| NASTECH PHARMACEUTICAL CO INC ITEM 1A RISK FACTORS You should carefully consider the risks described below before making an investment decision |
| We do not generate operating income and will require additional financing in the future |
| If additional capital is not available, we may have to curtail or cease operations |
| Our business currently does not generate the cash that is necessary to finance our operations |
| We incurred losses from operations (excluding interest income/expense and other income/expense) of dlra6dtta2 million in 2003, dlra28dtta5 million in 2004 and dlra33dtta8 million in 2005 |
| Subject to the success of our development programs and potential licensing transactions, we will need to raise additional capital to fund research and development, to develop and commercialize our product candidates, to enhance existing services, to respond to competitive pressures and to acquire complementary businesses or technologies |
| Our future capital needs depend on many factors, including: • the scope, duration and expenditures associated with our research and development programs; • continued scientific progress in these programs; • the outcome of potential licensing transactions, if any; • competing technological developments; 25 _________________________________________________________________ [79]Table of Contents • our proprietary patent position, if any, in our products; and • the regulatory approval process for our products |
| We may seek to raise necessary funds through public or private equity offerings, debt financings or additional strategic alliances and licensing arrangements |
| We may not be able to obtain additional financing on terms favorable to us, if at all |
| General market conditions may make it very difficult for us to seek financing from the capital markets |
| We may be required to relinquish rights to our technologies or drug candidates, or grant licenses on terms that are not favorable to us in order to raise additional funds through alliance, joint venture or licensing arrangements |
| If adequate funds are not available, we may have to delay, reduce or eliminate one or more of our research or development programs and reduce overall overhead expenses |
| These actions would likely reduce the market price of our common stock |
| We have not been profitable on an annual basis for nine years, and we may never become profitable |
| We have incurred net losses in each of the past nine years |
| As of December 31, 2005, we had an accumulated deficit of approximately dlra115dtta6 million and expect additional operating losses in the future as we continue our research and development activities |
| The process of developing our products requires significant research and development efforts, including basic research, pre-clinical and clinical development, as well as FDA regulatory approval |
| These activities, together with our sales, marketing, general and administrative expenses, have resulted in operating losses in the past, and there can be no assurance that we can achieve profitability in the future |
| Our ability to achieve profitability depends on our ability, alone or with our collaborators, to develop our drug candidates, conduct clinical trials, obtain necessary regulatory approvals, and manufacture, distribute, market and sell our drug products |
| We cannot assure you that we will be successful at any of these activities or predict when we will ever become profitable |
| We are dependent on our collaborative arrangements with third parties for a substantial portion of our revenue, and our development and commercialization activities may be delayed or reduced if we fail to negotiate or maintain successful collaborative arrangements |
| We are dependent on our current and any other possible future collaborators to commercialize many of our product candidates and to provide the regulatory compliance, sales, marketing and distribution capabilities required for the success of our business |
| If we fail to secure or maintain successful collaborative arrangements, our development and commercialization activities will be delayed or reduced and our revenues will be materially and adversely impacted |
| We entered into collaboration partnerships with P&G in January 2006, Merck in September 2004 and Par Pharmaceutical in October 2004 |
| The strategic collaboration that we entered into with Merck in September 2004 for PYY was terminated on March 1, 2006 |
| Over the next several years, we will depend on these types of collaboration partnerships for a significant portion of our revenue |
| The expected future milestone payments and cost reimbursements from collaboration agreements will provide an important source of financing for our research and development programs, thereby facilitating the application of our technology to the development and commercialization of our products |
| These collaborative agreements can be terminated either by us or by our partners at their discretion upon the satisfaction of certain notice requirements |
| Our partners are not precluded from independently pursuing competing products and drug delivery approaches or technologies |
| Even if our partners continue their contributions to our collaborative arrangements, they may nevertheless determine not to actively pursue the development or commercialization of any resulting products |
| Our partners may fail to perform their obligations under the collaborative arrangements or may be slow in performing their obligations |
| In addition, our partners may experience financial difficulties at any time that could prevent them from having available funds to contribute to these collaborations |
| If our collaboration partners fail to conduct their commercialization, regulatory compliance, sales and marketing or distribution activities successfully and in a timely manner, we will earn little or no revenue from those products and we will not be able to achieve our objectives or build a sustainable or profitable business |
| 26 _________________________________________________________________ [80]Table of Contents Our success depends to a significant degree upon the commercial success of products manufactured by us pursuant to supply agreements or marketed by our collaboration partners |
| Even if we are able to develop products and obtain the necessary regulatory approvals, our success depends to a significant degree on the commercial success of products manufactured by us pursuant to supply agreements or marketed by our collaboration partners |
| If these products fail to achieve or subsequently maintain market acceptance or commercial viability, our business would be significantly harmed because our revenue is dependent upon sales of these products |
| Even if we are successful in commercializing a product candidate, it is possible that the commercial opportunity for intranasally-administered products will be limited |
| None of our product candidates utilizing our intranasal drug delivery technology have been brought to market except for Nascobal nasal gel and Nascobal nasal spray |
| Accordingly, while we believe there is a commercial market for our intranasal drug delivery technology, there can be no assurance that our intranasal drug delivery technology will become a viable commercial alternative to other drug delivery methods |
| Many factors may affect the market acceptance and commercial success of any potential products, including: • establishment and demonstration of the effectiveness and safety of the drugs; • timing of market entry as compared to competitive products; • the benefits of our drugs relative to their prices and the comparative price of competing products; • actual and perceived benefits and detriments of intranasal drug delivery, which may be affected by press and academic literature; • marketing and distribution support of our products; and • any restrictions on labeled indications |
| Our revenues and profits from any particular generic pharmaceutical products decline as our competitors introduce their own generic equivalents |
| On October 22, 2004, we entered into a license and supply agreement granting Par Pharmaceutical the exclusive US distribution and marketing rights to our generic calcitonin-salmon intranasal spray |
| Under the terms of the agreement with Par Pharmaceutical, we will obtain FDA approval, manufacture and supply finished generic calcitonin-salmon intranasal spray to Par Pharmaceutical |
| Par Pharmaceutical will distribute the product in the United States |
| Novartis, the supplier of branded calcitonin-salmon intranasal spray, may introduce a generic version through Sandoz US, its wholly-owned subsidiary and Apotex has filed a generic application of intranasal salmon-calcitonin with a filing date that has priority over our ANDA See Item 1: Business — Collaborations and Programs — Par Pharmaceutical Partnership |
| Selling prices of generic drugs typically decline, sometimes dramatically, as additional companies receive approvals for a given product and competition intensifies |
| To the extent that our collaboration partner and we succeed in being the first to market a generic version of a significant product, our initial sales and profitability following the introduction of such product will be subject to material reduction upon a competitor’s introduction of the equivalent product |
| Our ability to sustain our sales and profitability on any product over time is dependent on both the number of new competitors for such product and the timing of their approvals |
| Clinical trials of our product candidates are expensive and time-consuming, and the results of these trials are uncertain |
| Many of our research and development programs are at an early stage |
| Clinical trials in patients are long, expensive and uncertain processes |
| The length of time generally varies substantially according to the type of drug, complexity of clinical trial design, regulatory compliance requirements, intended use of the drug candidate and rate of patient enrollment for the clinical trials |
| Clinical trials may not be commenced 27 _________________________________________________________________ [81]Table of Contents or completed on schedule, and the FDA may not ultimately approve our product candidates for commercial sale |
| Further, even if the results of our pre-clinical studies or clinical trials are initially positive, it is possible that we will obtain different results in the later stages of drug development or that results seen in clinical trials will not continue with longer term treatment |
| Drugs in late stages of clinical development may fail to show the desired safety and efficacy traits despite having progressed through initial clinical testing |
| For example, positive results in early Phase I or Phase II clinical trials may not be repeated in larger Phase II or Phase III clinical trials |
| All of our potential drug candidates are prone to the risks of failure inherent in drug development |
| The clinical trials of any or all of our drugs or drug candidates, including PYY intranasal spray, PTH[(1-34)], generic calcitonin-salmon intranasal spray, insulin and morphine gluconate could be unsuccessful, which would prevent us from commercializing these drugs |
| The FDA conducts its own independent analysis of some or all of the pre-clinical and clinical trial data submitted in a regulatory filing and often comes to different and potentially more negative conclusions than the analysis performed by the drug sponsor |
| Our failure to develop safe, commercially viable drugs approved by the FDA would substantially impair our ability to generate revenues and sustain our operations and would materially harm our business and adversely affect our stock price |
| In addition, significant delays in clinical trials will impede our ability to seek regulatory approvals, commercialize our drug candidates and generate revenue, as well as substantially increase our development costs |
| We are subject to extensive government regulation including the requirement of approval before our products may be manufactured or marketed |
| We, our collaboration partners, and our product candidates are subject to extensive regulation by governmental authorities in the US and other countries |
| Failure to comply with applicable requirements could result in, among other things, any of the following actions: warning letters; fines and other civil penalties; unanticipated expenditures; delays in approving or refusal to approve a product candidate; product recall or seizure; interruption of manufacturing or clinical trials; operating restrictions; injunctions; and criminal prosecution |
| Our product candidates cannot be marketed in the United States without FDA approval or clearance |
| The FDA has approved only two of our product candidates, Nascobal nasal gel and Nascobal nasal spray, and cleared only one, our MASCT device, for sale in the United States |
| Our other product candidates are in development, and will have to be approved by the FDA before they can be marketed in the United States |
| Obtaining FDA approval requires substantial time, effort, and financial resources, and may be subject to both expected and unforeseen delays, including without limitation citizen’s petitions or other filings with the FDA, and there can be no assurance that any approval will be granted on a timely basis, if at all or that delays will be resolved favorably or in a timely manner |
| If the FDA does not approve our product candidates in a timely fashion, or does not approve them at all, our business and financial condition may be adversely affected |
| We, our collaboration partners, or the FDA may suspend or terminate human clinical trials at any time on various grounds, including a finding that the patients are being exposed to an unacceptable health risk |
| In addition, both before and after regulatory approval, we, our collaboration partners, and our product candidates are subject to numerous FDA requirements covering, among other things, testing, manufacturing, quality control, labeling, advertising, promotion, distribution, and export |
| The FDA’s requirements may change and additional government regulations may be promulgated that could affect us, our collaboration partners, and our product candidates |
| We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the United States or abroad |
| There can be no assurance that we will not be required to incur significant costs to comply with such laws and regulations in the future or that such laws or regulations will not have a material adverse effect upon our business |
| In addition, some of our product candidates, such as our morphine gluconate, will be subject to the requirements of the Controlled Substances Act and implementing regulations thereunder, which are administered by the DEA Establishments may not handle controlled drug substances until they have been inspected and registered by the DEA The DEA also imposes recordkeeping and reporting requirements, 28 _________________________________________________________________ [82]Table of Contents procurement and manufacturing quotas, sales restrictions, and other obligations |
| Facilities must be equipped to meet DEA security requirements |
| We currently hold a DEA registration to conduct research at both of our Hauppauge, NY and Bothell, Washington facilities relating to drug formulations containing DEA controlled substances |
| However, there can be no assurance that we will be able to maintain our DEA registration or that we will be able to obtain additional registrations required to continue to research or commercially distribute our product candidates |
| Our patent applications may be inadequate in terms of priority, scope or commercial value |
| We apply for patents covering our discoveries and technologies as we deem appropriate |
| However, we may fail to apply for patents on important discoveries or technologies in a timely fashion or at all |
| Also, our pending patent applications may not result in the issuance of any patents |
| These applications may not be sufficient to meet the statutory requirements for patentability, and therefore we may be unable to obtain enforceable patents covering the related discoveries or technologies we may want to commercialize |
| In addition, because patent applications are maintained in secrecy for approximately 18 months after filing, other parties may have filed patent applications relating to inventions before our applications covering the same or similar inventions |
| In addition, foreign patent applications are often published initially in local languages, and until an English language translation is available it can be impossible to determine the significance of a third party invention |
| Any patent applications filed by third parties may prevail over our patent applications or may result in patents that issue alongside patents issued to us, leading to uncertainty over the scope of the patents or the freedom to practice the claimed inventions |
| Although we have a number of issued patents, the discoveries or technologies covered by these patents may not have any therapeutic or commercial value |
| Also, issued patents may not provide commercially meaningful protection against competitors |
| Other parties may be able to design around our issued patents or independently develop products having effects similar or identical to our patented product candidates |
| In addition, the scope of our patents is subject to considerable uncertainty and competitors or other parties may obtain similar patents of uncertain scope |
| Our ability to commercialize our products after FDA approval is subject to exclusivity periods provided by law |
| Under US law, the FDA awards 180 days of market exclusivity to the first generic manufacturer who challenges the patent of a branded product |
| However, amendments to the Hatch-Waxman Act will affect the future availability of this market exclusivity in many cases |
| These amendments now require generic applicants to launch their products within certain time frames or risk losing the marketing exclusivity that they had gained through being a first-to-file applicant |
| Apotex has filed a generic application for its intranasal salmon-calcitonin product with a filing date that has priority over our ANDA for our generic calcitonin-salmon intranasal spray |
| The amendments to the Hatch-Waxman Act do not apply to the Apotex intranasal salmon-calcitonin product, which preceded the adoption of such amendments |
| Consequently, the Apotex filing prevents us from marketing our product until 180 days after Apotex commences marketing its product |
| In November 2002, Novartis brought a patent infringement action against Apotex claiming that Apotex’s intranasal salmon-calcitonin product infringes on Novartis’s patents, seeking damages and requesting injunctive relief |
| That action is still pending |
| We are unable to predict what, if any, effect the Novartis action will have on Apotex’s ability or plans to commence marketing its product, nor can we determine when, if at all, Apotex will commence marketing its product |
| 29 _________________________________________________________________ [83]Table of Contents Our operating results are subject to significant fluctuations and uncertainties, and our failure to meet expectations of public market analysts or investors regarding operating results may cause our stock price to decline |
| Our operating results are subject to significant fluctuations and uncertainties due to a number of factors including, among others: • timing and achievement of licensing transactions, including milestones and other performance factors associated with these contracts; • time and costs involved in patent prosecution and development of our proprietary position; • continued scientific progress and level of expenditures in our research and development programs; • cost of manufacturing scale-up and production batches, including vendor provided activities and costs; • time and costs involved in obtaining regulatory approvals; • changes in general economic conditions and drug delivery technologies; • expiration of existing patents and related revenues; and • new products and product enhancements that we or our competitors introduce |
| As a result of these factors and other uncertainties, our operating results have fluctuated significantly in recent years, resulting in net losses of dlra2dtta1 million in 2003, dlra28dtta6 in 2004 and dlra32dtta2 million in 2005 |
| Our revenues and operating results, particularly those reported on a quarterly basis, will continue to fluctuate significantly |
| This fluctuation makes it difficult to forecast our operating results |
| Therefore, we believe that quarterly comparisons of our operating results may not be meaningful, and you should not rely on them as an indication of our future performance |
| In addition, our operating results in a future quarter or quarters may fall below the expectations of public market analysts or investors |
| If this were to occur, the price of our stock could decline |
| If we are unable to adequately protect our proprietary technology from legal challenges, infringement or alternative technologies, this inability will hurt our competitive position and negatively impact our operating results |
| We specialize in the intranasal delivery of pharmaceutical products and rely on the issuance of patents, both in the United States and internationally, for protection against competitive drug delivery technologies |
| Although we believe that we exercise the necessary due diligence in our patent filings, our proprietary position is not established until the appropriate regulatory authorities actually issue a patent, which may take over three years from initial filing or may never occur |
| Moreover, even the established patent positions of pharmaceutical companies are generally uncertain and involve complex legal and factual issues |
| Although we believe our issued patents are valid, third parties may infringe our patents or may initiate proceedings challenging the validity or enforceability of our patents |
| The issuance of a patent is not conclusive as to its claim scope, validity or enforceability |
| Challenges raised in patent infringement litigation we initiate or in proceedings initiated by third parties may result in determinations that our patents have not been infringed or that they are invalid, unenforceable or otherwise subject to limitations |
| In the event of any such determinations, third parties may be able to use the discoveries or technologies claimed in our patents without paying licensing fees or royalties to us, which could significantly diminish the value of these discoveries or technologies |
| As a result of such determinations, we may be enjoined from pursuing research, development or commercialization of potential products or may be required to obtain licenses, if available, to the third party patents or to develop or obtain alternative technology |
| Responding to challenges initiated by third parties may require 30 _________________________________________________________________ [84]Table of Contents significant expenditures and divert the attention of our management and key personnel from other business concerns |
| Furthermore, it is possible others will infringe or otherwise circumvent our issued patents and that we will be unable to fund the cost of litigation against them or that we would elect not to pursue litigation |
| In addition, enforcing our patents against third parties may require significant expenditures regardless of the outcome of such efforts |
| We also cannot assure you that others have not filed patent applications for technology covered by our pending applications or that we were the first to invent the technology |
| There may also exist third party patents or patent applications relevant to our potential products that may block or compete with the technologies covered by our patent applications and third parties may independently develop IP similar to our patented IP, which could result in, among other things, interference proceedings in the United States Patent and Trademark Office to determine priority of invention |
| In addition, we may not be able to protect our established and pending patent positions from competitive drug delivery technologies, which may provide more effective therapeutic benefit to patients and which may therefore make our products, technology and proprietary position obsolete |
| If we are unable to adequately protect our proprietary technology from legal challenges, infringement or alternative technologies, we will not be able to compete effectively in the pharmaceutical delivery business |
| Because intellectual property rights are of limited duration, expiration of intellectual property rights and licenses will negatively impact our operating results |
| Intellectual property rights, such as patents and license agreements based on those patents, generally are of limited duration |
| Our operating results depend on our patents and IP licenses |
| Therefore, the expiration or other loss of rights associated with IP and IP licenses can negatively impact our business |
| Our product development efforts may not result in commercial products |
| Our future results of operations depend, to a significant degree, upon our and our collaboration partners’ ability to successfully commercialize additional pharmaceutical products |
| The development and commercialization process, particularly with respect to innovative products, is both time consuming and costly and involves a high degree of business risk |
| Successful product development in the pharmaceutical industry is highly uncertain, and very few research and development projects result in a commercial product |
| Product candidates that appear promising in the early phases of development, such as in early human clinical trials, may fail to reach the market for a number of reasons, such as: • a product candidate may not perform as expected in later or broader trials in humans and limit marketability of such product candidate; • necessary regulatory approvals may not be obtained in a timely manner, if at all; • a product candidate may not be able to be successfully and profitably produced and marketed; • third parties may have proprietary rights to a product candidate, and do not allow sale on reasonable terms; • a product candidate may not be financially successful because of existing therapeutics that offer equivalent or better treatments; or • suppliers of product pumps or actuators required to atomize our formulations may increase their price or cease to manufacture them without prior notice |
| To date, except for our Nascobal nasal gel and Nascobal nasal spray (the new drug applications (each, an “NDA”) for which have been transferred to QOL), none of our other product candidates utilizing our current intranasal drug delivery technology have been approved by the FDA Accordingly, there can be no assurance that any of our product candidates currently in development will ever be successfully commercialized, and delays in any part of the process or our inability to obtain regulatory 31 _________________________________________________________________ [85]Table of Contents approval could adversely affect our operating results by restricting introduction of new products by us or our collaboration partners |
| We have limited experience in marketing or selling our products, and we may need to rely on marketing partners or contract sales companies |
| Even if we are able to develop our products and obtain necessary regulatory approvals, we have limited experience or capabilities in marketing or commercializing our products |
| We currently have a limited sales, marketing and distribution infrastructure |
| Accordingly, we are dependent on our ability to build this capability ourselves or find collaborative marketing partners or contract sales companies for commercial sale of our internally-developed products |
| Even if we find a potential marketing partner, we may not be able to negotiate a licensing contract on favorable terms to justify our investment or achieve adequate revenues |
| Coverage and reimbursement status of newly approved drugs is uncertain and the failure to obtain adequate reimbursement coverage could limit our ability to generate revenue |
| Our products may prove to be unsuccessful if various parties, including government health administration authorities, private healthcare insurers and other healthcare payers, such as health maintenance organizations and self-insured employee plans that determine reimbursement to the consumer, do not accept our products for reimbursement |
| Sales of therapeutic and other pharmaceutical products depend in significant part on the availability of reimbursement to the consumer from these third party payers |
| Third party payers are increasingly challenging the prices charged for medical products and services |
| We cannot assure you that reimbursement will be available at all or at levels sufficient to allow our marketing partners to achieve profitable price levels for our products |
| If we fail to achieve adequate reimbursement levels, patients may not purchase our products and sales of these products will be absent or reduced |
| We may be required to defend lawsuits or pay damages for product liability claims |
| Our business inherently exposes us to potential product liability claims |
| We face substantial product liability exposure in human clinical trials and for products that we sell, or manufacture for others to sell, after regulatory approval |
| The risk exists even with respect to those drugs that are approved by regulatory agencies for commercial distribution and sale and manufactured in facilities licensed and regulated by regulatory agencies |
| Any product liability claims, regardless of their merits, could be costly, divert management’s attention and adversely affect our reputation and the demand for our products |
| We currently have product liability insurance coverage in the amount of dlra10 million per occurrence and a dlra20 million aggregate limitation, subject to a deductible of dlra10cmam000 per occurrence |
| From time to time, the pharmaceutical industry has experienced difficulty in obtaining product liability insurance coverage for certain products or coverage in the desired amounts or with the desired deductibles |
| We cannot assure you that we will be able to obtain the levels or types of insurance we would otherwise have obtained prior to these market changes or that the insurance coverage we do obtain will not contain large deductibles or fail to cover certain liabilities or that it will otherwise cover all potential losses |
| We may be unable to compete successfully against our current and future competitors |
| Competition in the drug industry is intense |
| Although we are not aware of any other companies that have the scope of proprietary technologies and processes that we have developed, there are a number of competitors who possess capabilities relevant to the drug delivery field |
| In particular, we face substantial competition from companies pursuing the commercialization of products using intranasal drug delivery technology such as Archimedes, Intranasal Technologies, Inc, Aegis Therapeutics, Bentley Pharmaceuticals, Inc |
| and IDDS Established pharmaceutical companies such as AstraZeneca and GlaxoSmithKline plc also have in-house intranasal drug delivery research and development programs that have successfully developed and are marketing products using intranasal drug delivery technology |
| We also 32 _________________________________________________________________ [86]Table of Contents face indirect competition from other companies with expertise in alternate drug delivery technologies such as oral, injectable, patch-based and pulmonary administration |
| These competitors include Alza, Alkermes, Nektar, Skye Pharma, Unigene, Neose, Generex Biotechnology Corporation and Emisphere Technologies (Emisphere) |
| We also face competition in the area of siRNA therapeutics from companies such as Alnylam Pharmaceuticals, Inc |
| Universities and public and private research institutions are also potential competitors |
| While these organizations primarily have educational objectives, they may develop proprietary technologies related to the drug delivery field or secure protection that we may need for development of our technologies and products |
| We may attempt to license these proprietary technologies, but these licenses may not be available to us on acceptable terms, if at all |
| Many of our competitors have substantially greater capital resources, research and development resources and experience, manufacturing capabilities, regulatory expertise, sales and marketing resources, and established collaborating relationships with pharmaceutical companies |
| Our competitors, either alone or with their collaboration partners, may succeed in developing drug delivery technologies that are similar or preferable in effectiveness, safety, cost and ease of commercialization, and our competitors may obtain IP protection or commercialize such products sooner than we do |
| Developments by others may render our product candidates or our technologies obsolete or, if developed earlier than our products, may achieve market acceptance which could negatively impact the opportunities for our products regardless of the merits of our technology |
| If we have a problem with our manufacturing facilities, we may not be able to market our products or conduct clinical trials |
| A substantial portion of our products for both clinical and commercial use is, or will be manufactured at our facilities in Hauppauge, New York, and in Bothell, Washington |
| Our manufacturing capacity of the New York facility is approximately 6 million product units per year, and our manufacturing capacity of the Washington facility will be approximately 54 million product units per year |
| If we have a problem at either of our manufacturing facilities, it could cause a delay in clinical trials or the supply of product to market |
| Any significant delay or failure to manufacture could jeopardize our performance contracts with collaboration partners, resulting in material penalties to us and jeopardizing the commercial viability of our products |
| Our facilities are subject to risks of natural disasters including earthquakes and floods |
| Although we have insurance, there can be no assurance that any business disruption caused by a natural disaster would be fully reimbursed or that it would not delay our product development processes |
| Our current facilities are leased and there can be no assurance that we will be able to negotiate future lease extensions at reasonable rates |
| We use hazardous chemicals and radioactive and biological materials in our business |
| Any disputes relating to improper use, handling, storage or disposal of these materials could be time-consuming and costly |
| Our research and development operations involve the use of hazardous, radioactive and biological, potentially infectious, materials |
| We are subject to the risk of accidental contamination or discharge or any resultant injury from these materials |
| Federal, state and local laws and regulations govern the use, manufacture, storage, handling and disposal of these materials |
| We could be subject to damages, fines and penalties in the event of an improper or unauthorized release of, or exposure of individuals to, these hazardous materials, and our liability could exceed our total assets |
| Compliance with environmental laws and regulations may be expensive, and current or future environmental regulations may impair our business |
| 33 _________________________________________________________________ [87]Table of Contents Reforms in the healthcare industry and the uncertainty associated with pharmaceutical pricing, reimbursement and related matters could adversely affect the marketing, pricing and demand for our products |
| Increasing expenditures for healthcare have been the subject of considerable public attention in the United States |
| Both private and government entities are seeking ways to reduce or contain healthcare costs |
| Numerous proposals that would effect changes in the United States healthcare system have been introduced or proposed in Congress and in some state legislatures, including reductions in the cost of prescription products and changes in the levels at which consumers and healthcare providers are reimbursed for purchases of pharmaceutical products |
| For example, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 and the proposed rules thereunder impose new requirements for the distribution and pricing of prescription drugs in 2004, which could reduce reimbursement of prescription drugs for healthcare providers and insurers |
| Although we cannot predict the full effect on our business of the implementation of this legislation, we believe that legislation that reduces reimbursement for our products could adversely impact how much or under what circumstances healthcare providers will prescribe or administer our products |
| This could materially and adversely impact our business by reducing our ability to generate revenue, raise capital, obtain additional collaborators and market our products |
| In addition, we believe the increasing emphasis on managed care in the United States has and will continue to put pressure on the price and usage of our products, which may adversely impact product sales |
| If we lose our key personnel, or if we are unable to attract and retain additional personnel, then we may be unable to successfully develop our business |
| If we are unable to retain one or more of our corporate officers, Dr |
| Paul H Johnson, Senior Vice President, Research and Development and Chief Scientific Officer, Philip C Ranker, Chief Financial Officer and Corporate Secretary, David E Wormuth, Senior Vice President, Operations, Timothy M Duffy, Executive Vice President, Marketing and Business Development, or any of our other key managers or key technical personnel, our business could be seriously harmed |
| Except for the employment agreements with Dr |
| Quay and Mr |
| Ranker, we generally do not execute employment agreements with members of our management team |
| Whether or not a member of management has executed an employment agreement, there can be no assurance that we will be able to retain our key managers or key technical personnel or replace any of them if we lose their services for any reason |
| Although we make a significant effort and allocate substantial resources to recruit candidates to our Washington state and New York state offices, competition for competent managers and technical personnel is intense |
| Failure to retain our key personnel may compromise our ability to negotiate and enter into additional collaborative arrangements, delay our ongoing discovery research efforts, delay pre-clinical or clinical testing of our product candidates, delay the regulatory approval process or prevent us from successfully commercializing our product candidates |
| In addition, if we have to replace any of these individuals, we may not be able to replace knowledge that they have about our operations |
| We may encounter difficulties managing our growth, which could adversely affect our business |
| We increased the number of our full-time employees from 83 on December 31, 2003 to 140 on January 31, 2006, and we expect to continue to grow to meet our strategic objectives |
| If our growth continues, it may place a strain on us, our management and our resources |
| Our ability to effectively manage our operations, growth and various projects requires us to continue to improve our operational, financial and management controls, reporting systems and procedures and to attract and retain sufficient numbers of talented employees |
| We may not be able to successfully implement these tasks on a larger scale and, accordingly, we may not achieve our research, development and commercialization goals |
| If we fail to improve our operational, financial and management information systems, or fail to effectively monitor or manage our new and future employees or our growth, our business could suffer significantly |
| In 34 _________________________________________________________________ [88]Table of Contents addition, no assurance can be made that we will be able to secure adequate facilities to house our staff, conduct our research or achieve our business objectives |
| We cannot assure you that our stock price will not decline |
| The market price of our common stock could be subject to significant fluctuations |
| Among the factors that could affect our stock price are: • negative results from our clinical or pre-clinical trials or adverse FDA decisions related to our product candidates or third party products that are in the same drug class as our products; • changes in revenue estimates or publication of research reports by analysts or the decision of analysts to drop coverage of us; • failure to meet analysts’ revenue estimates; • speculation in the press or investment community; • strategic actions by us or our competitors, such as acquisitions or restructurings; • actions by institutional stockholders and other significant stockholders; • low average daily trading volumes due to relatively small number of shares outstanding; • general market conditions; and • domestic and international economic factors unrelated to our performance |
| Additionally, numerous factors relating to our business may cause fluctuations or declines in our stock price |
| The stock markets in general and the markets for pharmaceutical stocks in particular, have experienced extreme volatility that has often been unrelated to the operating performance of particular companies |
| This may in part be related to the increasing influence of hedge funds, who can use stock shorting and other techniques that increase volatility |
| These broad market fluctuations may adversely affect the trading price of our common stock |
| A significant number of shares of our common stock are subject to options and warrants, and we expect to sell additional shares of our common stock in the future |
| Sales of these shares will dilute the interests of other security holders and may depress the price of our common stock |
| As of December 31, 2005, there were 20cmam750cmam477 shares of common stock outstanding |
| In addition, we may issue additional common stock and warrants from time to time to finance our operations |
| For example, we completed public offerings of 1cmam725cmam000, 4cmam250cmam000 and 1cmam136cmam364 (and 511cmam364 warrants) shares of our common stock in August 2005, December 2004 and June 2004, respectively, to raise capital for general corporate purposes |
| We may also issue additional shares to fund potential acquisitions or in connection with additional stock options or restricted stock granted to our employees, officers, directors and consultants under our stock option plans |
| The issuance, perception that issuance may occur, or exercise of warrants or options will have a dilutive impact on other stockholders and could have a material negative effect on the market price of our common stock |
| We have never paid cash or stock dividends on our common stock and we do not anticipate paying dividends in the foreseeable future |
| We have paid no cash or stock dividends on any of our classes of common stock to date, and we currently intend to retain our future earnings, if any, to fund the development and growth of our business |
| 35 _________________________________________________________________ [89]Table of Contents The terms of our current borrowing facility prohibit the payment of dividends without bank approval |
| In addition, the terms of any future debt or credit facility may preclude us from paying any dividends |
| As a result, capital appreciation, if any, of our common stock may be the sole source of potential gain for the foreseeable future |
| The anti-takeover provisions of our stockholder rights plan may entrench management, may delay or prevent beneficial takeover bids by third parties and may prevent or frustrate any stockholder attempt to replace or remove the current management even if the stockholders consider it beneficial to do so |
| We have a stockholder rights plan designed to protect our stockholders from coercive or unfair takeover tactics |
| Each preferred stock purchase right entitles the holder to purchase from us 1/1000 of a share of Series A Junior Participating Preferred Stock for dlra50 |
| In the event any acquiring entity or group accumulates or initiates a tender offer to purchase 15prca or more of our common stock, then each holder of a preferred stock purchase right, other than the acquiring entity and its affiliates, will have the right to receive, upon exercise of the preferred stock purchase right, shares of our common stock or shares in the acquiring entity having a value equal to two times the exercise price of the preferred stock purchase right |
| The intent of the stockholder rights plan is to protect our stockholders’ interests by encouraging anyone seeking control of our company to negotiate with our board of directors (the “Board”) |
| However, our stockholder rights plan could make it more difficult for a third party to acquire us without the consent of the Board, even if doing so may be beneficial to our stockholders |
| This plan may discourage, delay or prevent a tender offer or takeover attempt, including offers or attempts that could result in a premium over the market price of our common stock |
| This plan could reduce the price that investors might be willing to pay for shares of our common stock in the future |
| Furthermore, the anti-takeover provisions of our stockholder rights plan may entrench management and make it more difficult for stockholders to replace management even if the stockholders consider it beneficial to do so |
| An interruption in the supply of our raw and bulk materials needed to make our products could cause our product development and commercialization to be slowed or stopped |
| We currently obtain supplies of critical raw and bulk materials used in our research and development and manufacturing efforts from several suppliers |
| However, we do not have long-term contracts with any of these suppliers |
| While our existing arrangements supply sufficient quantities of raw and bulk materials needed to accomplish the clinical development of our product candidates, there can be no assurance that we would have the capability to manufacture sufficient quantities of our product candidates to meet our needs if our suppliers are unable or unwilling to supply such materials |
| Any delay or disruption in the availability of raw or bulk materials could slow or stop product development and commercialization of the relevant product |
| Our dependence upon third parties for the manufacture of our bottles, pumps, and cap components of our intranasal products and the related supply chain may adversely affect our cost of goods, our ability to develop and commercialize products on a timely and competitive basis, and the production volume of our intranasal products |
| Failure of the Company’s internal control over financial reporting could harm its business and financial results |
| Our management is responsible for establishing and maintaining adequate internal control over financial reporting |
| Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of financial reporting for external purposes in accordance with accounting principles generally accepted in the United States of America |
| Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of the financial statements; providing reasonable assurance that receipts and expenditures of our assets are made in accordance with management authorization; and providing reasonable assurance that unauthorized 36 _________________________________________________________________ [90]Table of Contents acquisition, use or disposition of our assets that could have a material effect on the financial statements would be prevented or detected on a timely basis |
| Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected |
| Our rapid growth and entry into new products and markets will place significant additional pressure on our system of internal control over financial reporting |
| Any failure to maintain an effective system of internal control over financial reporting could limit our ability to report our financial results accurately and timely or to detect and prevent fraud |