which Riquent is designed to treat, is approximately 300cmam000 |
| However, there is limited information available regarding the actual size of these patient populations |
| In addition, it is uncertain whether the results from previous or future clinical trials of our drug candidates will be observed in broader patient populations, and the number of patients who may benefit from our drug candidates may be significantly smaller than the estimated patient populations |
| Furthermore, management of patients with renal disease by specialists other than nephrologists and immunologists is likely to reduce our ability to access patients who may benefit from Riquent |
| Our drugs may not achieve market acceptance |
| Even if Riquent or our other drug candidates receive regulatory approval, patients and physicians may not readily or quickly accept our proposed methods of treatment |
| In order for Riquent or our other drug candidates to be commercially successful, we will need to increase the 37 _________________________________________________________________ [91]Table of Contents awareness and acceptance of our drug candidates among physicians, patients and the medical community |
| Riquent is designed to be administered weekly by intravenous injection |
| It is possible that providers and patients may resist an intravenously administered therapeutic |
| It is also possible that physician treatment practices may change and that the use of other drugs, either newly approved or currently on the market for other conditions, may become widely utilized by clinicians for the treatment of patients with lupus and reduce the potential use of Riquent in this patient population |
| In addition, if we are unable to manufacture drugs at an acceptable cost, physicians may not readily prescribe drugs that we may manufacture due to cost-benefit considerations when compared to other methods of treatment |
| If we are unable to achieve market acceptance for approved products, our revenues and potential for profitability will be negatively affected |
| We lack experience in marketing products for commercial sale |
| In order to commercialize any drug candidate approved by the FDA or foreign regulatory authorities, we must either develop marketing and sales programs or enter into marketing arrangements with others |
| If we cannot do either of these successfully, we will not generate meaningful sales of any products that may be approved |
| If we develop our own marketing and sales capabilities, we will be required to employ a sales force, establish and staff a customer service department, and create or identify distribution channels for our drugs |
| We will compete with other companies that have experienced and well-funded marketing and sales operations |
| In addition, if we establish our own sales and distribution capabilities, we will incur material expenses and may experience delays or have difficulty in gaining market acceptance for our drug candidates |
| We currently have no marketing arrangements with others |
| There can be no guarantee that, if we desire to, we will be able to enter into any marketing agreements on favorable terms, if at all, or that any such agreements will result in payments to us |
| If we enter into co-promotion or other marketing and sales arrangements with other companies, any revenues that we may receive will be dependent on the efforts of others |
| There can be no guarantee that these efforts will be successful |
| We may not earn as much income as we hope due to possible changes in healthcare reimbursement policies |
| The continuing efforts of government and healthcare insurance companies to reduce the costs of healthcare may reduce the amount of income that we can generate from sales of future products, if any |
| For example, in certain foreign markets, pricing and profitability of prescription drugs are subject to government control |
| In the United States, we expect that there will continue to be a number of federal and state proposals to implement similar government controls |
| In addition, an increasing emphasis on managed care in the United States will continue to put pressure on drug manufacturers to reduce prices |
| Price control initiatives could reduce the revenue that we receive for any products we may develop and sell in the future |
| We have a history of losses and may not become profitable |
| We have incurred operating losses each year since our inception in 1989 and had an accumulated deficit of approximately dlra260dtta3 million as of December 31, 2005 |
| We expect to incur substantial losses each year for at least the next several years as we conduct clinical trials of our drug candidates, seek regulatory approval and continue our clinical development, manufacturing, regulatory and research activities |
| In addition, assuming we ultimately receive approval from the FDA or foreign regulatory authorities for Riquent or our other drug candidates, 38 _________________________________________________________________ [92]Table of Contents we will be required to develop commercial manufacturing capabilities and marketing and sales programs which may result in substantial additional losses |
| To achieve profitability we must, among other matters, complete the development of our products, obtain all necessary regulatory approvals and establish commercial manufacturing, marketing and sales capabilities |
| The amount of losses and the time required by us to reach sustained profitability are highly uncertain and we may never achieve profitability |
| We do not expect to generate revenues from the sale of Riquent, if approved, or our other products, if any, in the near term, and we may never generate product revenues |
| Our success in developing and marketing our drug candidates depends significantly on our ability to obtain patent protection for Riquent and any other developed products |
| In addition, we will need to successfully preserve our trade secrets and operate without infringing on the rights of others |
| We depend on patents and other unpatented intellectual property to prevent others from improperly benefiting from products or technologies that we may have developed |
| As of December 31, 2005, we owned 105 issued patents and 75 pending patent applications in the United States and in foreign countries |
| These patents and patent applications cover various technologies and drug candidates, including Riquent |
| There can be no assurance, however, that any additional patents will be issued, that the scope of any patent protection will be sufficient to protect us or our technology, or that any current or future issued patent will be held valid if subsequently challenged |
| There is a substantial backlog of biotechnology patent applications at the United States Patent and Trademark Office that may delay the review and issuance of any patents |
| The patent position of biotechnology firms like ours is highly uncertain and involves complex legal and factual questions, and no consistent policy has emerged regarding the breadth of claims covered in biotechnology patents or the protection afforded by these patents |
| We intend to continue to file patent applications as believed appropriate for patents covering both our products and processes |
| There can be no assurance that patents will be issued from any of these applications, or that the scope of any issued patents will protect our technology |
| We do not necessarily know if others, including competitors, have patents or patent applications pending that relate to compounds or processes that overlap or compete with our intellectual property or which may affect our freedom to operate |
| We are aware of certain families of patents and patent applications that contain claims covering subject matter that may affect our ability to develop, manufacture and sell our products in the future |
| We have conducted investigations into these patent families to determine what impact, if any, the patent families could have on our continued development, manufacture and, if approved by the FDA, sale of our drug candidates, including Riquent |
| Based on our investigations to date, we currently do not believe that these patent families are likely to impede the advancement of our drug candidates, including Riquent |
| However, there can be no assurance that upon our further investigation, these patent families or other patents will not ultimately be found to impact the advancement of our drug candidates, including Riquent |
| If the United States Patent and Trademark Office or any foreign counterpart issues or has issued patents containing competitive or conflicting claims, and if these claims are valid, the protection provided by our existing patents or any future patents that may be issued could be significantly reduced, and our ability to prevent competitors from developing products or technologies identical or similar to ours could be negatively affected |
| In addition, there can be no guarantee that we would be able to obtain licenses to these patents on commercially reasonable terms, if at all, or that we would be able to develop or obtain alternative 39 _________________________________________________________________ [93]Table of Contents technology |
| Our failure to obtain a license to a technology or process that may be required to develop or commercialize one or more of our drug candidates may have a material adverse effect on our business |
| In addition, we may have to incur significant expenses and management time in defending or enforcing our patents |
| We also rely on unpatented intellectual property such as trade secrets and improvements, know-how, and continuing technological innovation |
| While we seek to protect these rights, it is possible that: • others, including competitors, will develop inventions relevant to our business; • our confidentiality agreements will be breached, and we may not have, or be successful in obtaining, adequate remedies for such a breach; or • our trade secrets will otherwise become known or be independently discovered by competitors |
| We could incur substantial costs and devote substantial management time in defending suits that others might bring against us for infringement of intellectual property rights or in prosecuting suits that we might bring against others to protect our intellectual property rights |
| Because a number of companies compete with us, many of which have greater resources than we do, and because we face rapid changes in technology in our industry, we cannot be certain that our products will be accepted in the marketplace or capture market share |
| Competition from domestic and foreign biotechnology companies, large pharmaceutical companies and other institutions is intense and is expected to increase |
| A number of companies and institutions are pursuing the development of pharmaceuticals in our targeted areas |
| Many of these companies are very large, and have financial, technical, sales and distribution and other resources substantially greater than ours |
| The greater resources of these competitors could enable them to develop competing products more quickly than we are able to, and to market any competing product more quickly or effectively so as to make it extremely difficult for us to develop a share of the market for our products |
| These competitors also include companies that are conducting clinical trials and pre-clinical studies for the treatment of lupus |
| Our competitors may develop or obtain regulatory approval for products more rapidly than we do |
| If the FDA were to approve a drug that is significantly similar in structure to Riquent for the same indication that Riquent is designed to treat, and such drug received marketing exclusivity under the Orphan Drug Act, the FDA may be prevented from approving Riquent |
| Also, the biotechnology and pharmaceutical industries are subject to rapid changes in technology |
| Our competitors may develop and market technologies and products that are more effective or less costly than those we are developing, or that would render our technology and proposed products obsolete or noncompetitive |
| We may not be able to take advantage of the orphan drug designation for Riquent |
| In September 2000, the FDA granted us orphan drug designation for Riquent for the treatment of lupus nephritis |
| The Orphan Drug Act potentially enables us to obtain research funding and tax credits for certain research expenses |
| In addition, the Orphan Drug Act allows for seven years of exclusive marketing rights to a specific drug for a specific orphan indication |
| Exclusivity is conferred upon receipt of marketing approval from the FDA The marketing 40 _________________________________________________________________ [94]Table of Contents exclusivity prevents FDA approval during the seven-year period of the same drug, as defined in the FDA regulations, from another company for the same orphan indication |
| Whether we will be able to take advantage of the benefits afforded by the orphan drug designation will ultimately be determined by the FDA only after further review of our NDA The use of Riquent or other potential products in clinical trials, as well as the sale of any approved products, may expose us to lawsuits resulting from the use of these products |
| The use and possible sale of Riquent or other potential products may expose us to legal liability and negative publicity if we are subject to claims that our products harmed people |
| These claims might be made directly by patients, pharmaceutical companies, or others |
| We currently maintain dlra10dtta0 million of product liability insurance for claims arising from the use of our products in clinical trials |
| However, product liability insurance is becoming increasingly expensive |
| In addition, in the event of any commercialization of any of our products, we will likely need to obtain additional insurance, which will increase our insurance expenses |
| There can be no guarantee that we will be able to maintain insurance or that insurance can be acquired at a reasonable cost, in sufficient amounts, or with broad enough coverage to protect us against possible losses |
| Furthermore, it is possible that our financial resources would be insufficient to satisfy potential product liability or other claims |
| A successful product liability claim or series of claims brought against us could negatively impact our business and financial condition |
| We face environmental liabilities related to certain hazardous materials used in our operations |
| Due to the nature of our manufacturing processes, we are subject to stringent federal, state and local laws governing the use, handling and disposal of certain materials and wastes |
| We may have to incur significant costs to comply with environmental regulations if and when our manufacturing increases to commercial volumes |
| Current or future environmental laws may significantly affect our operations because, for instance, our production process may be required to be altered, thereby increasing our production costs |
| In our research and manufacturing activities, we use radioactive and other materials that could be hazardous to human health, safety or the environment |
| These materials and various wastes resulting from their use are stored at our facility pending ultimate use and disposal |
| The risk of accidental injury or contamination from these materials cannot be eliminated |
| In the event of such an accident, we could be held liable for any resulting damages, and any such liability could exceed our resources |
| Although we maintain general liability insurance, we do not specifically insure against environmental liabilities |
| II RISK FACTORS RELATED SPECIFICALLY TO OUR STOCK Our stock may be removed from listing on the Nasdaq quotation system and may not qualify for listing on any stock exchange, in which case it may be difficult to maintain a market in our stock |
| In 2005, we received a notice from the Nasdaq Stock Market that our stock price fell below the required minimum bid price |
| We have since regained compliance with the minimum bid price rule, but we are required to maintain compliance in order to maintain our listing |
| In addition to the minimum bid price rule, the Nasdaq Stock Market has several other continued listing requirements |
| Failure to maintain compliance with any Nasdaq listing requirement could cause our stock to be removed from listing on Nasdaq |
| If this were to happen, we may not be able to secure listing on other exchanges or quotation systems |
| If our stock is no longer traded on an exchange or quotation system, it may be difficult for our stockholders to sell the shares that they own |
| 41 _________________________________________________________________ [95]Table of Contents The ownership of our common stock is concentrated |
| As of February 22, 2006, our three largest stockholders beneficially owned approximately 46prca of our currently outstanding shares of common stock |
| Investors who purchase our common stock may be subject to certain risks due to the concentrated ownership of our common stock |
| For example, the sale by any of our large stockholders of a significant portion of that stockholder’s holdings could have a material adverse effect on the market price of our common stock |
| In addition, two of these stockholders have the ability, either alone or jointly, to appoint four members of our board of directors |
| Accordingly, these stockholders, either directly or indirectly, have the ability to significantly influence the outcome of all matters submitted to a vote of our stockholders |
| Our common stock price is volatile and may decline even if our business is doing well |
| The market price of our common stock has been and is likely to continue to be highly volatile |
| Recent corporate events have caused our stock price to be particularly volatile |
| Market prices for securities of biotechnology and pharmaceutical companies, including ours, have historically been highly volatile, and the market has from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies |
| The following factors, among others, can have a significant effect on the market price of our securities: • our clinical trial results; • actions or decisions by the FDA and other comparable agencies; • announcements of technological innovations or new therapeutic products by us or others; • developments in patent or other proprietary rights; • public concern as to the safety of drugs discovered or developed by us or others; • future sales of significant amounts of our common stock by us or our stockholders; • developments concerning potential agreements with collaborators; • comments by securities analysts and general market conditions; and • government regulation, including any legislation that may impact the price of any commercial products that we may seek to sell |
| The realization of any of the risks described in these “Risk Factors” could have a negative effect on the market price of our common stock |
| 42 _________________________________________________________________ [96]Table of Contents Future sales of our stock by our stockholders could negatively affect the market price of our stock |
| Sales of our common stock in the public market, or the perception that such sales could occur, could result in a drop in the market price of our securities |
| As of February 22, 2006, there were: • Approximately 32cmam523cmam381 shares of common stock that have been issued in registered offerings or were otherwise freely tradable in the public markets |
| • Approximately 11cmam144 shares of common stock eligible for resale in the public market pursuant to SEC Rule 144 |
| • 4cmam399cmam992 shares of common stock underlying warrants which have been registered for resale under a Registration Statement on Form S-3 |
| • 2cmam194cmam171 shares of common stock that may be issued on the exercise of outstanding stock options granted under our various stock option plans at a weighted average exercise price of dlra15dtta23 per share |
| • Approximately 3cmam271cmam281 shares of common stock reserved for future issuance pursuant to awards granted under our equity incentive and employee stock purchase plans, which shares are covered by effective registration statements under the Securities Act of 1933, as amended (the “Securities Act”) |
| • Pursuant to a registration statement on Form S-3 filed on December 10, 2002, we registered an aggregate amount of dlra125cmam000cmam000 of our common stock for issuance from time to time |
| As of February 22, 2006, there was dlra53cmam937cmam500 of our common stock available for future issuance |
| We cannot estimate the number of shares of common stock that may actually be resold in the public market because this will depend on the market price for our common stock, the individual circumstances of the sellers and other factors |
| We also have a number of stockholders that own significant blocks of our common stock |
| If these stockholders sell significant portions of their holdings in a relatively short time, for liquidity or other reasons, the market price of our common stock could drop significantly |
| Failure to achieve and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and stock price |
| Section 404 of the Sarbanes-Oxley Act requires us to evaluate annually the effectiveness of our internal controls over financial reporting as of the end of each fiscal year beginning in 2004 and to include a management report assessing the effectiveness of our internal controls over financial reporting in all annual reports beginning with the annual report on Form 10-K for the fiscal year ended December 31, 2004 |
| Section 404 also requires our independent registered public accounting firm to attest to, and report on, management’s assessment of our internal controls over financial reporting |
| We evaluated our internal controls over financial reporting as of December 31, 2005 in order to comply with Section 404 and concluded that our disclosure controls and procedures were effective as of such date |
| In addition, our independent registered public accounting firm reported on our assertion with respect to the effectiveness of our internal controls over financial reporting as of December 31, 2005 |
| If we fail to maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to 43 _________________________________________________________________ [97]Table of Contents time, we cannot provide any assurances that we will be able to conclude in the future that we have effective internal controls over financial reporting in accordance with Section 404 |
| Anti-takeover devices may prevent changes in our board of directors and management |
| We have in place several anti-takeover devices, including a stockholder rights plan, which may have the effect of delaying or preventing changes in our management or deterring third parties from seeking to acquire significant positions in our common stock |
| For example, one anti-takeover device provides for a board of directors that is separated into three classes, with their terms in office staggered over three year periods |
| This has the effect of delaying a change in control of our board of directors without the cooperation of the incumbent board |
| In addition, our bylaws require stockholders to give us written notice of any proposal or director nomination within a specified period of time prior to the annual stockholder meeting, establish certain qualifications for a person to be elected or appointed to the board of directors during the pendency of certain business combination transactions, and do not allow stockholders to call a special meeting of stockholders |
| We may also issue shares of preferred stock without further stockholder approval and upon terms that our board of directors may determine in the future |
| The issuance of preferred stock could have the effect of making it more difficult for a third party to acquire a majority of our outstanding stock, and the holders of such preferred stock could have voting, dividend, liquidation and other rights superior to those of holders of our common stock |