UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2017
OR
| |
| For the quarterly period ended September 30, 2021 |
| |
OR | |
| |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| |
| For the transition period from to |
For the transition period from to
Commission file number: 001-35668
INTERCEPT PHARMACEUTICALS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware | 22-3868459 | |
(State or Other Jurisdiction of
| | (I.R.S. Employer
|
| ||
(646) 10 Hudson Yards, 37th Floor
New York, NY10001
(Address of Principal Executive Offices and Zip Code)
(646) 747-1000
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, par value $0.001 per share | ICPT | Nasdaq Global Select Market |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x⌧ No ¨◻
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x⌧ No ¨◻
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company”company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer⌧ | Accelerated filer | |||||
Non-accelerated filer◻ | Smaller reporting company☐ | |||||
|
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨☐ No x⌧
AsThe number of shares of the registrant’s common stock outstanding as of September 30, 2017, there were 25,102,079 shares2021 was 29,546,974.
Table of common stock, $0.001 par value per share, outstanding.
Contents
Intercept Pharmaceuticals, Inc.
INDEX
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| Notes to Condensed Consolidated Financial Statements (Unaudited) | | 14 | |||
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| Management’s Discussion and Analysis of Financial Condition and Results of Operations | | 35 | |||
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| Quantitative and Qualitative | | 44 | |||
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Unless the context otherwise indicates,requires, references in this Quarterly Report on Form 10-Q to “we,” “our,” “us” and “the Company”the “Company” refer, collectively, to Intercept Pharmaceuticals, Inc., a Delaware corporation, and its consolidated subsidiaries.
2
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements, that involve substantial risksincluding, but not limited to, statements regarding the progress, timing and uncertainties. All statements other than statementsresults of historical facts containedour clinical trials, including our clinical trials for the treatment of nonalcoholic steatohepatitis (“NASH”), the safety and efficacy of our approved product, Ocaliva (obeticholic acid or “OCA”) for primary biliary cholangitis (“PBC”), and our product candidates, including OCA for liver fibrosis due to NASH, the timing and acceptance of our regulatory filings and the potential approval of OCA for liver fibrosis due to NASH, the review of our New Drug Application for OCA for the treatment of liver fibrosis due to NASH by the U.S. Food and Drug Administration (the “FDA”), our intent to work with the FDA to address the issues raised in this Quarterly Report on Form 10-Q, including statements regardinga complete response letter (“CRL”), the potential commercial success of OCA, as well as our strategy, future operations, future financial position, future revenue, projected costs, financial guidance, prospects, plans objectives of management and expected market growth, are forward-looking statements. objectives.
These statements involve knownconstitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied bySection 21E of the forward-looking statements.
Securities Exchange Act of 1934, as amended. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “target,” “potential,” “will,” “would,” “could,” “should,” “continue,“possible,” “continue” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates, and we undertake no obligation to update any forward-looking statement except as required by law. These forward-looking statements include, among other things, statements about:are based on estimates and assumptions by our management that, although believed to be reasonable, are inherently uncertain and subject to a number of risks.
The following represent some, but not necessarily all, of the factors that could cause actual results to differ materially from historical results or those anticipated or predicted by our forward-looking statements:
| ● |
| ● |
| ● |
| ● | conditions that may be imposed by regulatory authorities on our marketing approvals for our products and product candidates, including OCA for liver fibrosis due to NASH, such as the need for clinical outcomes data (and not just results based on achievement of a surrogate endpoint), any risk mitigation programs such as a REMS, and any related restrictions, limitations and/or warnings contained in the label of any of our products or product candidates; |
| ● | any potential side effects associated with Ocaliva for PBC, OCA for liver fibrosis due to NASH or our other product candidates that could delay or prevent approval, require that an approved product be taken off the market, require the inclusion of safety warnings or precautions, or otherwise limit the sale of such product or product candidate, including in connection with our update to the Ocaliva prescribing information in May 2021 contraindicating Ocaliva for patients with PBC and decompensated cirrhosis, a prior decompensation event, or compensated cirrhosis with evidence of portal hypertension; |
| ● | the initiation, timing, cost, conduct, progress and results of our research and development activities, preclinical studies and clinical trials, including any issues, delays or failures in identifying patients, enrolling patients, treating patients, retaining patients, meeting specific endpoints in the jurisdictions in which we intend to seek approval or completing and timely reporting the results of our NASH or PBC clinical trials; |
| ● | the outcomes of interactions with regulators (e.g., the FDA and the European Medicines Agency ("EMA")) regarding our clinical trials; |
| ● | our ability to establish and maintain relationships with, and the performance of, third-party manufacturers, contract research organizations and other vendors upon whom we are substantially dependent for, among other things, the |
3
| ● | our |
| ● | our ability to obtain and maintain intellectual property protection for our products and product |
| ● |
| the size and growth of the markets for our products and product candidates and our ability to serve those markets; |
| ● | the |
| ● | the |
| ● |
| ● |
| ● |
| ● | our ability to prevent or defend against system failures or security or data breaches due to cyber-attacks, or cyber intrusions, including ransomware, phishing attacks and other malicious intrusions; |
| ● | our ability to comply with data protection laws; |
| ● | costs and outcomes relating to any disputes, governmental inquiries or investigations, regulatory proceedings, legal proceedings or litigation, including any securities, intellectual property, employment, product liability or other litigation; |
| ● | our collaborators’ election to pursue research, development and commercialization activities; |
| ● | our ability to |
| ● | our need for and ability to generate or obtain additional financing; |
| ● | our estimates regarding future expenses, revenues and capital requirements and the accuracy thereof; |
| ● | our use of cash, cash equivalents and short-term investments; |
| ● | our ability to |
| ● | our ability to manage the growth of our operations, infrastructure, personnel, systems and controls; |
| ● | our ability to obtain and maintain adequate insurance coverage; |
| ● | continuing threats from COVID-19, including additional waves of infections, and their impacts including quarantines and other government actions; delays relating to our regulatory applications; disruptions relating to our ongoing clinical trials or |
These forward-looking statements are only predictions and we may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, so you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our business, financial condition and operating results. We have included important factors in the cautionary statements included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 1, 2017, particularly in Item 1.A. Risk Factors, and in our subsequent periodic and current reports filed with the Securities and Exchange Commission, including those filed in this Quarterly Report on Form 10-Q. Those risk factors, together with any updates to those risk factors contained in our subsequent periodic and current reports filed with the Securities and Exchange Commission, could cause actual future results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.
You should read this Quarterly Report on Form 10-Q and the documents that we have filed as exhibits to the Quarterly Report on Form 10-Q with the understanding that our actual future results may be materially different from what we expect. We do not assume any obligation to update any forward-looking statements whether as a result of new information, future events or otherwise, except as required by applicable law.
| ● | the impact of general U.S. and foreign economic, industry, market, regulatory or political conditions, including the impact of Brexit; and |
| ● | the other risks and uncertainties identified under the captions “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Quarterly Report on Form 10-Q and in our other periodic filings filed with the U.S. Securities and Exchange Commission (the “SEC”), including our most recent Annual Report. |
4
NON-GAAP FINANCIAL MEASURES
This Quarterly Report on Form 10-Q presents projected adjusted operating expense, which is a financial measure not calculated in accordance with U.S. generally accepted accounting principles, or GAAP, and should be considered in addition to, but not as a substitute for, operating expense that we prepare and announce in accordance with GAAP. We exclude certain items from adjusted operating expense, such as stock-based compensation and other non-cash items, that management does not believe affect our basic operations and that do not meet the GAAP definitionTable of unusual or non-recurring items.For the nine months ended September 30, 2016, adjusted operating expense also excludes a one-time $45 million net expense for the settlement of a purported class action lawsuit. Other than the net class action lawsuit settlement amount, which is a one-time expense, we anticipate that stock-based compensation expense will represent the most significant non-cash item that is excluded in adjusted operating expenses as compared to operating expenses under GAAP. A reconciliation of projected non-GAAP adjusted operating expense to operating expense calculated in accordance with GAAP is not available on a forward-looking basis without unreasonable effort due to an inability to make accurate projections and estimates related to certain information needed to calculate, for example, future stock-based compensation expense. Management also uses adjusted operating expense to establish budgets and operational goals and to manage our company’s business. Other companies may define this measure in different ways. We believe this presentation provides investors and management with supplemental information relating to operating performance and trends that facilitate comparisons between periods and with respect to projected information.Contents
NOTE REGARDING TRADEMARKS
The Intercept Pharmaceuticals® name and logo and the Ocaliva® name and logo are either registered or unregistered trademarks or trade names of Intercept Pharmaceuticals, Inc.the Company in the United States and/or other countries. All other trademarks, trade names and service marks or other tradenames appearing in this Quarterly Report on Form 10-Q are the property of their respective owners. Solely for convenience, trademarks and trade names referred to in this Quarterly Report on Form 10-Q may appear without the ® and ™ symbols, but those references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or that the applicable owner will not assert its rights to these trademarks and trade names.
5
SUMMARY RISK FACTORS
Investing in our securities involves a high degree of risk. Investors should carefully consider the risks and uncertainties discussed under the caption “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2020 before deciding whether to invest in our securities. The following is a list of some of these risks:
Risks Related to Our Financial Position and Need for Additional Capital
| ● |
| ● | We have never been profitable. We expect to incur losses for the foreseeable future, and we may never achieve or sustain profitability. |
| ● | We will require substantial additional funding, which may not be available to us on acceptable terms, if at all. If adequate funds are not available to us, we may be required to delay, limit, reduce or cease our operations. |
| ● | Raising additional capital may cause dilution to our stockholders, restrict our operations or require us to relinquish rights to our technologies or product candidates. |
Risks Related to the Development and the Regulatory Review and
Approval of Our Products and Product Candidates
| ● | We cannot be certain whether Ocaliva will receive full approval for PBC in jurisdictions where it has previously received accelerated or conditional approval, or that Ocaliva will be approved for PBC in any jurisdictions beyond those in which it is currently approved. Furthermore, OCA may not be approved on an accelerated basis, or at all, for NASH or any other indication beyond PBC and we may not receive regulatory approval for any other product candidate. Without regulatory approval, we will not be able to market and commercialize our product candidates. |
| ● | We are developing product candidates for the treatment of rare diseases or diseases for which there are no or limited therapies, such as PBC and NASH, and for some of which there is little clinical experience, and our development approach involves new endpoints and methodologies. As a result, there is a heightened risk that we will not be able to gain agreement with regulatory authorities regarding an acceptable development plan, that the outcome of our clinical trials will not be favorable or that, even if favorable, regulatory authorities may not find the results of our clinical trials to be sufficient for marketing approval. |
| ● | Delays or difficulties in the commencement, enrollment and completion of our clinical trials and studies could increase our product development costs and delay, limit or prevent us from obtaining regulatory approval for OCA and our other product candidates. |
| ● | Continuing threats from COVID-19, including additional waves of infections, could materially and adversely affect our clinical trials. |
| ● | Failure can occur at any stage of clinical development. The results of earlier clinical trials are not necessarily predictive of future results and any product candidate we or our collaborators advance through clinical trials, including OCA, may not have favorable results in later clinical trials or receive or maintain regulatory approval. |
| ● | Our product candidates may have undesirable side effects which may delay or prevent marketing approval, or, if approval is received, require that our products be taken off the market or include new or additional safety warnings. Any such events may limit our existing and future product sales and materially and adversely affect our business, financial condition and results of operations. |
| ● | We may not be able to obtain or, if approved, maintain orphan drug exclusivity for our approved products or product candidates, which could cause our revenues to suffer. |
6
Risks Related to the Commercialization of Our Products
| ● | Sales of Ocaliva may be adversely affected by safety and labeling changes required by the FDA. |
| ● | We are subject to uncertainty relating to pricing and reimbursement. Failure to obtain or maintain adequate coverage, pricing and reimbursement for Ocaliva for PBC, OCA for liver fibrosis due to NASH, if approved, or our other future approved products, if any, could have a material adverse impact on our ability to commercialize such products. |
| ● | Legislative and regulatory healthcare reform may adversely affect our business. |
| ● | Ocaliva and our other future approved products, if any, may not achieve broad market acceptance among physicians, patients and healthcare payors, and revenues generated from their sales may be limited as a result. |
| ● | If we fail to develop OCA for additional indications such as NASH, our commercial opportunity will be limited. |
Risks Related to Our Business and Strategy
| ● | We depend on third-party contractors for a substantial portion of our operations and may not be able to control their work as effectively as if we performed these functions ourselves. |
| ● | We face rapid technological change and competition from other biotechnology and pharmaceutical companies. Our operating results will suffer if we fail to compete effectively. |
| ● | Our business and operations would suffer in the event of system failures or security or data breaches due to cyber-attacks, or cyber intrusions, including ransomware, phishing attacks and other malicious intrusions. |
| ● | We are subject to various data protection laws and our business and operations would suffer in the event of violations of these laws. |
Risks Related to Our Intellectual Property
| ● | It is difficult and costly to protect our proprietary rights, and we may not be able to ensure their protection. If our patent position does not adequately protect our products such as Ocaliva and product candidates such as OCA for liver fibrosis due to NASH, others may compete against us more directly, which could harm our business, possibly materially. |
| ● | If we do not obtain protection under the Hatch-Waxman Act in the United States (and similar legislation outside of the United States) extending the terms of our patents and/or providing data or other exclusivity for our products and product candidates, our business may be materially harmed. |
| ● | We may incur substantial costs as a result of litigation or other proceedings relating to patent and other intellectual property rights, and such litigation may divert the attention of our management and scientific personnel and adversely affect our development and commercialization efforts. |
Risks Related to Our Indebtedness
| ● | Servicing our debt will require significant amounts of cash, and we may not have sufficient cash flow from our business to effectively service our debt. |
| ● | We may incur substantially more debt or take other actions that would affect our ability to pay the principal of and interest on our debt. |
Risks Related to Ownership of Our Common Stock
| ● | We have previously been, and are currently, subject to securities class action litigation and may be subject to similar or other litigation in the future. Such matters can be expensive, time-consuming and have a material adverse effect on our business, results of operations and financial condition. |
| ● | Our stock price has been and may in the future be volatile, which could cause holders of our common stock to incur substantial losses. |
7
PART I
Item 1. FINANCIAL STATEMENTSFinancial Statements.
INTERCEPT PHARMACEUTICALS, INC.
Condensed Consolidated Balance Sheets
(In thousands, except share and per share data)
| | | | | | |
| | September 30, | | December 31, | ||
| | 2021 | | 2020 | ||
|
| (Unaudited) |
| (Audited) | ||
Assets |
| |
|
| |
|
Current assets: |
| |
|
| |
|
Cash and cash equivalents | | $ | 68,329 | | $ | 58,151 |
Restricted cash | | | 8,636 | | | 7,503 |
Investment debt securities, available-for-sale | |
| 351,801 | |
| 411,516 |
Accounts receivable, net of allowance for credit losses of $256 and $235, respectively | |
| 46,164 | |
| 41,549 |
Prepaid expenses and other current assets | |
| 21,405 | |
| 27,022 |
Total current assets | |
| 496,335 | |
| 545,741 |
Fixed assets, net | |
| 3,799 | |
| 6,326 |
Inventory | |
| 8,780 | |
| 9,027 |
Security deposits | |
| 6,646 | |
| 7,068 |
Other assets | |
| 7,514 | |
| 12,327 |
Total assets | | $ | 523,074 | | $ | 580,489 |
Liabilities and Stockholders’ Deficit | |
|
| |
|
|
Current liabilities: | |
| | |
|
|
Accounts payable, accrued expenses and other liabilities | | $ | 139,959 | | $ | 171,039 |
Short-term interest payable | |
| 3,894 | |
| 8,037 |
Total current liabilities | |
| 143,853 | |
| 179,076 |
Long-term liabilities: | |
| | |
|
|
Long-term debt | |
| 530,408 | |
| 560,582 |
Long-term other liabilities | |
| 4,843 | |
| 7,684 |
Total liabilities | | $ | 679,104 | | $ | 747,342 |
Commitments and contingencies (Note 17) | | | | | | |
Stockholders’ deficit: | |
|
| |
|
|
Common stock par value $0.001 per share; 90,000,000 shares authorized; 29,546,974 and 33,015,614 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively | |
| 30 | |
| 33 |
Additional paid-in capital | |
| 2,300,396 | |
| 2,233,937 |
Accumulated other comprehensive loss, net | |
| (2,964) | |
| (2,477) |
Accumulated deficit | |
| (2,453,492) | |
| (2,398,346) |
Total stockholders’ deficit | |
| (156,030) | |
| (166,853) |
Total liabilities and stockholders’ deficit | | $ | 523,074 | | $ | 580,489 |
| September 30, | December 31, | |||||||
| 2017 | 2016 | |||||||
| (Unaudited) | (Audited) | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 120,244 | $ | 43,675 | ||||
| Investment securities, available-for-sale | 372,506 | 645,710 | ||||||
| Accounts receivable, net | 14,487 | 9,126 | ||||||
| Prepaid expenses and other current assets | 14,278 | 9,354 | ||||||
| Total current assets | 521,515 | 707,865 | ||||||
| Fixed assets, net | 18,141 | 11,295 | ||||||
| Inventory, net | 3,897 | 2,279 | ||||||
| Security deposits | 16,873 | 17,814 | ||||||
| Total assets | $ | 560,426 | $ | 739,253 | ||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable, accrued expenses and other liabilities | $ | 82,070 | $ | 65,551 | ||||
| Short-term interest payable | 3,737 | 7,267 | ||||||
| Short-term portion of deferred revenue | 1,782 | 5,694 | ||||||
| Total current liabilities | 87,589 | 78,512 | ||||||
| Long-term liabilities: | ||||||||
| Long-term debt | 351,984 | 341,356 | ||||||
| Long-term other liabilities | 6,068 | - | ||||||
| Long-term portion of deferred revenue | 3,118 | 4,453 | ||||||
| Total liabilities | 448,759 | 424,321 | ||||||
| Stockholders’ equity: | ||||||||
| Preferred stock par value $0.001 per share; 5,000,000 shares authorized; none outstanding as of September 30, 2017 and December 31, 2016, respectively | - | - | ||||||
| Common stock par value $0.001 per share; 45,000,000 shares authorized; 25,102,079 and 24,819,918 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively | 25 | 25 | ||||||
| Additional paid-in capital | 1,470,545 | 1,426,168 | ||||||
| Accumulated other comprehensive loss, net | (632 | ) | (2,801 | ) | ||||
| Accumulated deficit | (1,358,271 | ) | (1,108,460 | ) | ||||
| Total stockholders’ equity | 111,667 | 314,932 | ||||||
| Total liabilities and stockholders’ equity | $ | 560,426 | $ | 739,253 | ||||
See accompanying notes to the condensed consolidated financial statements.
8
INTERCEPT PHARMACEUTICALS, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share amounts)data)
| | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | ||||||||
| | September 30, | | September 30, | ||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
| | | | | | | | | | | | |
Revenue: | | |
|
| | |
| |
|
| |
|
Product revenue, net | | $ | 92,827 | | $ | 79,521 | | $ | 271,064 | | $ | 229,422 |
Total revenue | |
| 92,827 | |
| 79,521 | |
| 271,064 | |
| 229,422 |
Operating expenses: | |
|
| |
|
| |
|
| |
|
|
Cost of sales | |
| 658 | |
| 1,826 | |
| 2,086 | |
| 4,555 |
Selling, general and administrative | |
| 53,339 | |
| 70,619 | |
| 170,265 | |
| 262,537 |
Research and development | |
| 45,048 | |
| 48,858 | |
| 133,606 | |
| 139,587 |
Restructuring | | | 2 | | | 13,381 | | | (86) | | | 13,381 |
Total operating expenses | |
| 99,047 | |
| 134,684 | |
| 305,871 | |
| 420,060 |
Operating loss | |
| (6,220) | |
| (55,163) | |
| (34,807) | |
| (190,638) |
Other income (expense): | |
|
| |
|
| |
| | |
|
|
Interest expense | |
| (14,095) | |
| (12,091) | |
| (39,103) | |
| (35,801) |
Gain on extinguishment of debt | | | 16,511 | | | 0 | | | 16,511 | | | 0 |
Other income, net | |
| 172 | |
| 785 | |
| 2,253 | |
| 3,706 |
Total other income (expense), net | |
| 2,588 | |
| (11,306) | |
| (20,339) | |
| (32,095) |
Net loss | | $ | (3,632) | | $ | (66,469) | | $ | (55,146) | | $ | (222,733) |
Net loss per common and potential common share: | |
|
| |
|
| |
|
| |
|
|
Basic and diluted | | $ | (0.11) | | $ | (2.01) | | $ | (1.69) | | $ | (6.76) |
Weighted average common and potential common shares outstanding: | |
|
| |
|
| |
|
| |
|
|
Basic and diluted | |
| 31,736 | |
| 32,989 | |
| 32,679 | |
| 32,957 |
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Revenue: | ||||||||||||||||
| Product revenue, net | $ | 40,889 | $ | 4,732 | $ | 91,933 | $ | 4,807 | ||||||||
| Licensing revenue | 445 | 445 | 1,336 | 6,336 | ||||||||||||
| Total revenue | 41,334 | 5,177 | 93,269 | 11,143 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Cost of sales | 172 | - | 548 | - | ||||||||||||
| Selling, general and administrative | 61,356 | 52,802 | 189,363 | 197,382 | ||||||||||||
| Research and development | 45,977 | 35,411 | 134,001 | 102,292 | ||||||||||||
| Total operating expenses | 107,505 | 88,213 | 323,912 | 299,674 | ||||||||||||
| Operating loss | (66,171 | ) | (83,036 | ) | (230,643 | ) | (288,531 | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Interest expense | (7,354 | ) | (7,065 | ) | (21,840 | ) | (7,065 | ) | ||||||||
| Other income, net | 924 | 1,286 | 3,388 | 2,807 | ||||||||||||
| (6,430 | ) | (5,779 | ) | (18,452 | ) | (4,258 | ) | |||||||||
| Net loss | $ | (72,601 | ) | $ | (88,815 | ) | $ | (249,095 | ) | $ | (292,789 | ) | ||||
| Net loss per common and potential common share: | ||||||||||||||||
| Basic and diluted | $ | (2.89 | ) | $ | (3.59 | ) | $ | (9.96 | ) | $ | (11.90 | ) | ||||
| Weighted average common and potential common shares outstanding: | ||||||||||||||||
| Basic and diluted | 25,104 | 24,738 | 25,021 | 24,614 | ||||||||||||
See accompanying notes to the condensed consolidated financial statements.
9
INTERCEPT PHARMACEUTICALS, INC.
Condensed Consolidated Statements of Comprehensive Loss
(Unaudited)
(In thousands)
| | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | ||||||||
| | September 30, | | September 30, | ||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
| | | | | | | | | | | | |
Net loss | | $ | (3,632) | | $ | (66,469) | | $ | (55,146) | | $ | (222,733) |
Other comprehensive (loss) income: | |
|
| |
|
| |
|
| |
|
|
Net changes related to available-for-sale investment debt securities: | | | | | | | | | | | | |
Unrealized (losses) gains on investment debt securities | |
| (171) | |
| (730) | |
| (538) | |
| 230 |
Reclassification adjustment for realized gains on investment debt securities included in other income, net | |
| 0 | |
| 0 | |
| 2 | |
| 53 |
Net unrealized (losses) gains on investment debt securities | | $ | (171) | | $ | (730) | | $ | (536) | | $ | 283 |
Foreign currency translation gains (losses) | |
| 72 | |
| 109 | |
| 49 | |
| (891) |
Other comprehensive (loss) | | $ | (99) | | $ | (621) | | $ | (487) | | $ | (608) |
Comprehensive loss | | $ | (3,731) | | $ | (67,090) | | $ | (55,633) | | $ | (223,341) |
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Net loss | $ | (72,601 | ) | $ | (88,815 | ) | $ | (249,095 | ) | $ | (292,789 | ) | ||||
| Other comprehensive loss: | ||||||||||||||||
| Unrealized gains (losses) on securities: | ||||||||||||||||
| Unrealized holding gains (losses) arising during the period | 409 | (1,073 | ) | 1,114 | 966 | |||||||||||
| Reclassification for recognized losses on marketable investment securities during the period | - | - | - | (52 | ) | |||||||||||
| Net unrealized gains (losses) on marketable investment securities | $ | 409 | $ | (1,073 | ) | $ | 1,114 | $ | 914 | |||||||
| Foreign currency translation adjustments | 488 | (691 | ) | 1,055 | (1,585 | ) | ||||||||||
| Comprehensive loss | $ | (71,704 | ) | $ | (90,579 | ) | $ | (246,926 | ) | $ | (293,460 | ) | ||||
See accompanying notes to the condensed consolidated financial statements.
10
INTERCEPT PHARMACEUTICALS, INC.
Condensed Consolidated Statements of Cash Flows
Changes in Stockholders’ (Deficit) Equity
(Unaudited)
(In thousands)
| | | | | | | | | | | | | | | | | |
| | | |||||||||||||||
| | | | | | | | | | Accumulated | | | | | | ||
| | | | | | | Additional | | Other | | | | Total | ||||
| | Common Stock | | Paid-in | | Comprehensive | | Accumulated | | Stockholders’ | |||||||
| | Shares |
| Amount |
| Capital |
| Loss, Net |
| Deficit |
| (Deficit) | |||||
Balance - June 30, 2021 | | 33,201 | | $ | 33 | | $ | 2,249,497 | | $ | (2,865) | | $ | (2,449,860) | | $ | (203,195) |
Stock-based compensation |
| 0 | |
| 0 | |
| 8,616 | |
| — | |
| 0 | |
| 8,616 |
Repurchase of common stock | | (4,522) | | | (4) | | | (75,821) | | | 0 | | | 0 | | | (75,825) |
Extinguishment of allocated costs related to exchange of convertible notes | | 0 | | | 0 | | | (37,213) | | | 0 | | | 0 | | | (37,213) |
Extinguishment of allocated costs related to repurchase of convertible notes | | | | | 0 | | | (1,933) | | | 0 | | | 0 | | | (1,933) |
Bifurcation of conversion option upon issuance of convertible notes, net of issuance costs | | 0 | | | 0 | | | 147,458 | | | 0 | | | 0 | | | 147,458 |
Issuance of common stock for services | | 770 | | | 1 | | | 9,999 | | | 0 | | | 0 | | | 10,000 |
Proceeds from capped call transactions | | 0 | | | 0 | | | 57 | | | 0 | | | 0 | | | 57 |
Issuance of common stock under equity plan | | 112 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 |
Employee withholding taxes related to stock-based awards | | (14) | | | 0 | | | (264) | | | 0 | | | 0 | | | (264) |
Other comprehensive loss |
| 0 | |
| 0 | |
| 0 | | | (99) | |
| 0 | |
| (99) |
Net loss |
| 0 | |
| 0 | |
| 0 | |
| 0 | |
| (3,632) | |
| (3,632) |
Balance - September 30, 2021 |
| 29,547 | | $ | 30 | | $ | 2,300,396 | | $ | (2,964) | | $ | (2,453,492) | | $ | (156,030) |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | Accumulated | | | | | | ||
| | | | | | | Additional | | Other | | | | Total | ||||
| | Common Stock | | Paid-in | | Comprehensive | | Accumulated | | Stockholders’ | |||||||
| | Shares |
| Amount |
| Capital |
| Loss, Net |
| Deficit |
| (Deficit) | |||||
Balance - December 31, 2020 | | 33,016 | | $ | 33 | | $ | 2,233,937 | | $ | (2,477) | | $ | (2,398,346) | | $ | (166,853) |
Stock-based compensation | | 0 | | | 0 | | | 25,483 | | | 0 | | | 0 | | | 25,483 |
Repurchase of common stock | | (4,522) | | | (4) | | | (75,821) | | | 0 | | | 0 | | | (75,825) |
Extinguishment of allocated costs related to exchange of convertible notes | | 0 | | | 0 | | | (37,213) | | | 0 | | | 0 | | | (37,213) |
Extinguishment of allocated costs related to repurchase of convertible notes | | 0 | | | 0 | | | (1,933) | | | 0 | | | 0 | | | (1,933) |
Bifurcation of conversion option upon issuance of convertible notes, net of issuance costs | | 0 | | | 0 | | | 147,458 | | | 0 | | | 0 | | | 147,458 |
Issuance of common stock for services | | 770 | | | 1 | | | 9,999 | | | 0 | | | 0 | | | 10,000 |
Proceeds from capped call transactions | | 0 | | | 0 | | | 57 | | | 0 | | | 0 | | | 57 |
Issuance of common stock under equity plan | | 353 | | | 0 | | | 18 | | | 0 | | | 0 | | | 18 |
Employee withholding taxes related to stock-based awards |
| (70) | | | 0 | | | (1,589) | | | 0 | | | 0 | | | (1,589) |
Other comprehensive loss |
| 0 | |
| 0 | |
| 0 | |
| (487) | |
| 0 | |
| (487) |
Net loss | | 0 | | | 0 | | | 0 | | | 0 | | | (55,146) | | | (55,146) |
Balance - September 30, 2021 | | 29,547 | | $ | 30 | | $ | 2,300,396 | | $ | (2,964) | | $ | (2,453,492) | | $ | (156,030) |
11
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | Accumulated | | | | | | ||
| | | | | | | Additional | | Other | | | | Total | ||||
| | Common Stock | | Paid-in | | Comprehensive | | Accumulated | | Stockholders’ | |||||||
| | Shares |
| Amount |
| Capital |
| Loss, Net |
| Deficit |
| (Deficit) | |||||
Balance - June 30, 2020 | | 32,981 | | $ | 33 | | $ | 2,202,026 | | $ | (1,125) | | $ | (2,279,730) | | $ | (78,796) |
Stock-based compensation |
| 0 | |
| 0 | |
| 15,825 | |
| 0 | |
| 0 | |
| 15,825 |
Net proceeds from exercise of stock options | | 14 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 |
Employee withholding taxes related to stock-based awards | | (3) | | | 0 | | | (226) | | | 0 | | | 0 | | | (226) |
Other comprehensive loss |
| 0 | |
| 0 | |
| 0 | | | (621) | |
| 0 | |
| (621) |
Net loss |
| 0 | |
| 0 | |
| 0 | |
| 0 | |
| (66,469) | |
| (66,469) |
Balance - September 30, 2020 |
| 32,992 | | $ | 33 | | $ | 2,217,625 | | $ | (1,746) | | $ | (2,346,199) | | $ | (130,287) |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | Accumulated | | | | | | ||
| | | | | | | Additional | | Other | | | | Total | ||||
| | Common Stock | | Paid-in | | Comprehensive | | Accumulated | | Stockholders’ | |||||||
| | Shares |
| Amount |
| Capital |
| Loss, Net |
| Deficit |
| Equity (Deficit) | |||||
Balance - December 31, 2019 | | 32,853 | | $ | 33 | | $ | 2,176,133 | | $ | (1,144) | | $ | (2,123,466) | | $ | 51,556 |
Stock-based compensation | | 0 | | | 0 | | | 44,381 | | | 0 | | | 0 | | | 44,381 |
Net proceeds from exercise of stock options | | 149 | | | 0 | | | (1,052) | | | 0 | | | 0 | | | (1,052) |
Employee withholding taxes related to stock-based awards |
| (10) | | | 0 | | | (1,837) | | | 0 | | | 0 | | | (1,837) |
Other comprehensive loss |
| 0 | |
| 0 | |
| 0 | |
| (602) | |
| 0 | |
| (602) |
Net loss | | 0 | | | 0 | | | 0 | | | 0 | | | (222,733) | | | (222,733) |
Balance - September 30, 2020 | | 32,992 | | $ | 33 | | $ | 2,217,625 | | $ | (1,746) | | $ | (2,346,199) | | $ | (130,287) |
| Nine Months Ended September 30, | ||||||||
| 2017 | 2016 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (249,095 | ) | $ | (292,789 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Stock-based compensation | 41,584 | 27,041 | ||||||
| Amortization of investment premium | 2,777 | 3,736 | ||||||
| Amortization of deferred financing costs | 1,052 | 326 | ||||||
| Depreciation | 3,256 | 2,187 | ||||||
| Accretion of debt discount | 9,576 | 3,001 | ||||||
| Realized gain on investments | - | 52 | ||||||
| Changes in operating assets: | ||||||||
| Prepaid expenses and other current assets | (4,924 | ) | (984 | ) | ||||
| Accounts receivable | (5,361 | ) | - | |||||
| Inventory | (1,618 | ) | - | |||||
| Security deposits | - | (1,803 | ) | |||||
| Changes in operating liabilities: | ||||||||
| Accounts payable, accrued expenses and other current liabilities | 16,519 | 1,699 | ||||||
| Long-term other liabilities | 6,068 | - | ||||||
| Interest payable | (3,530 | ) | 3,738 | |||||
| Deferred revenue | (5,247 | ) | 817 | |||||
| Net cash used in operating activities | (188,943 | ) | (252,979 | ) | ||||
| Cash flows from investing activities: | ||||||||
| Purchases of investment securities | (127,002 | ) | (443,323 | ) | ||||
| Refund of security deposits | 941 | - | ||||||
| Sales of investment securities | 398,543 | 361,019 | ||||||
| Purchases of equipment, leasehold improvements, and furniture and fixtures | (10,102 | ) | (4,005 | ) | ||||
| Net cash provided by (used in) investing activities | 262,380 | (86,309 | ) | |||||
| Cash flows from financing activities: | ||||||||
| Payments for capped call transactions and associated costs | - | (38,364 | ) | |||||
| Proceeds from issuance of Convertible Notes, net of issuance costs | - | 447,715 | ||||||
| Proceeds from exercise of options, net | 2,077 | 4,429 | ||||||
| Net cash provided by financing activities | 2,077 | 413,780 | ||||||
| Effect of exchange rate changes | 1,055 | (2,018 | ) | |||||
| Net increase in cash and cash equivalents | 76,569 | 72,474 | ||||||
| Cash and cash equivalents – beginning of period | 43,675 | 32,742 | ||||||
| Cash and cash equivalents – end of period | $ | 120,244 | $ | 105,216 | ||||
See accompanying notes to the condensed consolidated financial statements.
12
INTERCEPT PHARMACEUTICALS, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
| | | | | | |
| | Nine Months Ended September 30, | ||||
|
| 2021 |
| 2020 | ||
Cash flows from operating activities: |
| |
|
| |
|
Net loss | | $ | (55,146) | | $ | (222,733) |
Adjustments to reconcile net loss to net cash used in operating activities: | |
|
| |
|
|
Stock-based compensation | |
| 25,483 | |
| 44,381 |
Amortization of premium on investment debt securities | |
| 3,384 | |
| 2,617 |
Amortization of deferred financing costs | |
| 1,990 | |
| 1,883 |
Depreciation | |
| 2,557 | |
| 2,282 |
Non-cash operating lease cost | | | 4,345 | | | 4,645 |
Accretion of debt discount | |
| 21,885 | |
| 19,255 |
Gain on extinguishment of debt | | | (16,511) | | | — |
Provision for allowance of credit losses, net of write-offs | | | 21 | | | 224 |
Changes in operating assets: | |
| | |
|
|
Accounts receivable | |
| (5,370) | |
| (821) |
Prepaid expenses and other current assets | |
| 5,426 | |
| (1,705) |
Inventory | |
| 103 | |
| (110) |
Security deposits | | | 345 | | | (263) |
Changes in operating liabilities: | |
| | |
|
|
Accounts payable, accrued expenses and other current liabilities | |
| (26,631) | |
| 4,261 |
Operating lease liabilities | | | (5,352) | | | (5,380) |
Interest payable | | | (2,021) | | | (2,587) |
Net cash used in operating activities | |
| (45,492) | |
| (154,051) |
Cash flows from investing activities: | |
|
| |
|
|
Purchases of investment debt securities | |
| (278,438) | |
| (282,629) |
Sales and maturities of investment debt securities | |
| 334,233 | |
| 417,592 |
Purchases of equipment, leasehold improvements, and furniture and fixtures | |
| (397) | |
| (1,990) |
Net cash provided by investing activities | |
| 55,398 | |
| 132,973 |
Cash flows from financing activities: | |
|
| |
|
|
Payments for repurchase of common stock | | | (75,825) | | | — |
Proceeds from issuance of Notes | | | 117,551 | | | — |
Payments for repurchases of convertible senior notes | | | (38,129) | | | — |
Proceeds from terminations of capped call options | | | 57 | | | — |
Proceeds from exercise of options, net | |
| 18 | |
| 1,300 |
Payments of employee withholding taxes related to stock-based awards | | | (1,589) | | | (1,837) |
Net cash provided by (used in) financing activities | |
| 2,083 | |
| (537) |
Effect of exchange rate changes on cash, cash equivalents and restricted cash | |
| (678) | |
| (1,674) |
Net increase (decrease) in cash, cash equivalents and restricted cash | |
| 11,311 | |
| (23,289) |
Cash, cash equivalents and restricted cash at beginning of period | |
| 65,654 | |
| 74,780 |
Cash, cash equivalents and restricted cash at end of period | | $ | 76,965 | | $ | 51,491 |
Supplemental disclosure of non-cash transactions: | | | | | | |
Right-of-use asset obtained in exchange for new operating lease obligations | | $ | — | | $ | 1,230 |
| | | | | | |
Reconciliation of cash, cash equivalents and restricted cash included in the condensed consolidated balance sheets: | | | | | | |
Cash and cash equivalents | | $ | 68,329 | | $ | 45,311 |
Restricted cash | | | 8,636 | | | 6,180 |
Total cash, cash equivalents and restricted cash | | $ | 76,965 | | $ | 51,491 |
| | | | | | |
Supplemental non-cash disclosure: | | | | | | |
Exchange for existing 2023 and 2026 convertible notes | | $ | (421,137) | | | — |
Exchange for new 2026 secured convertible notes | | $ | 382,448 | | | — |
Issuance of common stock to financial advisor in connection with convertible notes exchange | | $ | 10,000 | | | — |
Recognition of conversion option upon issuance of 2026 secured convertible notes | | $ | 150,704 | | | — |
Extinguishment of conversion options upon exchange and repurchase of 2023 convertible notes and exchange of 2026 convertible notes | | $ | (39,146) | | | — |
See accompanying notes to the condensed consolidated financial statements.
13
INTERCEPT PHARMACEUTICALS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
| 1. Overview of Business |
Intercept Pharmaceuticals, Inc. (“Intercept” or the(the “Company”) is a biopharmaceutical company focused on the development and commercialization of novel therapeutics to treat progressive non-viral progressive liver diseases, including primary biliary cholangitis (“PBC”), and nonalcoholic steatohepatitis (“NASH”), primary sclerosing cholangitis (“PSC”. The Company currently has one marketed product, Ocaliva (obeticholic acid or “OCA”) and biliary atresia.. Founded in 2002 in New York, Intercept nowthe Company has operations in the United States, Europe and Canada.
2. Basis of Presentation |
The Company’s financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”).All intercompany accountsbalances and transactions have been eliminated.eliminated in consolidation. Certain information that is normally required by U.S. GAAP has been condensed or omitted in accordance with rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Operating results for the three and nine months ended September 30, 20172021 are not necessarily indicative of the results that may be expected for any future period or for the year ending December 31, 2017.2021. In the opinion of management, these unaudited condensed consolidated financial statements include all normal and recurring adjustments considered necessary for a fair presentation of these interim unaudited condensed consolidated financial statements.
These unaudited condensed consolidated financial statements should be read in conjunction with the Company'sCompany’s audited consolidated financial statements and the notes thereto for the year ended December 31, 2016,2020, included in the Company’s 2016 Annual Report on Form 10-K filed with the SEC.
Certain reclassifications have been made to prior period amounts in the Company’s unaudited condensed consolidated statements of operations to conform to the current period presentation. The Company reclassified certain medical affairs costs of $8.4 million and $20.3 million from research and development expense to selling, general and administrative expense on the unaudited condensed consolidated statements of operations during the three and nine months ended September 30, 2016.
Use of Estimates
The preparation of these unaudited consolidated condensed financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, expenses, revenues and related disclosures. Significant estimates include: clinical trial accruals, revenues and share-based compensation expense. The Company bases its estimates on historical experience and other market-specific or other relevant assumptions that it believes to be reasonable under the circumstances. Actual results may differ from those estimates or assumptions.
The Company’s significant accounting policies are described in Note 3 of Notes to Consolidated Financial Statements included in its Annual Report on Form 10-K for the year ended December 31, 2016.2020 filed with the SEC.
Use of Estimates
Revenue RecognitionThe preparation of these unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, the disclosure of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates.
Product Revenue, NetWe are not presently aware of any events or circumstances arising from the coronavirus (“COVID-19”) pandemic that would require us to update our estimates or judgments or revise the carrying value of our assets or liabilities.
Revenue is recognized when the four basic criteria3. Summary of revenue recognition are met: (1) persuasive evidence that an arrangement exists; (2) delivery has occurred or servicesSignificant Accounting Policies
There have been rendered; (3)no new or material changes to the fee is fixed or determinable; and (4) collectability is reasonably assured. Whensignificant accounting policies discussed in the revenue recognition criteria are not met, we defer the recognition of revenue by recording deferred revenueCompany’s Annual Report on the balance sheet until such time that all criteria are met.
The Company commenced its commercial launch of Ocaliva® (obeticholic acid or “OCA”)Form 10-K for the treatmentyear ended December 31, 2020 that are of PBC in the United States in June 2016. In December 2016, the European Commission granted conditional approval for the treatment of PBC and the Company commenced launch in January of 2017. In May 2017, Health Canada granted a conditional approval for the treatment of PBC and the Company commenced launch in July of 2017. The Company sells Ocaliva to a limited number of specialty pharmacies which dispense the product directly to patients. The specialty pharmacies are referred to as the Company’s customers.
The Company provides the right of return to its customers for unopened product for a limited time before and after its expiration date. Prior to July 2017, given the Company’s limited sales history for Ocaliva and the inherent uncertainties in estimating product returns, the Company determined that the shipments of Ocaliva made to its customers did not meet the criteria for revenue recognition at the time of shipment. Accordingly, the Company recognized revenue when the product was sold through by its customers, provided all other revenue recognition criteria were met. The Company invoiced its customers upon shipment of Ocaliva to them and recorded accounts receivable, with a corresponding liability for deferred revenue equalsignificance, or potential significance, to the gross invoice price. The Company then recognized revenue when Ocaliva was sold through as specialty pharmacies dispensed product directly to the patients (sell-through basis).Company.
The Company re-evaluated its revenue recognition policy in the third quarter of 2017, which included the accumulation and review of customer related transactions since the Company’s commercial launch in the second quarter of 2016. The Company now believes it has accumulated sufficient data to reasonably estimate product returns and, therefore, it will now effectively recognize revenue at the time of shipment to its customers (sell-in basis).
During the third quarter of 2017, the Company recorded an adjustment related to this change in estimate to recognize previously deferred revenue. The net effect was an increase in net sales of Ocaliva of $4.1 million for the three and nine months ended September 30, 2017. The Company also established a new reserve of $0.7 million during the third quarter of 2017 related to future returns from its customers under its various contracts.
The Company recognized net sales of Ocaliva of $40.9 million and $4.7 million for the three months ended September 30, 2017 and 2016, respectively, and $91.9 million and $4.8 million for the nine months ended September 30, 2017 and 2016, respectively.
The Company has written contracts with each of its customers and delivery occurs when the customer receives Ocaliva. The Company evaluates the creditworthiness of each of its customers to determine whether collection is reasonably assured. In order to conclude that the price is fixed and determinable, the Company must be able to (i) calculate its gross product revenues from the sales to its customers and (ii) reasonably estimate its net product revenues. The Company calculates gross product revenues based on the wholesale acquisition cost that the Company charges its customers for Ocaliva. The Company estimates its net product revenues by deducting from its gross product revenues (i) trade allowances, such as invoice discounts for prompt payment and customer fees, (ii) estimated government rebates and discounts related to Medicare, Medicaid and other government programs, and (iii) estimated costs of incentives offered to certain indirect customers including patients.
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In May 2014,December 2019, theFinancial Accounting Standards Board (“FASB”) issued ASU 2014-09, Revenue from Contracts with CustomersAccounting Standards Update (“ASU”) No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2014-09”). ASU 2014-09 supersedes the revenue recognition requirements of FASB ASC Topic 605, Revenue Recognition and most industry-specific guidance throughout the ASC, resulting in the creation of FASB ASC Topic 606, Revenue from Contracts with Customers. ASU 2014-09 requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. This ASU provides alternative methods of adoption. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers, Deferral of the Effective Date (“ASU 2015-14”). ASU 2015-14 defers the effective date of ASU 2014-09 by one year to December 15, 2017 for fiscal years, and interim periods within those years, beginning after that date and permits early adoption of the standard, but not before the original effective date for fiscal years beginning after December 15, 2016. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers, Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (“ASU 2016-08”) clarifying the implementation guidance on principal versus agent considerations. Specifically, an entity is required to determine whether the nature of a promise is to provide the specified good or service itself (that is, the entity is a principal) or to arrange for the good or service to be provided to the customer by the other party (that is, the entity is an agent). The determination influences the timing and amount of revenue recognition. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers, Identifying Performance Obligations and Licensing, clarifying the implementation guidance on identifying performance obligations and licensing. Specifically, the amendments reduce the cost and complexity of identifying promised goods or services and improves the guidance for determining whether promises are separately identifiable. The amendments also provide implementation guidance on determining whether an entity’s promise to grant a license provides a customer with either a right to use the entity’s intellectual property (which is satisfied at a point in time) or a right to access the entity’s intellectual property (which is satisfied over time). The effective date and transition requirements for ASU 2016-08 and ASU 2016-10 are the same as the effectivedate and transition requirements for ASU 2014-09. The Company is currently evaluating which transition approach it will utilize and the impact of adopting ASU 2014-09, ASU 2016-08 and ASU 2016-10 on its consolidated financial statements and related disclosures.The Company continues to execute on its implementation plan for ASC 606 and its assessment of the impact that adoption will have on the Company’s consolidated financial statements; specifically, as it relates to different revenue streams within a given contract and the impact adoption of ASC 606 could have on the Company’s financial statement disclosures. The Company will adopt Topic 606 in the first quarter of 2018 using the modified retrospective method which consists of applying and recognizing the cumulative effect of Topic 606 at the date of initial application and providing certain additional disclosures as defined per Topic 606. The Company is in the process of reviewing variable consideration, potential disclosures, and our method of adoption to complete our evaluation of the impact on our consolidated financial statements prior to the end of 2017. In addition, we continue to monitor additional changes, modifications, clarifications or interpretations undertaken by the FASB, which may impact our current conclusions.
On August 27, 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”2019-12”), which requires an entity to evaluate whether conditions or events, in the aggregate, raise substantial doubt about the entity’s ability to continue as a going concern for one year from the date the financial statements are issued or are available to be issued. The guidance became effective January 1, 2017. The Company adopted ASU No. 2014-15 on January 1, 2017, and its adoption did not have a material impact on the Company’s financial statements.
In January 2016, FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). ASU 2016-01 requires equity investments to be measured at fair value with changes in fair value recognized in net income; simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; requires separate presentation of financial assets and financial liabilities by measurement category and form of financial assets on the balance sheet or the accompanying notes to the financial statements and clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. ASU 2016-01 is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company is currently evaluating the impact that the adoption of ASU 2016-01 will have on its consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”) which supersedes Topic 840, Leases. ASU 2016-02 requires lessees to recognize a right-of-use asset and a lease liability on their balance sheets for all the leases with terms greater than twelve months. Based on certain criteria, leases will be classified as either financing or operating, with classification affecting the pattern of expense recognition in the income statement. For leases with a term of twelve months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within those years, with early adoption permitted. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients primarily focused on leases that commenced before the effective date of Topic 842, including continuing to account for leases that commence before the effective date in accordance with previous guidance, unless the lease is modified. The Company is evaluating the impact of the adoption of the standard on its consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”) which is intended to improve the accounting for share-based payment transactions as part of the FASB’s simplification initiative. The ASU changes certainsimplify various aspects of the accounting for share-based payment award transactions, including: (1)related to accounting for income taxes; (2) classification of excess tax benefits on the statement of cash flows; (3) forfeitures; (4) minimum statutory tax withholding requirements; and (5) classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax withholding purposes. Thetaxes. ASU is effective for fiscal years beginning after December 15, 2016, and interim periods within those years for public business entities. The Company adopted ASU 2016-09 during the first quarter of 2017. In connection with the adoption of this ASU, the Company elected to account for forfeitures as they occur and applied this change in accounting policy on a modified retrospective basis. As a result, the Company recorded a cumulative-effect adjustment to retained earnings which resulted in an increase to accumulated deficit of $0.7 million with an offsetting increase to additional paid-in capital (zero net total equity impact) as of the date of adoption, related to additional stock compensation expense that would have been recognized on unvested outstanding options unadjusted for estimated forfeitures. As a result of this guidance, the Company also recorded $58.7 million of additional deferred tax assets, which are fully offset by a valuation allowance. Other provisions of ASU 2016-09 had no impact on the Company’s consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting, which clarifies when to account for a change2019-12 removes certain exceptions to the terms or conditions of a share-based payment award as a modification. Under the newgeneral principles in Topic 740 and also clarifies and amends existing guidance modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. It is effective prospectively for the annual period ending December 31, 2018 and interim periods within that annual period. Early adoption is permitted. The Company is evaluating the impact of adoption of the standard on the consolidated financial statements and related disclosures, but does not expect it to have a significant impact.
In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception, (ASU 2017-11). Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accountingimprove consistent application. This guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests. The amendments in Part II of this update do not have an accounting effect. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.2020, with early adoption permitted. The Company is currently assessingadopted ASU 2019-12 on January 1, 2021 and its
14
adoption did not have any material impact on the potential impact of adopting ASU 2017-11 on itsCompany’s condensed consolidated financial statements and related disclosures, but does not expect itdisclosures.
Recent Accounting Pronouncements to have a significant impact.be Adopted
Sumitomo Dainippon Pharma Co, Ltd. (Sumitomo Dainippon)
In March 2011,August 2020, the Company entered intoFASB issued ASU No. 2020-06, “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an exclusive license agreement with Sumitomo DainipponEntity’s Own Equity” (“ASU 2020-06”), which simplifies accounting for convertible instruments by removing major separation models required under current U.S. GAAP. The ASU removes certain settlement conditions that are required for equity contracts to research, develop and commercialize OCA as a therapeuticqualify for the treatmentderivative scope exception and it also simplifies the diluted earnings per share calculation in certain areas. Either a modified retrospective method of PBC and NASH in Japan and China (excluding Taiwan). Under the termstransition or a fully retrospective method of the license agreement, the Company received an up-front payment from Sumitomo Dainippon of $15.0 million and may be eligible to receive additional milestone payments of up to an aggregate of approximately $30.0 million in development milestones based on the initiation or completion of clinical trials, $70.0 million in regulatory approval milestones and $200.0 million in sales milestones. The regulatory approval milestones include $15.0 million for receiving marketing approval of OCA for NASH in Japan, $10.0 million for receiving marketing approval of OCA for NASH in China, and $5.0 million for receiving marketing approval of OCA for PBC in the United States, which was achieved upon the FDA approval of Ocalivatransition is permissible for the treatmentadoption of PBC in May 2016. As of September 30, 2017, the Company had achieved $6.0 million of the development milestones under its collaboration agreementthis standard. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021, with Sumitomo Dainippon. The sales milestones are based on aggregate sales amounts of OCA in the Sumitomo Dainippon territory and include $5.0 million for achieving net sales of $50.0 million, $10.0 million for achieving net sales of $100.0 million, $20.0 million for achieving net sales of $200.0 million, $40.0 million for achieving net sales of $400.0 million and $120.0 million for achieving net sales of $1.2 billion.early adoption permitted. The Company has determined that each potential future development, regulatoryexpects the impact of this standard to be material on its consolidated financial statements and sales milestone is substantive. In May 2014, Sumitomo Dainippon exercised its option under the license agreement to add Korea as part of its licensed territoriesrelated disclosures.
4. Cash, Cash Equivalents and paid the Company a $1.0 million up-front fee. Sumitomo Dainippon has the option to add several other Asian countries to its territory to pursue OCA for additional indications. Sumitomo Dainippon will be responsible for the costs of developing and commercializing OCA in its territories. Sumitomo Dainippon is also required to make royalty payments ranging from the tens to the twenties in percent based on net sales of OCA products in the Sumitomo Dainippon territory.
The Company evaluated the license agreement with Sumitomo Dainippon and determined that it is a revenue arrangement with multiple deliverables, or performance obligations. The Company’s substantive performance obligations under this license include an exclusive license to its technology, technical and scientific support to the development plan and participation on a joint steering committee. The Company determined that these performance obligations represent a single unit of accounting, since, initially, the license does not have stand-alone value to Sumitomo Dainippon without the Company’s technical expertise and steering committee participation during the development of OCA. This development period is currently estimated as continuing through June 2020 and, as such, the up-front payment and payments made in respect of the Korea option are being recognized ratably over this period.During the three months ended September 30, 2017 and 2016, the Company recorded licensing revenue of approximately $0.4 millionand $0.4 million, respectively. During the nine months ended September 30, 2017 and 2016, the Company recorded licensing revenue ofapproximately $1.3 millionand $6.3 million, respectively.
Investment Debt Securities
The following table summarizes the Company’s cash, cash equivalents and investmentsinvestment debt securities as of September 30, 20172021 and December 31, 2016:2020:
| | | | | | | | | | | | | | | |
| | As of September 30, 2021 | |||||||||||||
| | | | | Allowance | | Gross | | Gross | | | | |||
| | | | | for Credit | | Unrealized | | Unrealized | | | | |||
|
| Amortized Cost | | Losses |
| Gains |
| Losses |
| Fair Value | |||||
| | (in thousands) | |||||||||||||
Cash and cash equivalents: |
| |
| | | |
| |
|
| |
|
| |
|
Cash and money market funds | | $ | 63,329 | | $ | — | | $ | — | | $ | — | | $ | 63,329 |
Commercial paper | | | 5,000 | | | — | | | — | | | — | | | 5,000 |
Total cash and cash equivalents | | | 68,329 | | | — | | | — | | | — | | | 68,329 |
Investment debt securities: | |
|
| |
|
| |
|
| |
|
| |
|
|
Commercial paper | |
| 72,558 | |
| 0 | |
| 1 | |
| (17) | |
| 72,542 |
Corporate debt securities | |
| 274,263 | |
| 0 | |
| 50 | |
| (108) | |
| 274,205 |
Municipal bonds | | | 5,057 | | | — | | | 0 | | | (3) | | | 5,054 |
Total investment debt securities | |
| 351,878 | |
| 0 | |
| 51 | |
| (128) | |
| 351,801 |
Total cash, cash equivalents and investment debt securities | | $ | 420,207 | | $ | 0 | | $ | 51 | | $ | (128) | | $ | 420,130 |
| | | | | | | | | | | | | | | | ||||||||||||||||
| | As of December 31, 2020 | |||||||||||||||||||||||||||||
| | | | | Allowance | | Gross | | Gross | | | | |||||||||||||||||||
| | | | | for Credit | | Unrealized | | Unrealized | | | | |||||||||||||||||||
|
| Amortized Cost | | Losses |
| Gains |
| Losses | | Fair Value | |||||||||||||||||||||
| As of September 30, 2017 | |||||||||||||||||||||||||||||||
| Gross | Gross | ||||||||||||||||||||||||||||||
| Unrealized | Unrealized | ||||||||||||||||||||||||||||||
| Amortized Cost | Gains | Losses | Fair Value | ||||||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||||
| | (in thousands) | | | | ||||||||||||||||||||||||||
| Cash and cash equivalents: |
| |
| | | |
| |
|
| |
| | |
| ||||||||||||||||
| Cash and money market funds | $ | 120,244 | $ | - | $ | - | $ | 120,244 | | $ | 58,151 | | $ | — | | $ | — | | $ | — | | $ | 58,151 | ||||||||
| Investment securities: | |||||||||||||||||||||||||||||||
Total cash and cash equivalents | | | 58,151 | | | — | | | — | | | — | | | 58,151 | ||||||||||||||||
Investment debt securities: | |
|
| |
|
| |
|
| |
|
| |
|
| ||||||||||||||||
| Commercial paper | 11,468 | - | (4 | ) | 11,464 | |
| 55,460 | |
| — | |
| 6 | |
| (9) | |
| 55,457 | |||||||||||
| Corporate debt securities | 342,252 | 1 | (433 | ) | 341,820 | |
| 355,597 | |
| — | |
| 529 | |
| (67) | |
| 356,059 | |||||||||||
| U.S. government and agency securities | 19,248 | - | (26 | ) | 19,222 | ||||||||||||||||||||||||||
| Total investments | 372,968 | 1 | (463 | ) | 372,506 | ||||||||||||||||||||||||||
| Total cash, cash equivalents and investments | $ | 493,212 | $ | 1 | $ | (463 | ) | $ | 492,750 | ||||||||||||||||||||||
Total investment debt securities | |
| 411,057 | |
| — | |
| 535 | |
| (76) | |
| 411,516 | ||||||||||||||||
Total cash, cash equivalents and investment debt securities | | $ | 469,208 | | $ | — | | $ | 535 | | $ | (76) | | $ | 469,667 | ||||||||||||||||
| As of December 31, 2016 | ||||||||||||||||
| Gross | Gross | |||||||||||||||
| Unrealized | Unrealized | |||||||||||||||
| Amortized Cost | Gains | Losses | Fair Value | |||||||||||||
| (In thousands) | ||||||||||||||||
| Cash and cash equivalents: | ||||||||||||||||
| Cash and money market funds | $ | 43,675 | $ | - | $ | - | $ | 43,675 | ||||||||
| Investment securities: | ||||||||||||||||
| Commercial paper | 66,185 | - | (71 | ) | 66,114 | |||||||||||
| Corporate debt securities | 554,847 | 14 | (1,443 | ) | 553,418 | |||||||||||
| U.S. government and agency securities | 26,254 | - | (76 | ) | 26,178 | |||||||||||
| Total investments | 647,286 | 14 | (1,590 | ) | 645,710 | |||||||||||
| Total cash, cash equivalents and investments | $ | 690,961 | $ | 14 | $ | (1,590 | ) | $ | 689,385 | |||||||
As
15
The aggregate fair value of the Company held a total of forty eight positionsCompany’s available-for-sale investment debt securities that werehave been in a continuous unrealized loss position for moreless than twelve months. The Company has determined that the unrealized losses are deemed to be temporary impairmentsmonths or twelve months or longer is as offollows:
| | | | | | | | | | | | | | | | | | |
| | As of September 30, 2021 | ||||||||||||||||
| | Less than 12 months | | 12 months or longer | | Total | ||||||||||||
| | (in thousands) | ||||||||||||||||
| | | | | Gross | | | | | Gross | | | | | Gross | |||
| | | | | Unrealized | | | | Unrealized | | | | | Unrealized | ||||
|
| Fair Value |
| Losses |
| Fair Value |
| Losses |
| Fair Value |
| Losses | ||||||
Commercial paper | | $ | 60,896 | | $ | (16) | | $ | 0 | | $ | 0 | �� | $ | 60,896 | | $ | (16) |
Corporate debt securities | | | 220,462 | | | (108) | | | 3,019 | | | (1) | | | 223,481 | | | (109) |
Municipal bonds | | | 5,054 | | | (3) | | | 0 | | | 0 | | | 5,054 | | | (3) |
Total | | $ | 286,412 | | $ | (127) | | $ | 3,019 | | $ | (1) | | $ | 289,431 | | $ | (128) |
| | | | | | | | | | | | | | | | | | |
| | As of December 31, 2020 | ||||||||||||||||
| | Less than 12 months | | 12 months or longer | | Total | ||||||||||||
| | (in thousands) | ||||||||||||||||
| | | | | Gross |
| | |
| Gross |
| | |
| Gross | |||
| | | | | Unrealized | | | | | Unrealized | | | | | Unrealized | |||
|
| Fair Value |
| Losses |
| Fair Value |
| Losses |
| Fair Value |
| Losses | ||||||
Commercial paper | | $ | 32,970 | | $ | (9) | | $ | 0 | | $ | 0 | | $ | 32,970 | | $ | (9) |
Corporate debt securities | |
| 143,076 | |
| (67) | |
| 0 | |
| 0 | |
| 143,076 | |
| (67) |
Total | | $ | 176,046 | | $ | (76) | | $ | 0 | | $ | 0 | | $ | 176,046 | | $ | (76) |
At September 30, 2017. The2021, the Company believes thathad 99 available-for-sale investment debt securities in an unrealized loss position without an allowance for credit losses. Unrealized losses on corporate debt securities have not been recognized into income because the unrealized losses generallyissuers’ bonds are caused by increases in the risk premiums required by market participants rather than an adverse change in cash flows or a fundamental weakness in theof high credit quality of(rated A3/A- or higher), management does not intend to sell and it is likely that management will not be required to sell the issuer or underlying assets. Becausesecurities prior to their anticipated recovery and the Company has the ability and intent to hold these investments until a recovery ofdecline in fair value which may be maturity, it does not consideris largely due to market conditions and/or changes in interest rates. The issuers continue to make timely interest payments on the investmentsbonds. The fair value is expected to be other-than-temporarily impairedrecover as the bonds approach maturity.
Accrued interest receivable on available-for-sale investment debt securities totaled $1.2 million and $2.5 million at September 30, 2017.
Fixed assets are stated at cost2021 and depreciated or amortized usingDecember 31, 2020, respectively, is excluded from the straight-line method based on useful lives as follows:
| Useful lives | ||||||||||
| (Years) | September 30, 2017 | December 31, 2016 | ||||||||
| (In thousands) | ||||||||||
| Office equipment and software | 3 | $ | 5,044 | $ | 4,942 | |||||
| Leasehold improvements | Over life of lease | 15,280 | 6,668 | |||||||
| Furniture and fixtures | 7 | 5,250 | 4,202 | |||||||
| Subtotal | 25,574 | 15,812 | ||||||||
| Less: accumulated depreciation | (7,433 | ) | (4,517 | ) | ||||||
| Fixed assets, net | $ | 18,141 | $ | 11,295 | ||||||
Inventories are stated at the lowerestimate of cost or market. Inventories consist of the following:
| September 30, 2017 | December 31, 2016 | |||||||
| (In thousands) | ||||||||
| Work-in-process | $ | 3,717 | $ | 2,207 | ||||
| Finished goods | 180 | 72 | ||||||
| Inventory, net | $ | 3,897 | $ | 2,279 | ||||
Accounts payable, accruedcredit losses and is included in Prepaid expenses and other liabilities consisted of the following:current assets.
| September 30, 2017 | December 31, 2016 | |||||||
| (In thousands) | ||||||||
| Accounts payable | $ | 10,053 | $ | 6,722 | ||||
| Accrued contracted services | 44,244 | 35,429 | ||||||
| Accrued employee compensation | 18,720 | 19,287 | ||||||
| Other liabilities | 9,053 | 4,113 | ||||||
| Accounts payable, accrued expenses and other liabilities | $ | 82,070 | $ | 65,551 | ||||
| 5. Fair Value Measurements |
The carrying amounts of the Company’s receivables and payables approximate their fair value due to their short maturities.
Accounting principles provide guidance for using fair value to measure assets and liabilities. The guidance includes a three-level hierarchy of valuation techniques used to measure fair value, defined as follows:
| Unadjusted Quoted Prices — The fair value of an asset or liability is based on unadjusted quoted prices in active markets for identical assets or liabilities (Level 1). |
| Pricing Models with Significant Observable Inputs — The fair value of an asset or liability is based on information derived from either an active market quoted price, which may require further adjustment based on the attributes of the financial asset or liability being measured, or an inactive market transaction (Level 2). |
| Pricing Models with Significant Unobservable Inputs — The fair value of an asset or liability is primarily based on internally derived assumptions surrounding the timing and amount of expected cash flows for the financial instrument. Therefore, these assumptions are unobservable in either an active or inactive market (Level 3). |
16
The Company considers an active market as one in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis. Conversely, the Company views an inactive market as one in which there are few transactions for the asset or liability, the prices are not current, or price quotations vary substantially either over time or among market makers. Where appropriate, non-performance risk, or that of a counterparty, is considered in determining the fair values of liabilities and assets, respectively.
The Company’s cash deposits and money market funds are classified within Level 1 of the fair value hierarchy because they are valued using bank balances or quoted market prices. Investmentsprices in active markets. Investment debt securities are classified as Level 2 instruments based on market pricing and other observable inputs.
Financial assets carried at fair value are classified in the tables below in one of the three categories described above:
| | | | | | | | | | | | |
| | | | | Fair Value Measurements Using | |||||||
|
| Total |
| Level 1 |
| Level 2 |
| Level 3 | ||||
| | (in thousands) | ||||||||||
September 30, 2021 |
| |
|
| |
|
| |
|
| |
|
Assets |
| |
|
| |
|
| |
|
| |
|
Cash and cash equivalents: | | | | | | | | | | | | |
Money market funds | | $ | 31,657 | | $ | 31,657 | | $ | 0 | | $ | 0 |
Commercial paper | | | 5,000 | | | 0 | | | 5,000 | | | 0 |
Available-for-sale investment debt securities: | |
| | |
| | |
|
| |
|
|
Commercial paper | |
| 72,542 | |
| 0 | |
| 72,542 | |
| 0 |
Corporate debt securities | |
| 274,205 | |
| 0 | |
| 274,205 | |
| 0 |
Municipal bonds | |
| 5,054 | |
| 0 | |
| 5,054 | |
| 0 |
Total financial assets | | $ | 388,458 | | $ | 31,657 | | $ | 356,801 | | $ | 0 |
| | | | | | | | | | | | |
December 31, 2020 | |
|
| |
|
| |
|
| |
|
|
Assets | |
|
| |
|
| |
|
| |
|
|
Cash and cash equivalents: | | | | | | | | | | | | |
Money market funds | | $ | 15,492 | | $ | 15,492 | | $ | 0 | | $ | 0 |
Available-for-sale investment debt securities: | |
|
| |
|
| |
|
| |
|
|
Commercial paper | |
| 55,457 | |
| 0 | |
| 55,457 | |
| 0 |
Corporate debt securities | |
| 356,059 | |
| 0 | |
| 356,059 | |
| 0 |
Total financial assets | | $ | 427,008 | | $ | 15,492 | | $ | 411,516 | | $ | 0 |
| Fair Value Measurements Using | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| (In thousands) | ||||||||||||||||
| September 30, 2017 | ||||||||||||||||
| Assets: | ||||||||||||||||
| Money market funds (included in cash and cash equivalents) | $ | 37,426 | $ | 37,426 | $ | - | $ | - | ||||||||
| Available for sale securities: | ||||||||||||||||
| Commercial paper | 11,464 | - | 11,464 | - | ||||||||||||
| Corporate debt securities | 341,820 | - | 341,820 | - | ||||||||||||
| U.S. government and agency securities | 19,222 | - | 19,222 | - | ||||||||||||
| Total financial assets: | $ | 409,932 | $ | 37,426 | $ | 372,506 | $ | - | ||||||||
| December 31, 2016 | ||||||||||||||||
| Assets: | ||||||||||||||||
| Money market funds (included in cash and cash equivalents) | $ | 11,755 | $ | 11,755 | $ | - | $ | - | ||||||||
| Available for sale securities: | ||||||||||||||||
| Commercial paper | 66,114 | - | 66,114 | - | ||||||||||||
| Corporate debt securities | 553,418 | - | 553,418 | - | ||||||||||||
| U.S. government and agency securities | 26,178 | - | 26,178 | - | ||||||||||||
| Total financial assets | $ | 657,465 | $ | 11,755 | $ | 645,710 | $ | - | ||||||||
See Note 10 for the carrying amounts and estimated fair values of the Company’s 3.50% Convertible Senior Secured Notes due 2026 (“2026 Convertible Secured Notes”), 2.00% Convertible Senior Notes due 2026 (“2026 Convertible Notes”) and 3.25% Convertible Senior Notes due 2023 (“2023 Convertible Notes”).
The estimatedaggregate fair value of marketableall available-for-sale investment debt securities (commercial paper, corporate debt securities and U.S. government and agency securities)municipal bonds), by contractual maturity, are as follows:
| | | | | | |
| | Fair Value as of | ||||
|
| September 30, 2021 |
| December 31, 2020 | ||
| | (in thousands) | ||||
Due in one year or less | | $ | 323,275 | | $ | 328,077 |
Due after one year through two years | |
| 28,526 | |
| 83,439 |
Total investment debt securities | | $ | 351,801 | | $ | 411,516 |
| Fair Value as of | ||||||||
| September 30, 2017 | December 31, 2016 | |||||||
| (In thousands) | ||||||||
| Due in one year or less | $ | 344,852 | $ | 456,184 | ||||
| Due after 1 year through 5 years | 27,654 | 189,526 | ||||||
| Total investments in debt securities | $ | 372,506 | $ | 645,710 | ||||
Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations without call or prepayment penalties.
17
6. Fixed Assets, Net
Fixed assets are stated at cost and depreciated or amortized using the straight-line method based on useful lives as follows:
| | | | | | | | |
| | Useful lives | | | | | | |
|
| (Years) |
| September 30, 2021 |
| December 31, 2020 | ||
| | | | (in thousands) | ||||
Office equipment and software |
| 3 | | $ | 5,375 | | $ | 5,364 |
Leasehold improvements |
| Shorter of remaining lease term or useful life | |
| 13,241 | |
| 13,237 |
Furniture and fixtures |
| 7 | |
| 4,590 | |
| 4,602 |
Subtotal | | | |
| 23,206 | |
| 23,203 |
Less: accumulated depreciation | | | |
| (19,407) | |
| (16,877) |
Fixed assets, net | | | | $ | 3,799 | | $ | 6,326 |
7. Inventory
Inventories are stated at the lower of cost or market. Inventories consisted of the following:
| | | | | | |
|
| | | | | |
| | September 30, 2021 |
| December 31, 2020 | ||
| | (in thousands) | ||||
Work-in-process | | $ | 8,090 | | $ | 8,394 |
Finished goods | |
| 690 | |
| 633 |
Inventory | | $ | 8,780 | | $ | 9,027 |
8. Leases
The Company leases various office spaces under non-cancelable operating leases with original lease periods expiring between the first quarter of 2022 and 2025. The Company also enters into leases for equipment. A number of the Company’s leases include one or more options to renew, with renewal terms that can extend the lease term. The exercise of lease renewal options is typically at the sole discretion of the Company. All renewals to extend the lease terms are not included in the right-of-use (“ROU”) assets and lease liabilities as they are not reasonably certain of exercise.
Operating lease assets and liabilities are classified on the condensed consolidated balance sheets as follows:
| | | | | | | | |
Leases | | Classification | | September 30, 2021 | | December 31, 2020 | ||
Assets | | | | (in thousands) | ||||
Operating lease assets | | Other assets | | $ | 7,514 | | $ | 12,327 |
Total leased assets | | | | $ | 7,514 | | $ | 12,327 |
| | | | | | | | |
Liabilities | | | | | | | | |
Current | | | | | | | | |
Operating lease liabilities | | Accounts payable, accrued expenses and other liabilities | | $ | 4,676 | | $ | 7,248 |
Noncurrent | | | | | | | | |
Operating lease liabilities | | Long-term other liabilities | | | 4,843 | | | 7,684 |
Total operating lease liabilities | | | | $ | 9,519 | | $ | 14,932 |
18
Operating lease costs for the three and nine-month periods ended September 30, 2021 and 2020, are as follows:
| | | | | | | | | | | | | | |
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | ||||||||
Lease Cost |
| Classification |
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
| | | | (in thousands) | | (in thousands) | ||||||||
Operating lease cost | | Selling, general and administrative expenses | | $ | 1,565 | | $ | 1,593 | | $ | 4,819 | | $ | 5,062 |
Short-term lease cost | | Selling, general and administrative expenses | | | 475 | | | 463 | | | 1,629 | | | 2,426 |
Variable lease cost | | Selling, general and administrative expenses | | | 152 | | | 262 | | | 744 | | | 1,119 |
Sublease expense (income) | | Other income, net | | | — | | | (11) | | | — | | | (125) |
Net lease cost | | | | $ | 2,192 | | $ | 2,307 | | $ | 7,192 | | $ | 8,482 |
The weighted-average remaining term of the Company’s operating leases was 2.6 years and the weighted-average discount rate used to measure the present value of the Company’s operating lease liabilities was 5.5% as of September 30, 2021.
Cash payments included in the measurement of the Company’s operating lease liabilities reported in operating cash flows were $5.4 million and $5.8 million for the nine months ended September 30, 2021 and 2020, respectively. During the nine months ended September 30, 2020, the Company obtained ROU assets of $1.2 million in exchange for new operating lease obligations of $1.2 million.
Maturities of the Company’s operating lease liabilities, which do not include short-term leases, as of September 30, 2021 are as follows:
| | | |
Maturity of Lease Liabilities | | Operating leases | |
| | (in thousands) | |
2021 (remaining) | | $ | 2,013 |
2022 | | | 3,582 |
2023 | | | 2,126 |
2024 | | | 1,607 |
2025 | | | 1,033 |
Thereafter | | | 0 |
Total lease payments | | | 10,361 |
Less: Present value discount | | | (842) |
Total operating lease liabilities | | $ | 9,519 |
19
9. Accounts Payable, Accrued Expenses and Other Liabilities
Accounts payable, accrued expenses and other liabilities consisted of the following:
| | | | | | |
|
| | | | ||
| | September 30, 2021 |
| December 31, 2020 | ||
| | (in thousands) | ||||
Accounts payable | | $ | 14,908 | | $ | 24,594 |
Accrued employee compensation | |
| 23,135 | |
| 27,154 |
Accrued contracted services | |
| 45,637 | |
| 62,425 |
Accrued restructuring | | | 0 | | | 2,504 |
Accrued rebates, discounts and other incentives | | | 43,831 | | | 38,172 |
Operating lease liabilities | | | 4,676 | | | 7,248 |
Other liabilities | | | 7,772 | | | 8,942 |
Accounts payable, accrued expenses and other liabilities | | $ | 139,959 | | $ | 171,039 |
The Company has $34.1 million and $27.4 million in rebates as of September 30, 2021 and December 31, 2020, respectively, included in Accrued rebates, discounts and other incentives, for a European jurisdiction in which final pricing is subject to ongoing negotiations with the government.
Research & Development Tax Credit
The Company has benefited from the U.K. Small and Medium-sized Enterprise R&D Tax Credit scheme, or the SME scheme, under which it can obtain a tax credit of up to 33.4% of eligible research and development expenses incurred by the Company in the U.K. Eligible expenses generally include employment costs for research staff, consumables, software and certain internal overhead costs incurred as part of research projects.
The Company has also started to recently benefit from the U.K. Research and Development Expenditure Scheme, or the RDEC scheme, under which it can obtain a tax credit of 12% of eligible research and development expenses incurred by the Company in the U.K. The RDEC scheme is more restrictive than the SME scheme, and generally applies where qualifying R&D expenditure is not eligible for relief under the SME scheme.
The Company has submitted claims seeking to obtain tax credits for qualifying R&D expenses incurred in the 2015, 2016, 2017, and 2018 calendar years. As described further in Note 13, the 2017 SME claim was finalized during the quarter ended June 30, 2021, and therefore the $9.4 million payment received in June 2020, which was previously deferred, was released into income as a reduction to research & development expenses.
With respect to the 2018 RDEC claim, in June 2021, the Company received a payment of $4.2 million from Her Majesty’s Revenue and Customs (“HMRC”), the U.K.’s government tax authority. Given the claim review has not been finalized for the 2018 year, the $4.2 million credit received along with a reduction of $0.1 million due to foreign currency is recorded as a deferred liability within Accounts payable, accrued expenses, and other liabilities.
20
10. Long-Term Debt
Debt, net of discounts and deferred financing costs, consistsconsisted of the following:
| | | | | | |
|
| | | | ||
| | September 30, 2021 |
| December 31, 2020 | ||
| | (in thousands) | ||||
2026 Convertible Secured Notes | | $ | 500,000 | | $ | 0 |
2026 Convertible Notes | | | 115,349 | | | 230,000 |
2023 Convertible Notes | | | 113,655 | | | 460,000 |
Long-term debt, gross | | | 729,004 | | | 690,000 |
Less: Unamortized debt discounts and fees | | | (198,596) | | | (129,418) |
Long-term debt, net | | $ | 530,408 | | $ | 560,582 |
| September 30, 2017 | December 31, 2016 | |||||||
| (In thousands) | ||||||||
| Long-term debt | $ | 351,984 | $ | 341,356 | ||||
| Less current portion | - | - | ||||||
| Long-term debt outstanding | $ | 351,984 | $ | 341,356 | ||||
On July 6, 2016,The Company has 3 series of convertible notes outstanding (together, the Company issued $460.0 million aggregate principal amount of the 3.25% convertible senior notes due 2023 (“Convertible“Convertible Notes”). The Company received net proceeds of $447.6 million after deducting underwriting discounts and estimated offering expenses of approximately $12.4 million. The Company used approximately $38.4 million of the net proceeds from the offering to fund the payment of the cost of the capped call transactions that were entered into in connection with the issuance of the Convertible Notes.
The Convertible Notes are senior unsecured obligations of the Company. Interest is payable semi-annually on January 1 and July 1 of each year, beginning on January 1, 2017. The Convertible Notes mature on July 1, 2023, unless earlier repurchased, redeemed or converted. The Convertible NotesAll 3 series are convertible at the option of holders, under certain circumstances and during certain periods, into cash, shares of the Company’s common stock, or a combination of cash and shares of the Company’s common stock,thereof, at the Company’s election.
The initial conversion2023 Convertible Notes were issued on July 6, 2016, in the amount of $460.0 million principal, at an interest rate of 3.25%. The Company received net proceeds from their sale of $447.6 million, net of $12.4 million in underwriting discounts, commissions, and estimated offering expenses.
The 2026 Convertible Notes were issued on May 14, 2019, in the amount of $230.0 million principal, at an interest rate of 2.00%. The Company received net proceeds from their sale of $223.4 million, net of $6.6 million in underwriting discounts, commissions, and estimated offering expenses.
On August 10, 2021, the Company entered into privately negotiated exchange and subscription agreements with a limited number of existing “accredited investors” and “qualified institutional buyers” (as defined under Securities Act rules) holding 2023 Convertible Notes and 2026 Convertible Notes to (1) exchange $306.5 million principal of 2023 Convertible Notes for $292.4 million principal of new notes, (2) exchange $114.7 million principal of 2026 Convertible Notes for $90.0 million principal of new notes, and (3) sell $117.6 million principal of new notes for cash. On August 17, 2021, these new notes were issued as 2026 Convertible Secured Notes in the amount of $500.0 million principal, at an interest rate of 3.50%. The Company received cash proceeds from the sale of notes of approximately $117.6 million. The Company also paid its financial advisor $10.0 million in stock for services rendered, in the amount of 769,823 shares, based on the closing price of $12.99 per share on August 20, 2021.
Further, on September 9, 2021, the Company entered into privately negotiated agreements with certain holders of 2023 Convertible Notes to repurchase $39.9 million principal for $38.1 million in cash, which purchase closed on September 14, 2021.
Net of these transactions, as of September 30, 2021, the Company had $729.0 million in gross long-term debt, as shown in the table above.
The approximate fair value of the Convertible Notes is 5.0358 shareswas determined as follows using Level 2 inputs based on quoted market values:
| | | | | | |
| | September 30, 2021 |
| December 31, 2020 | ||
| | (in thousands) | ||||
2026 Convertible Secured Notes | | $ | 510,790 | | $ | - |
2026 Convertible Notes | | $ | 69,891 | | $ | 142,837 |
2023 Convertible Notes | | $ | 103,086 | | $ | 363,690 |
21
In accordance with Accounting Standards Codification (“ASC”) Subtopic 470-20, “Debt with Conversion and Other Options” (“ASC 470-20”), the exchange of the Company’s common stock per $1,000 principal amount of2023 Convertible Notes which is equivalent to an initial conversion price of approximately $198.58 per shareand 2026 Convertible Notes and repurchase of the Company’s common stock.2023 Convertible Notes were all treated as extinguishments of debt. The conversion rate is subjectdifference between the consideration attributed to adjustment upon the occurrence of certain events.liability component, and its net carrying cost, resulted in a gain on extinguishment. The difference between the consideration attributed to the equity component, and its net carrying cost, resulted in a reduction to additional paid-in capital.
| | | | | | |
| | Gain on extinguishment of debt |
| Reduction to additional paid-in capital | ||
| | (in thousands) | ||||
Exchange of 2023 Convertible Notes | | $ | 2,169 | | $ | 14,139 |
Exchange of 2026 Convertible Notes | | | 13,839 | | | 23,074 |
Repurchase of 2023 Convertible Notes | | | 503 | | | 1,933 |
Total | | $ | 16,511 | | $ | 39,146 |
At issuance, in accordance with ASC 470-20, the Company may redeem for cash all or partused effective interest rates to determine the liability components of the Convertible Notes, at its option, on or after July 6, 2021, under certain circumstances at a redemption price equal to 100% ofwith the principal amount of the Convertible Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.
The capped call transactions are expected generally to reduce the potential dilution upon conversion of the Convertible Notes in the event that the market price per share of the Company’s common stock, as measured under the terms of the capped call transactions, is greater than the strike price of the capped call transactions, which initially corresponds to the conversion price of the Convertible Notes, and is subject to anti-dilution adjustments generally similar to those applicable to the conversion rate of the Convertible Notes. The cap price of the capped call transactions is initially $262.2725 per share, and is subject to certain adjustments under the terms of the capped call transactions. If, however, the market price per share of the Company’s common stock, as measured under the terms of the capped call transactions, exceeds the cap price of the capped call transactions, there would nevertheless be dilution upon conversion of the Convertible Notes to the extent that such market price exceeds the cap price of the capped call transactions.
In accordance with ASC Subtopic 470-20, the Company used an effective interest rate of 8.4% to determine the liability component of the Convertible Notes. This resulted in the recognition of $334.4 million as the liability component of the Convertible Notes and the recognition of the residual $113.2 million as the debt discount, with a corresponding increase to additional paid-in capital for the equity component of the Convertible Notes.
Interest expense was $7.4 The Company used an effective interest rate of 12.46%, to determine the liability component of the 2026 Convertible Secured Notes, for the purpose of initial recognition, and 14.62%, 8.94% and 9.32% for the exchange of 2026 Convertible Notes, exchange of 2023 Convertible Notes and repurchase of 2023 Convertible Notes, respectively, for the calculation of the fair values of the Company’s debt for purposes of determining the gain on extinguishment. This resulted in the initial recognition of $349.3 million as the liability component and the residual $150.7 million as the debt discount for the equity component of the 2026 Convertible Secured Notes. The 2026 Convertible Notes and 2023 Convertible Notes were not subject to remeasurement and after giving effect to the reductions in additional paid-in capital, the remaining balances of the equity components are $62.8 million and $7.1$97.1 million, respectively.
Underwriting discounts, commissions, and estimated offering expenses (both cash and non-cash) were allocated as debt or equity issuance costs in proportion to the allocation of the liability and equity components of the Convertible Notes, with debt issuance costs recorded as a deduction from the carrying value of the debt, and equity issuance costs recorded as an offset to additional paid-in capital. Debt issuance costs of $7.5 million, $4.1 million and $9.4 million for the 2026 Convertible Secured Notes, 2026 Convertible Notes and 2023 Convertible Notes, respectively, were recorded on the issuance date and are reflected as a direct deduction from the carrying value of the associated debt liability. Equity issuance costs of $3.3 million, $2.5 million and $3.0 million for the 2026 Convertible Secured Notes, 2026 Convertible Notes, and 2023 Convertible Notes, respectively were recorded as an offset to additional paid-in capital.
The debt discount and debt issuance costs will be amortized as non-cash interest expenses through the scheduled maturity of the Convertible Notes.
The Note Indentures
The 2023 Convertible Notes, and the 2026 Convertible Notes, were each issued pursuant to a Base Indenture, dated as of July 6, 2016, between the Company and U.S. Bank National Association (“U.S. Bank”), as trustee, and a First Supplemental Indenture (with respect to the 2023 Convertible Notes) and Second Supplemental Indenture (with respect to the 2026 Convertible Notes), dated July 6, 2016, and May 14, 2019, respectively, each between the Company and U.S. Bank as trustee. The 2026 Convertible Secured Notes were issued pursuant to a Base Indenture and a First Supplemental Indenture, each dated as of August 17, 2021, between the Company and U.S. Bank as trustee and collateral agent. In connection with the issuance of the 2026 Convertible Secured Notes, the Company also entered into a Security Agreement, dated as of August 17, 2021, with U.S. Bank as collateral agent.
Pursuant to these indentures, the 2023 Convertible Notes and 2026 Convertible Notes are senior unsecured obligations, and the 2026 Convertible Secured Notes are senior secured obligations, of the Company. Each indenture provides for customary events of default.
22
Each series of notes bears a fixed rate of interest as identified above, payable semi-annually in arrears:
| | | | | | | | |
| | Semi-annual payment dates | ||||||
| | First payment date | | First | | Second | | Maturity date* |
2026 Convertible Secured Notes | | February 15, 2022 | | February 15 | | August 15 | | February 15, 2026 |
2026 Convertible Notes | | November 15, 2019 | | May 15 | | November 15 | | May 15, 2026 |
2023 Convertible Notes | | January 1, 2017 | | January 1 | | July 1 | | July 1, 2023 |
* Unless earlier repurchased, redeemed, or converted.
Each of the 3 series of notes is convertible under certain circumstances. Prior to January 1, 2023 (for the 2023 Convertible Notes), February 15, 2026 (for the 2026 Convertible Notes), and November 15, 2025 (for the 2026 Convertible Secured Notes), holders may convert their notes only under any of the following circumstances:
(i) | During any calendar quarter commencing after the calendar quarter ended on September 30, 2016 (for the 2023 Convertible Notes), June 30, 2019 (for the 2026 Convertible Notes), or December 31, 2021 (for the 2026 Convertible Secured Notes), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is at least 130% of the applicable conversion price (as defined in the applicable indenture) on each applicable trading day (the “Stock Price Conversion Condition”). |
(ii) | During the five business day period after any five consecutive trading day period in which the trading price (as defined in the applicable indenture) per $1,000 principal amount for each trading day was less than 98% of the product of the last reported sale price of the Company’s common stock and the applicable conversion rate (as defined in the applicable indenture) on each such trading day. |
(iii) | If the Company calls any or all of the applicable series of notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date. |
(iv) | Upon the occurrence of specified corporate events. |
After those dates, holders may convert their notes, regardless of the foregoing circumstances, at any time until immediately preceding the applicable maturity date.
Upon conversion of notes, the Company will pay or deliver cash, shares of common stock (or cash in lieu of fractional shares), or a combination of cash and common stock, at the Company’s election.
The initial conversion rates of the Convertible Notes per $1,000 principal amount, and the approximate conversion price, are as follows:
| | | | |
| | Initial conversion rate | | Approximate conversion price |
2026 Convertible Secured Notes | | 47.7612 | | $20.94 |
2026 Convertible Notes | | 9.2123 | | $108.55 |
2023 Convertible Notes | | 5.0358 | | $198.58 |
These conversion rates are subject to adjustment upon occurrence of certain events but will not be adjusted for accrued and unpaid interest. Also, if certain specified events occur, the conversion rate will be increased for notes converted in connection with such events.
The Convertible Notes are redeemable by the Company in certain circumstances starting July 6, 2021 (for the 2023 Convertible Notes), May 20, 2023 (for the 2026 Convertible Notes), and February 20, 2024 (for the 2026 Convertible Secured Notes). After such dates, the Company may redeem for cash all or any part of the applicable Convertible Notes,
23
at its option, if the last reported sale price of the common stock has been at least 130% of the applicable conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period ending on and including the trading day immediately preceding the date of the applicable notice of redemption. The redemption price is equal to 100% of the principal amount redeemed, plus accrued and unpaid interest to (but excluding) the redemption date.
No sinking fund is provided for any of the Convertible Notes.
If the Company undergoes a fundamental change (as defined in the applicable indenture), noteholders may require the Company to repurchase for cash all or any portion of their notes at a fundamental change repurchase price equal to 100% of the principal amount of the notes to be repurchased, plus accrued and unpaid interest to (but excluding) the fundamental change repurchase date.
Upon the occurrence of certain corporate events (i.e., a “make-whole fundamental change”, as defined in the applicable indenture), the Company will, under certain circumstances, increase the conversion rate for holders of the Convertible Notes who elect to convert in connection with such corporate events. In addition, with respect to the 2026 Convertible Secured Notes, (1) if the Company elects to redeem all or part of such notes and provides notice of redemption to the holders or (2) if the Stock Price Conversion Condition is satisfied with respect to any calendar quarter commencing after the quarter ended September 30, 2022, the Company will, under certain circumstances, increase the conversion rate for holders who elect to convert (1) during the related redemption period, or (2) in connection with such Stock Price Conversion Condition. Upon a Company redemption of the 2026 Convertible Secured Notes, holders of notes called for redemption may be eligible to receive a make-whole premium. The Company, at its option, will satisfy the conversion obligation through cash, shares of common stock, or a combination of cash and common stock. The right to redeem the 2026 Convertible Secured Notes requires the Company to specify a date of redemption no earlier than 60 days and no later than 90 days after the notice of redemption is sent. If a holder elects to convert its 2026 Convertible Secured Notes prior to the effective date of a make-whole fundamental change or the date of the redemption notice, then it is not entitled to the increased conversion rate in connection with such make-whole fundamental change or redemption.
Upon certain events of default occurring and continuing, either the indenture trustee or holders of at least 25% in aggregate principal amount of a series of notes then outstanding may declare the entire principal amount of that series of notes, and accrued interest, if any, to be immediately due and payable. Upon events of default involving specified bankruptcy events involving the Company, the Convertible Notes are due and payable immediately.
The 2026 Convertible Secured Notes indenture and security agreement include (1) customary covenants, (2) guarantor provisions, and (3) collateral provisions. The 2026 Convertible Secured Notes may become guaranteed in the future by subsidiaries of the Company that meet certain threshold requirements, with the 2026 Convertible Secured Notes becoming senior obligations of such guarantor. The 2026 Convertible Secured Notes are secured by a first priority security interest in substantially all assets of the Company, and of any guarantors, subject to certain exceptions.
The Capped Call Transactions
On June 30, 2016, in connection with the pricing of the 2023 Convertible Notes, the Company entered into privately-negotiated capped call agreements (the “Base Capped Calls”) with each of Royal Bank of Canada, UBS AG, London Branch, and Credit Suisse Capital LLC. On July 1, 2016, in connection with the underwriters’ exercise of their over-allotment option in full, the Company entered into additional capped call agreements (the “Additional Capped Calls” and, together with the Base Capped Calls, the “Capped Calls”) with same counterparties.
The Capped Calls are considered to be instruments indexed to the Company’s own shares and met the criteria to be classified within equity. Therefore, they are not remeasured.
In August 2021, in connection with the exchange of 2023 Convertible Notes, of the 460,000 Capped Call options outstanding (400,000 Base Capped Call options and 60,000 Additional Capped Call Options), 306,486 options were terminated (246,486 Base Capped Call options and 60,000 Additional Capped Call options), equivalent to approximately 1.5 million shares.
24
In September 2021, in connection with the additional repurchase of $39.9 million of 2023 Convertible Notes, 39,859 more Capped Call options were terminated, equivalent to approximately 0.2 million shares, with 113,655 Base Capped Call options remaining, equivalent to approximately 0.6 million shares.
Upon settlement of each termination, the Company received an immaterial amount in cash proceeds, which was recorded as an increase to additional paid-in capital.
Interest Expense on Convertible Notes
The table summarizes the total interest expense recognized in the periods presented:
| | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | ||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
| | (in thousands) | | (in thousands) | ||||||||
Contractual interest expense | | $ | 5,453 | | $ | 4,887 | | $ | 15,228 | | $ | 14,662 |
Amortization of debt discount | | | 8,008 | | | 6,562 | | | 21,885 | | | 19,255 |
Amortization of debt issuance costs | |
| 634 | |
| 642 | |
| 1,990 | |
| 1,884 |
Total interest expense | | $ | 14,095 | | $ | 12,091 | | $ | 39,103 | | $ | 35,801 |
Accrued interest on the Convertible Notes was approximately $3.9 million and $8.1 million as of September 30, 2021 and December 31, 2020, respectively. After giving effect to the exchange and repurchase, the Company’s total recorded debt issuance costs are $13.9 million, which is being amortized using the effective interest method through the date of maturity. As of September 30, 2021, and December 31, 2020, $10.7 million and $10.7 million, respectively, of debt issuance costs are unamortized on the condensed consolidated balance sheets in Long-term debt. Cash payments for interest were $17.3 million and $17.3 million for the nine months ended September 30, 2021 and 2020, respectively.
11. Shareholders’ Deficit
Common Stock / Additional Paid-in Capital
In connection with the note exchange transactions described in Note 10, on August 11, 2021, the Company completed a repurchase of 4,521,502 shares of its common stock for an aggregate cash cost of $75.8 million. The Company subsequently retired the shares of common stock. The Company’s common stock is reduced by an amount equal to the number of shares repurchased multiplied by the par value of such shares. The excess amount that is repurchased over its par value is allocated as a reduction to additional paid-in capital. The Company also issued 769,823 shares to its financial advisor for services rendered, equivalent to $10.0 million. The financial advisory fee was included in the debt issuance costs of the 2026 Convertible Secured Notes, balanced by a corresponding increase to par value and additional paid-in capital.
12. Product Revenue, Net
The Company recognized net sales of Ocaliva of $92.8 million and $79.5 million for the three months ended September 30, 20172021 and 2016,2020, respectively and $21.8$271.1 million and $7.1$229.4 million for the nine months ended September 30, 20172021 and 2016, respectively, related to the Convertible Notes. Accrued interest on the Convertible Notes was approximately $3.7 million and $7.3 million as2020, respectively.
25
The Company recognized net sales of Ocaliva of $40.9 million and $4.7 million for the three months ended September 30, 2017 and 2016, respectively, and $91.9 million and $4.8 millionfor the nine months ended September 30, 2017 and 2016, respectively.
The table below summarizes consolidated product revenue, net by region:
| | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | ||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
| | (in thousands) | | (in thousands) | ||||||||
Product revenue, net: |
| |
|
| |
|
| |
|
| |
|
U.S. | | $ | 66,640 | | $ | 58,643 | | $ | 192,117 | | $ | 169,051 |
ex-U.S. | |
| 26,187 | |
| 20,878 | |
| 78,947 | |
| 60,371 |
Total product revenue, net | | $ | 92,827 | | $ | 79,521 | | $ | 271,064 | | $ | 229,422 |
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| (In thousands) | ||||||||||||||||
| Product revenue, net: | ||||||||||||||||
| U.S. | $ | 36,176 | $ | 4,732 | $ | 83,829 | $ | 4,807 | ||||||||
| ex-U.S. | 4,713 | - | 8,104 | - | ||||||||||||
| Total product revenue, net | $ | 40,889 | $ | 4,732 | $ | 91,933 | $ | 4,807 | ||||||||
Credit Losses
The following table summarizes the allowance for credit losses activity on the Company’s trade receivables for the nine-month period ended September 30, 2021 (in thousands):
| | |
Balance at December 31, 2020 | $ | 235 |
Provision for credit losses | | 59 |
Write-offs | | (38) |
Balance at September 30, 2021 | $ | 256 |
13. Research and Development Tax Credit
The Company has benefited from the U.K. Small and Medium-sized Enterprise R&D Tax Credit scheme, or the SME scheme, under which it can obtain a tax credit of up to 33.4% of eligible research and development expenses incurred by the Company in the U.K. Eligible expenses generally include employment costs for research staff, consumables, software and certain internal overhead costs incurred as part of research projects.
The Company submitted a claim seeking to obtain tax credits for qualifying R&D expenses incurred in the year ended December 31, 2017. In June 2020, the Company received a payment of $9.4 million from HMRC.
The claim for 2017 was finalized and approved in the quarter ended June 30, 2021, at which time the Company recorded the U.K. research and development tax credit payments received of $10.7 million as a reduction of research and development expense in the condensed consolidated statements of operations.
14. Restructuring Expenses
On August 31, 2020, the Company adopted a plan to reduce its workforce in light of the previously announced receipt of a complete response letter from the U.S. Food and Drug Administration (the “FDA”) with respect to its New Drug Application for OCA for the treatment of liver fibrosis due to NASH (the “2020 Workforce Plan”). The 2020 Workforce Plan sought to streamline the Company’s operations and reduce operating expenses, while maintaining the critical resources needed to continue to support the NASH and PBC clinical programs, pursue the approval of OCA for the treatment of liver fibrosis due to NASH and support the Company’s successful PBC business. The 2020 Workforce Plan resulted in a workforce reduction of approximately 25%, or approximately 170 employees. The 2020 Workforce Plan was implemented during the third quarter of 2020, immediately after its announcement, and was fully completed by the end of the second quarter in 2021 upon payments of cash for charges incurred under the 2020 Workforce Plan. In the three and nine months ended September 30, 2021 the Company recorded restructuring benefits of $0.0 million and $0.1 million, respectively, which were primarily related to a reversal of unclaimed other related termination benefits recognized in conjunction with the 2020 Workforce Plan.
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The following table reflects total (benefits)/expenses related to restructuring activities recognized within the condensed consolidated statements of operations as restructuring costs:
| | | | | | | | | | | |
| | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, | ||||||||
| 2021 |
| 2020 | | 2021 |
| 2020 | ||||
| (in thousands) | | (in thousands) | ||||||||
Employee compensation costs | $ | 2 |
| $ | 11,973 | | $ | (90) |
| $ | 11,973 |
Equity compensation costs |
| — | |
| 1,408 | |
| 4 | |
| 1,408 |
Total restructuring costs | $ | 2 | | $ | 13,381 | | $ | (86) | | $ | 13,381 |
As of September 30, 2021, the cumulative restructuring costs incurred under the 2020 Workforce Plan were $14.5 million. In the nine months ended September 30, 2021, the Company recorded an immaterial amount in non-cash stock-based compensation expense, in association with the acceleration of the vesting of certain options and restricted stock units (“RSUs”) held by terminated employees.
The following table displays a rollforward of the changes to the accrued balances as of September 30, 2021:
| |
| | | |
| | | Severance and Related Costs |
| | (in thousands) | |
Accrued balance at December 31, 2020 | | $ | 2,504 |
Charges incurred | | | 180 |
Cash payments made | | | (2,104) |
Other reserve adjustments | | | (580) |
Accrued balance at September 30, 2021 | | $ | 0 |
15. Stock Compensation
The Company’s 2012 Equity Incentive Plan (“2012 Plan”) became effective upon the pricing of theits initial public offering in October 2012. At the same time, the Company’s 2003 Stock Incentive Plan (“2003 Plan”) was terminated and 555,843 shares available under the 2003 Plan were added to the 2012 Plan.
On January 1, 2017,2021, the number of shares reservedavailable for issuance under the 2012 Plan was increased by 993,5581,211,533 shares, as a result of the automatic increase in shares reserved pursuantprovisions thereof.
The Company launched on August 16, 2021, and closed on September 17, 2021, an offer to exchange eligible out-of-the-money employee stock options for a lesser number of new options with at-the-money strike prices (the “Option Exchange”). Following expiration of the Option Exchange, out of 703,967 eligible options, the Company accepted for exchange 612,080 original options, with a weighted average exercise price of $99.79 and exchanged them for 338,848 new options, granted effective September 20, 2021, with a strike price of $15.18, the closing stock price on that day. The original options have been cancelled. Original options that had already vested were exchanged for new options vesting one year from the new grant date, subject to the terms thereof.employee’s continued employment. Original options that had not already vested were exchanged for new options vesting two years from the new grant date, subject to the employee’s continued employment. New options will expire after 6.5 years. On the date of modification, incremental compensation cost related to the difference in the fair values of the original options and the new options of $1.0 million was measured and will be recognized over the revised requisite service period.
The estimated fair value of the stock options that have been granted underin the 2003 and 2012 Plans isnine months ended September 30, 2021 (including but not limited to the exchanged options) was determined utilizing thea Black-Scholes option-pricing model at the date of grant. The fair value of restricted stock units (“RSUs”) and restricted stock awards (“RSAs”) that have beenthe RSUs granted under the 2012 Plan is determined utilizing the closing stock price on the date of grant.
The following table summarizes stock option activity duringin the nine months ended September 30, 2017:
| Weighted | ||||||||||||||||
| Average | ||||||||||||||||
| Number | Weighted | Remaining | Aggregate | |||||||||||||
| of Shares | Average | Contractual | Intrinsic Value | |||||||||||||
| (In thousands) | Exercise Price | Term (years) | (In thousands) | |||||||||||||
| Outstanding at December 31, 2016 | 1,553 | $ | 117.80 | 7.4 | $ | 48,308 | ||||||||||
| Granted | 499 | $ | 113.27 | - | $ | - | ||||||||||
| Exercised | (85 | ) | $ | 24.36 | - | $ | - | |||||||||
| Cancelled/forfeited | (103 | ) | $ | 141.78 | - | $ | - | |||||||||
| Expired | (53 | ) | $ | 214.69 | - | $ | - | |||||||||
| Outstanding at September 30, 2017 | 1,811 | $ | 116.76 | 7.3 | $ | 15,118 | ||||||||||
| Expected to vest | 1,811 | $ | 116.76 | 7.3 | $ | 15,118 | ||||||||||
| Exercisable | 914 | $ | 102.08 | 6.0 | $ | 15,115 | ||||||||||
As2021 was determined utilizing the closing price of September 30, 2017, there was approximately $54.2 millionthe Company’s common stock on the date of total unrecognized compensation expense related to the unvested stock options shown in the table above, which is expected to be recognized over a weighted average period of 2.5 years.
grant. The fair value of the Company's option awards were estimated using the assumptions below:
| Nine Months Ended September 30, | ||||
| 2017 | 2016 | |||
| Volatility | 60.9 - 65.4% | 59.6 - 65.6% | ||
| Expected term (in years) | 6.0 - 9.9 | 6.0 - 10.0 | ||
| Risk-free rate | 1.8 - 2.4% | 1.1 - 1.8% | ||
| Expected dividend yield | —% | —% | ||
The following table summarizes the aggregate RSU and RSA activity duringperformance restricted stock units (“PRSUs”) granted in the nine months ended September 30, 2017:2021 was determined utilizing the Monte Carlo simulation method. The
27
| Weighted | ||||||||
| Number of | Average Fair | |||||||
| Awards | Value | |||||||
| (In thousands) | ||||||||
| Non-vested shares outstanding, December 31, 2016 | 381 | $ | 136.89 | |||||
| Granted | 262 | $ | 113.41 | |||||
| Vested | (133 | ) | $ | 135.92 | ||||
| Forfeited | (46 | ) | $ | 134.77 | ||||
| Non-vested shares outstanding, September 30, 2017 | 464 | $ | 124.11 | |||||
The Company accounts for all forfeitures when they occur. Ultimately, the actual expense recognized over the vesting period will be for only those shares that vest. When performancevest and are not forfeited.
The Company has in the past, and may in the future, grant performance-based awards with vesting terms based grants are issued,on the achievement of specified goals. To the extent such awards do not contain a market condition, the Company recognizes no expense until achievement of the performance requirement is deemed probable. There are no awards with performance conditions outstanding as of September 30, 2021.
The following table summarizes stock option activity during the nine months ended September 30, 2021:
| | | | | | | | | | |
| | | | | | | Weighted | | | |
| | | | | | | Average | | | |
| | Number | | Weighted | | Remaining | | Aggregate | ||
| | of Options | | Average | | Contractual | | Intrinsic Value | ||
|
| (in thousands) |
| Exercise Price |
| Term (years) |
| (in thousands) | ||
Outstanding at December 31, 2020 |
| 2,199 | | $ | 96.92 |
| 6.9 | | $ | 146 |
Granted |
| 1,238 | | $ | 26.55 |
| — | | $ | — |
Exercised |
| (2) | | $ | 8.67 |
| — | | $ | — |
Exchanged (1) | | (273) | | $ | 0 | | — | | $ | — |
Cancelled/forfeited |
| (404) | | $ | 59.51 |
| — | | $ | — |
Expired |
| (393) | | $ | 111.58 |
| — | | $ | — |
Outstanding at September 30, 2021 |
| 2,365 | | $ | 51.65 |
| 7.4 | | $ | 0 |
Expected to vest |
| 1,515 | | $ | 28.43 |
| 8.6 | | $ | 0 |
Exercisable |
| 849 | | $ | 93.08 |
| 5.3 | | $ | 0 |
(1) The number of options included as exchanged include the 612,080 options exchanged offset by the grant of 338,848 new options.
The aggregate intrinsic value of options is calculated as the difference between the exercise price of the underlying options and the fair value of the Company’s common stock for those options that had exercise prices lower than the fair value of the Company’s common stock. As of September 30, 2021, the total compensation cost related to non-vested option awards not yet recognized is approximately $28.5 million with a weighted average remaining vesting period of 1.41 years.
The Company estimated the fair value of stock options granted in the periods presented utilizing a Black-Scholes option-pricing model utilizing the following assumptions:
| | | | | |
| | Nine Months Ended September 30, | |||
|
| 2021 |
| 2020 | |
Volatility |
| 65.2 - 69.3 | % | 61.9 - 87.1 | % |
Expected term (in years) |
| 3.75 - 6.0 |
| 5.5 - 6.0 |
|
Risk-free rate |
| 0.4 - 0.9 | % | 0.2 - 1.7 | % |
Expected dividend yield |
| 0 | % | 0 | % |
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The following table summarizes the aggregate RSU, restricted stock award (“RSA”), PRSU and performance restricted share award (“PRSA”) activity during the nine months ended September 30, 2021:
| | | | | |
| | | | Weighted | |
| | Number of | | Average Grant Date | |
|
| Awards |
| Fair Value | |
| | (in thousands) | | | |
Non-vested awards at December 31, 2020 |
| 799 | | $ | 72.43 |
Granted |
| 965 | | $ | 28.00 |
Vested | | (231) | | $ | 49.12 |
Forfeited |
| (380) | | $ | 61.60 |
Non-vested awards at September 30, 2021 |
| 1,153 | | $ | 43.25 |
As of September 30, 2021, there is approximately $36.7 million of total unrecognized compensation expense related to unvested RSUs, RSAs, PRSUs and PRSAs, which is expected to be recognized over a weighted average vesting period of 1.55 years.
During the nine months ended September 30, 2021, the Company granted a total of 176,794 PRSUs to certain of the Company’s executive officers (of which 34,000 were subsequently forfeited upon employee termination). The performance criterion for such PRSUs is based on the Total Shareholder Return (“TSR”) of the Company’s common stock relative to the TSR of the companies comprising the S&P Biotechnology Select Industry Index (the “TSR Peer Group”) over a 3-year performance period and is accounted for as a market condition under ASC Topic 718, Compensation – Stock Compensation. The TSR for the Company or a member of the TSR Peer Group is calculated by dividing (a) the difference of the ending average stock price minus the beginning average stock price by (b) the beginning average stock price. The beginning average stock price equals the average closing stock price over the one calendar month period prior to the beginning of the performance period, after adjusting for dividends, as applicable. The ending average stock price equals the average closing price over the one calendar month period ending on the last day of the performance period, after adjusting for dividends, as applicable. The Company’s relative TSR is then used to calculate the payout percentage, which may range from zero percent (0%) to one hundred and fifty percent (150%) of the target award. The Company utilized a Monte Carlo simulation to determine the grant date fair value of such PRSUs.
The Company recorded approximately $0.5 million and $1.3 million of stock-based compensation related to such PRSUs granted during the three and nine months ended September 30, 2021.
Stock-based compensation expense has been reported in ourthe Company’s condensed consolidated statements of operations as follows:
| | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | ||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
| | (in thousands) | (in thousands) | |||||||||
Selling, general and administrative | | $ | 7,165 | | $ | 11,119 | | $ | 20,854 | | $ | 33,091 |
Research and development | |
| 1,451 | |
| 3,298 | |
| 4,625 | |
| 9,882 |
Restructuring | | | 0 | | | 1,408 | | | 4 | | | 1,408 |
Total stock-based compensation | | $ | 8,616 | | $ | 15,825 | | $ | 25,483 | | $ | 44,381 |
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| (In thousands) | ||||||||||||||||
| Selling, general and administrative | $ | 9,449 | $ | 7,207 | $ | 28,338 | $ | 14,191 | ||||||||
| Research and development | 3,788 | 5,337 | 13,246 | 12,850 | ||||||||||||
| Total stock-based compensation | $ | 13,237 | $ | 12,544 | $ | 41,584 | $ | 27,041 | ||||||||
The following table presents the historical computation of basic and diluted
16. Net Loss Per Share
Basic loss per share is computed by dividing net loss attributable to common stockholders (numerator) by the weighted average number of common shares outstanding (denominator) during the period. For the three and nine-month periods ended September 30, 2021 and 2020, as the Company was in a net loss position, the diluted loss per share: share computations for such periods did not assume the conversion of the Convertible Notes, exercise of stock options or vesting of RSUs or PRSUs as they would have had an anti-dilutive effect on loss per share.
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| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| (In thousands, except per share amounts) | ||||||||||||||||
| Historical net loss per share | ||||||||||||||||
| Numerator: | ||||||||||||||||
| Net loss attributable to common stockholders | $ | (72,601 | ) | $ | (88,815 | ) | $ | (249,095 | ) | $ | (292,789 | ) | ||||
| Denominator: | ||||||||||||||||
| Weighted average shares used in calculating net loss per share - basic and diluted | 25,104 | 24,738 | 25,021 | 24,614 | ||||||||||||
| Net loss per share: | ||||||||||||||||
| Basic and diluted | $ | (2.89 | ) | $ | (3.59 | ) | $ | (9.96 | ) | $ | (11.90 | ) | ||||
The following potentially dilutive securities have been excluded from the computations of diluted weighted average shares outstanding:outstanding for the three and nine-month periods ended September 30, 2021 and 2020, as the inclusion thereof would have been anti-dilutive:
| | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | ||||
|
| 2021 |
| 2020 | | 2021 |
| 2020 |
|
| | (in thousands) | | (in thousands) | | ||||
Shares issuable upon conversion of Convertible Notes | | 14,806 | | 4,435 | | 7,930 | | 4,435 | |
Options |
| 2,692 |
| 2,464 | | 2,722 |
| 2,436 |
|
Unvested restricted stock units |
| 1,244 |
| 940 | | 1,221 |
| 880 |
|
Total |
| 18,742 |
| 7,839 | | 11,873 |
| 7,751 |
|
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| (In thousands) | ||||||||||||||||
| Convertible Notes | 2,316 | - | 2,316 | - | ||||||||||||
| Options | 1,811 | 1,594 | 1,811 | 1,594 | ||||||||||||
| Restricted stock units | 464 | 388 | 464 | 388 | ||||||||||||
| Total | 4,591 | 1,982 | 4,591 | 1,982 | ||||||||||||
17. Commitments and Contingencies
Legal Proceedings
The Company is involved in various disputes, legal proceedings and litigation in the course of its business, including the matters described below and, from time to time, governmental inquiries and investigations and employment and other litigation. These matters, which could result in damages, fines or other administrative, civil or criminal remedies, liabilities or penalties, are often complex and the outcome of such matters is often uncertain. The Company may from time to time enter into settlements to resolve such matters.
Shareholder Litigation
On September 27, 2017, a purported shareholder class action, initially styled DeSmet v. Intercept Pharmaceuticals, Inc., et al., was filed in the United States District Court for the Southern District of New York, naming the Company and certain of its officers as defendants. The Court appointed lead plaintiffs in the lawsuit on June 1, 2018, and the lead plaintiffs filed an amended complaint on July 31, 2018, captioned Hou Liu and Amy Fu v. Intercept Pharmaceuticals, Inc., et al., naming the Company and certain of its current and former officers as defendants. The lead plaintiffs claim to be suing on behalf of anyone who purchased or otherwise acquired the Company’s common stock between June 9, 2016 and September 20, 2017. This lawsuit alleges that material misrepresentations and/or omissions of material fact were made in the Company’s public disclosures during the period from June 9, 2016 to September 20, 2017, in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 10b-5 promulgated thereunder. The alleged improper disclosures relate to statements regarding Ocaliva dosing, use and pharmacovigilance-related matters, as well as the Company’s operations, financial performance and prospects. The plaintiffs seek unspecified monetary damages on behalf of the putative class, an award of costs and expenses, including attorney’s fees, and rescissory damages. On September 14, 2018, the Company filed a motion to dismiss the amended complaint. On March 26, 2020, the Court granted the Company’s motion to dismiss the amended complaint in its entirety, and on March 27, 2020 the Court entered judgment in favor of the Company. On May 8, 2020, the plaintiffs filed a motion to set aside the judgment and grant leave to file a second amended complaint. On September 9, 2020, the Court denied the plaintiffs’ motion to set aside the judgment and grant leave to file a second amended complaint, finding that the proposed second amended complaint did not cure the deficiencies identified in the amended complaint. On October 9, 2020, the plaintiffs filed a notice of appeal to the United States Court of Appeals for the Second Circuit and on January 25, 2021, the plaintiffs filed an appellate brief challenging the March 27, 2020 judgment, the September 9, 2020 judgment and other orders entered in this action. On April 23, 2021, the Company filed a brief in response in the Second Circuit appellate proceeding. On May 14, 2021, the plaintiffs filed a reply brief.
Separately, on December 1, 2017, a purported shareholder demand was made on the Company based on substantially the same allegations as those set forth in the securities case above. In addition, on January 5, 2018, a follow-on derivative suit, styled Davis v. Pruzanski, et al., was filed in New York state court by shareholder Gregg Davis based on substantially the same allegations as those set forth in the securities case above. The court has entered an order staying the derivative litigation pending the outcome of the related securities case.
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On November 5, 2020, a purported shareholder class action, initially styled Chauhan v. Intercept Pharmaceuticals, Inc., et al., was filed in the United States District Court for the Eastern District of New York, naming the Company and certain of its officers as defendants. The lawsuit was transferred to the United States District Court for the Southern District of New York on January 4, 2021. The Court appointed lead plaintiff in the lawsuit on January 25, 2021, and the lead plaintiff filed a corrected amended complaint on March 15, 2021, captioned Richard Rice, as Trustee of the Richard E. and Melinda Rice Revocable Family Trust 5/9/90, and Christian Stankevitz v. Intercept Pharmaceuticals, Inc., et al., naming the Company and certain of its current and former officers as defendants. The lead plaintiff claims to be suing on behalf of anyone who purchased or otherwise acquired the Company’s securities between September 28, 2019 and October 7, 2020. This lawsuit alleges that material misrepresentations and/or omissions of material fact were made in the Company’s public disclosures during the period from September 28, 2019 to October 7, 2020, in violation of Sections 10(b) and 20(a) of the Exchange Act, and Rule 10b-5 promulgated thereunder. The alleged improper disclosures relate to statements regarding the Company’s New Drug Application for OCA for the treatment of liver fibrosis due to NASH and the use of Ocaliva in patients with PBC, as well as the Company’s operations, financial performance and prospects. The plaintiff seeks unspecified monetary damages on behalf of the putative class, and an award of costs and expenses, including attorney’s fees. On April 26, 2021, the Company filed a motion to dismiss the amended complaint. On May 26, 2021, the plaintiff filed an opposition to the motion to dismiss, and on June 9, 2021, the Company filed a reply brief.
Separately, on December 29, 2020, a follow-on derivative suit, styled Rabinovich v. Fundarò, et al., was filed in the United States District Court for the Southern District of New York by shareholder Delfin Rabinovich based on substantially the same allegations as those set forth in the securities case immediately above. This lawsuit was subsequently transferred to the United States District Court for the District of Delaware on January 28, 2021. On February 1, 2021, a second follow-on derivative suit, styled Fung v. Fundarò, et al., was filed in the United States District Court for the District of Delaware based on the substantially same allegations as those set forth in the securities case immediately above and the Rabinovich derivative action. On March 1, 2021, these follow-on derivative suits were consolidated in a single suit titled In re Intercept Pharmaceuticals, Inc. Derivative Litigation. On March 15, 2021, the District of Delaware entered an order staying the consolidated derivative litigation pending a decision on the motion to dismiss in the related securities case.
While the Company believes that it has a number of valid defenses to the claims described above and intends to vigorously defend itself, the matters are in the early stages of litigation and no assessment can be made as to the likely outcome of the matters or whether they will be material to the Company. Accordingly, an estimate of the potential loss, or range of loss, if any, to the Company relating to the matters is not possible at this time.
Patent Litigation
The Company has received paragraph IV certification notice letters from six generic drug manufacturers indicating that each such manufacturer has submitted to the FDA an Abbreviated New Drug Application (“ANDA”) seeking approval to manufacture and sell a generic version of the Company’s 5 mg and 10 mg dosage strengths of Ocaliva® (obeticholic acid) for PBC prior to the expiration of certain patents protecting Ocaliva.
Apotex Abbreviated New Drug Application
In July 2020, the Company received a paragraph IV certification notice (the “Apotex PIV Notice”) from Apotex Inc. (“Apotex”) indicating that Apotex has submitted to the FDA an ANDA seeking approval to manufacture and sell a generic version of the Company’s 5 mg and 10 mg dosage strengths of Ocaliva® (obeticholic acid) for PBC prior to the expiration of the Company’s U.S. Patents Nos. 9,238,673 (the “‘673 Patent”), 10,047,117 (the “‘117 Patent”), 10,052,337 (the “‘337 Patent”), and 10,174,073 (the “‘073 Patent”, and collectively with the ‘673 Patent, ‘117 Patent and ‘337 Patent, the “Apotex Challenged Patents”), which are listed for Ocaliva in the FDA’s Approved Drug Products with Therapeutic Equivalence Evaluations (referred to as the “Orange Book”). The Apotex PIV Notice alleges that the Apotex Challenged Patents are invalid, unenforceable, and/or will not be infringed by the commercial manufacture, use or sale of the generic products described in Apotex’s ANDA. Apotex did not make a paragraph IV certification against the Company’s U.S. Patents Nos. 7,138,390 (the “‘390 Patent”), 8,058,267 (the “‘267 Patent”) or 8,377,916 the (“‘916 Patent”), which are also listed for Ocaliva in the Orange Book. The Company initiated a patent infringement suit against Apotex in the United States District Court for the District of Delaware within 45 days of receipt of the Apotex PIV Notice. As a result, under the Drug Price Competition and Patent Term Restoration Act of 1984 (the “Hatch-Waxman Act”), the FDA cannot grant final approval
31
of Apotex’s ANDA before November 27, 2023 or a court decision in Apotex’s favor, whichever is earlier. Recently, the U.S. Patent and Trademark Office (the “USPTO”) awarded the Company two additional patents that were subsequently listed in the Orange Book for Ocaliva: U.S. Patents Nos. 10,751,349 (the “‘349 Patent”) and 10,758,549 (the “‘549 Patent”). In September and October 2020, the Company received additional paragraph IV certification notices from Apotex challenging the ‘349 Patent and the ‘549 Patent, respectively. The Company amended its complaint against Apotex in November 2020 to add infringement allegations for the ‘549 Patent. In January 2021, the Company received a further paragraph IV certification notice from Apotex challenging a reissue patent, U.S. Patent No. RE 48,286 (the “‘286 Patent”), as described below. The Company further amended its complaint against Apotex in March 2021 to add infringement allegations for the ‘286 Patent. In response to the Company’s allegations of infringement, Apotex has taken the position that the patents asserted against it are invalid and/or not infringed.
Lupin Abbreviated New Drug Application
In July 2020, the Company received a paragraph IV certification notice (the “Lupin PIV Notice”) from Lupin Limited (“Lupin”) indicating that Lupin has submitted to the FDA an ANDA seeking approval to manufacture and sell a generic version of the Company’s 5 mg and 10 mg dosage strengths of Ocaliva® (obeticholic acid) for PBC prior to the expiration of the ‘390 Patent, the ‘673 Patent, the ‘117 Patent, the ‘337 Patent and the ‘073 Patent (collectively, the “Lupin Challenged Patents”), which are listed for Ocaliva in the FDA’s Orange Book. The Lupin PIV Notice alleges that the Lupin Challenged Patents are invalid, unenforceable, and/or will not be infringed by the commercial manufacture, use or sale of the generic products described in Lupin’s ANDA. Lupin did not make a paragraph IV certification against the ‘267 Patent or the ‘916 Patent, which are also listed for Ocaliva in the Orange Book. The Company initiated a patent infringement suit against Lupin in the United States District Court for the District of Delaware within 45 days of receipt of the Lupin PIV Notice. As a result, under the Hatch-Waxman Act, the FDA cannot grant final approval of Lupin’s ANDA before November 27, 2023 or a court decision in Lupin’s favor, whichever is earlier. In September 2020, the Company received an additional paragraph IV certification notice from Lupin challenging the ‘349 Patent and the ‘549 Patent. In November 2020, the Company received an additional amended paragraph IV certification notice from Lupin challenging the ‘286 Patent. The Company amended its complaint against Lupin in November 2020 to add infringement allegations for the ‘549 Patent and to substitute the ‘286 Patent for the ‘390 Patent. In response to the Company’s allegations of infringement, Lupin has taken the position that the patents asserted against it are invalid and/or not infringed.
Amneal Abbreviated New Drug Application
In July 2020, the Company received a paragraph IV certification notice (the “Amneal PIV Notice”) from Amneal Pharmaceuticals of New York, LLC, as U.S. agent for Amneal EU Limited (“Amneal”), indicating that Amneal has submitted to the FDA an ANDA seeking approval to manufacture and sell a generic version of the Company’s 5 mg and 10 mg dosage strengths of Ocaliva® (obeticholic acid) for PBC prior to the expiration of the ‘673 Patent, the ‘117 Patent, the ‘337 Patent and the ‘073 Patent (collectively, the “Amneal Challenged Patents”), which are listed for Ocaliva in the FDA’s Orange Book. The Amneal PIV Notice alleges that the Amneal Challenged Patents are invalid, unenforceable, and/or will not be infringed by the commercial manufacture, use or sale of the generic products described in Amneal’s ANDA. Amneal did not make a paragraph IV certification against the ‘390 Patent, the ‘267 Patent or the ‘916 Patent, which are also listed for Ocaliva in the Orange Book. The Company initiated a patent infringement suit against Amneal in the United States District Court for the District of Delaware within 45 days of receipt of the Amneal PIV Notice. As a result, under the Hatch-Waxman Act, the FDA cannot grant final approval of Amneal’s ANDA before November 27, 2023 or a court decision in Amneal’s favor, whichever is earlier. In October 2020, the Company received an additional paragraph IV certification notice from Amneal challenging the ‘349 Patent and the ‘549 Patent. The Company amended its complaint against Amneal in November 2020 to add infringement allegations for the ‘349 Patent and the ‘549 Patent. In response to the Company’s allegations of infringement, Amneal has taken the position that the patents asserted against it are invalid and/or not infringed.
Optimus Abbreviated New Drug Application
In July 2020, the Company received a paragraph IV certification notice (the “Optimus PIV Notice”) from Optimus Pharma Pvt Ltd (“Optimus”) indicating that Optimus has submitted to the FDA an ANDA seeking approval to manufacture and sell a generic version of the Company’s 5 mg and 10 mg dosage strengths of Ocaliva® (obeticholic acid) for PBC
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prior to the expiration of the ‘390 Patent, the ‘673 Patent, the ‘117 Patent, the ‘337 Patent and the ‘073 Patent (collectively, the “Optimus Challenged Patents”) which are listed for Ocaliva in the FDA’s Orange Book. The Optimus PIV Notice alleges that the Optimus Challenged Patents are invalid, unenforceable, and/or will not be infringed by the commercial manufacture, use or sale of the generic products described in Optimus’s ANDA. Optimus did not make a paragraph IV certification against the ‘267 Patent or the ‘916 Patent, which are also listed for Ocaliva in the Orange Book. The Company initiated a patent infringement suit against Optimus in the United States District Court for the District of Delaware within 45 days of receipt of the Optimus PIV Notice. As a result, under the Hatch-Waxman Act, the FDA cannot grant final approval of Optimus’s ANDA before November 27, 2023 or a court decision in Optimus’s favor, whichever is earlier. In October 2020, the Company received an additional paragraph IV certification notice from Optimus challenging the ‘349 Patent and the ‘549 Patent. The Company amended its complaint against Optimus in November 2020 to add infringement allegations for the ‘549 Patent and to substitute the ‘286 Patent for the ‘390 Patent. In response to the Company’s allegations of infringement, Optimus has taken the position that the patents asserted against it are invalid and/or not infringed.
MSN Abbreviated New Drug Application
In July 2020, the Company received a paragraph IV certification notice (the “MSN PIV Notice”) from MSN Pharmaceuticals Inc. and MSN Laboratories Private Limited (collectively, “MSN”) indicating that MSN has submitted to the FDA an ANDA seeking approval to manufacture and sell a generic version of the Company’s 5 mg and 10 mg dosage strengths of Ocaliva® (obeticholic acid) for PBC prior to the expiration of the ‘390 Patent, the ‘673 Patent, the ‘117 Patent, the ‘337 Patent and the ‘073 Patent (collectively, the “MSN Challenged Patents”) which are listed for Ocaliva in the FDA’s Orange Book. The MSN PIV Notice alleges that the MSN Challenged Patents are invalid, unenforceable, and/or will not be infringed by the commercial manufacture, use or sale of the generic products described in MSN’s ANDA. MSN did not make a paragraph IV certification against the ‘267 Patent or the ‘916 Patent, which are also listed for Ocaliva in the Orange Book. The Company initiated a patent infringement suit against MSN in the United States District Court for the District of Delaware within 45 days of receipt of the MSN PIV Notice. As a result, under the Hatch-Waxman Act, the FDA cannot grant final approval of MSN’s ANDA before November 27, 2023 or a court decision in MSN’s favor, whichever is earlier. In November 2020, the Company received an additional paragraph IV certification notice from MSN challenging the ‘349 Patent, the ‘549 Patent, and the ‘286 Patent. The Company amended its complaint against MSN in December 2020 to add infringement allegations for the ‘549 Patent and to substitute the ‘286 Patent for the ‘390 Patent. In response to the Company’s allegations of infringement, MSN has taken the position that the patents asserted against it are invalid and/or not infringed.
DRL Abbreviated New Drug Application
In December 2020, the Company received a paragraph IV certification notice (the “DRL PIV Notice”) from Dr. Reddy’s Laboratories, Inc. and Dr. Reddy’s Laboratories, Ltd. (collectively, “DRL”) indicating that DRL has submitted to the FDA an ANDA seeking approval to manufacture and sell a generic version of the Company’s 5 mg and 10 mg dosage strengths of Ocaliva® (obeticholic acid) for PBC prior to the expiration of the ‘286 Patent, the ‘390 Patent, the ‘673 Patent, the ‘117 Patent, the ‘337 Patent, the ‘073 Patent, the ‘349 Patent and the ‘549 Patent (collectively, the “DRL Challenged Patents”) which are listed for Ocaliva in the FDA’s Orange Book. The DRL PIV Notice alleges that the DRL Challenged Patents are invalid, unenforceable, and/or will not be infringed by the commercial manufacture, use or sale of the generic products described in DRL’s ANDA. DRL did not make a paragraph IV certification against the ‘267 Patent or the ‘916 Patent, which are also listed for Ocaliva in the Orange Book. The Company initiated a patent infringement suit against DRL in the United States District Court for the District of Delaware within 45 days of receipt of the DRL PIV Notice. As a result, under the Hatch-Waxman Act, the FDA cannot grant final approval of DRL’s ANDA before November 27, 2023 or a court decision in DRL’s favor, whichever is earlier. In response to the Company’s allegations of infringement, DRL has taken the position that the patents asserted against it are invalid and/or not infringed.
In October 2020, the USPTO granted to the Company a reissue patent, ‘286 Patent. By operation of law, the ‘390 Patent was withdrawn and replaced by the ‘286 Patent, which contains composition of matter claims to OCA and has the same term as the ‘390 Patent. In February 2021, a patent term extension certificate was issued, which extends the term of the ‘286 Patent into 2027. The ‘286 Patent has been listed in the Orange Book.
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Trial against all of the generic challengers is scheduled for February 27, 2023.
These proceedings are costly and time consuming. Successful challenges to the Company’s patent or other intellectual property rights through these proceedings could result in a loss of rights in the relevant jurisdiction and may allow third parties to use the Company’s proprietary technologies without a license from the Company or its collaborators. While the Company intends to vigorously defend and enforce its intellectual property rights protecting Ocaliva, the Company can offer no assurance as to when the lawsuits will be decided, whether the lawsuits will be successful, or that a generic equivalent of Ocaliva will not be approved and enter the market before the expiration of the Company’s patents.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Operations.
TheYou should read the following discussion and analysis of our financial condition and results of operations should be read together with our unauditedcondensed consolidated financial statements and theaccompanying notes to those financial statements appearingincluded elsewhere in this Quarterly Report on Form 10-Q and theour audited consolidated financial statements and notes thereto and management’s discussion and analysis of financial condition and results of operations for the year ended December 31, 2016 included in our Annual Report on Form 10-K filed withfor the Securitiesyear ended December 31, 2020 (the “Annual Report”). This discussion and Exchange Commission on March 1, 2017. This discussionanalysis contains forward-looking statements, thatwhich involve significant risks and uncertainties. As a result of many factors, such as those set forth in Item 1.A.described under “Cautionary Note Regarding Forward-Looking Statements,” “Risk Factors” of our Annual Report on Form 10-K and elsewhere in this Quarterly Report on Form 10-Q and any updates to those risk factors contained in our subsequent periodic and current reports filed with the Securities and Exchange Commission,Annual Report, our actual results may differ materially from those anticipated in these forward-looking statements.
Overview
We are a biopharmaceutical company focused on the development and commercialization of novel therapeutics to treat progressive non-viral progressive liver diseases with high unmet medical need utilizing our proprietary bile acid chemistry. Our first marketed product, Ocaliva® (obeticholic acid or “OCA”), is a farnesoid X receptor (“FXR”) agonist approved in the United States, the United Kingdom, the European Union and several other jurisdictions for the treatment of primary biliary cholangitis (“PBC”) in combination with ursodeoxycholic acid (“UDCA”) in adults with an inadequate response to UDCA or as monotherapy in adults unable to tolerate UDCA. In addition to commercializing OCA for PBC under the Ocaliva brand name, we are also currently developing OCA for additional indications, including nonalcoholic steatohepatitis (“NASH”). We are also developing product candidates in various stages of clinical and preclinical development. We believe that OCA and our other product candidates have the potential to treat orphan and other more prevalent liver diseases such as NASH for which currently, there are currently limited therapeutic solutions.options.
Our lead product, obeticholic acid, or OCA, is a bile acid analog, a chemical substance that has a structure based on a naturally occurring human bile acid, that selectively binds to and activates the farnesoid X receptor, or FXR. We believe OCA has broad liver-protective properties and may effectively counter a variety of chronic insults to the liver that cause fibrosis, or scarring, which can eventually lead to cirrhosis, liver transplant and death.
OCAOcaliva was approved infor PBC by the United StatesU.S. Food and Drug Administration (“FDA”) in May 2016 for use in patients with primary biliary cholangitis, or PBC, under the brand name Ocaliva®.accelerated approval pathway. We commenced sales and marketing of Ocaliva in the United States shortly after receiving such marketing approval, and Ocaliva is now available to U.S. patients primarily through a network of specialty pharmacy distributors. In December 2016,Ocaliva received conditional approval for PBC from the European Commission granted conditional approval for Ocaliva for the treatment of PBC and we commenced our European commercial launch in January 2017. In May 2017, Health Canada granted a conditional approval for Ocaliva in PBCDecember 2016 and we commenced our commercial launchlaunches across Europe (including the United Kingdom) in JulyJanuary 2017. We have submitted dossiers and obtained, or are otherwise pursuing, pricing reimbursement from a number of national authorities across Europe. Since January 2017, Ocaliva has also planreceived regulatory approval in several of our target markets outside the United States and Europe, including (but not limited to) Canada, Israel, and Australia, and we continue to filepursue marketing approval of Ocaliva for marketing authorization for OCA in PBC in our other international target markets.
OCA is also being developed to treat a variety of other non-viral progressive liver diseases such as nonalcoholic steatohepatitis, or NASH, primary sclerosing cholangitis, or PSC, and biliary atresia. We are currently evaluating our future development strategy for OCA in other indications, for our product candidate INT-767 and for our pre-clinical candidates.
OCA Ocaliva has received orphan drug designation in both the United States and the European Union for the treatment of PBCPBC. In addition, we continue to work to execute on our post-marketing regulatory commitments with respect to Ocaliva in the U.S. and PSC and breakthrough therapy designationEurope.
Our lead development product candidate is OCA for the potential treatment of NASH. In February 2019, we announced topline results from the U.S. Food and Drug Administration, or FDA, for the treatmentplanned 18-month interim analysis of NASHour pivotal Phase 3 clinical trial of OCA in patients with liver fibrosis.
fibrosis due to NASH, known as the REGENERATE trial. In the primary efficacy analysis, once-daily OCA 25 mg met the primary endpoint agreed with the FDA of fibrosis improvement by at least one stage with no worsening of NASH at the planned 18-month interim analysis. Adverse events were generally mild to moderate in severity and the most common were consistent with the known profile of OCA. Interim analysis results at 18 months were based on surrogate endpoints and the impact on clinical outcomes has not been confirmed. The REGENERATE trial is ongoing and is expected to continue through clinical outcomes for verification and description of the clinical benefit of OCA. OCA also achieved the primary endpoint in a Phase 2b clinical trial for the treatment of NASH that completed in late July 2014, known as the FLINT trial, which was sponsored by the U.S. National Institute of Diabetes and Digestive and Kidney Diseases, or NIDDK, a part of the National Institutes of Health. The FLINT trial was completed in late July 2014. We have an ongoing Phase 3 clinical trial in non-cirrhoticOCA has received breakthrough therapy designation from the FDA for the treatment of NASH patients with liver fibrosis, known asfibrosis. In September 2019, we submitted a New Drug Application (“NDA”) to the REGENERATE trial. REGENERATE includes a pre-planned histology-based interim analysis after 72 weeks of treatment. In May 2017, we completed enrollment of the interim analysis cohort for the REGENERATE trial. We anticipate top-line results from the interim analysis in the first half of 2019. We have also completed a Phase 2 clinical trial, known as the CONTROL trial, the goal of which was to characterize the lipid metabolic effects of OCA and cholesterol management effects of concomitant statin administration in NASH patients. We announced that this trial met its primary endpoint in July 2017. We continue to work towards expanding our overall NASH development program with additional trials and studies, including a Phase 3 trial in NASH patients with cirrhosis, which we expect to initiate by the end of 2017.
In addition to PBC and NASH, we continue to invest in researchFDA seeking accelerated approval of OCA for additional patient populations with other liver diseases.fibrosis due to NASH. In July 2017,November 2019, the FDA accepted our NDA for filing and granted a priority review designation of OCA for liver fibrosis due to NASH. In December 2019, we announced top-line resultssubmitted a Marketing Authorization Application (“MAA”) to the European Medicines Agency (the “EMA”) seeking conditional approval of OCA for liver fibrosis due to NASH. In January 2020, the EMA completed its technical validation of our Phase 2 AESOP trialMAA and thereby confirmed that all essential regulatory elements required for scientific assessment had been included in PSC which evaluatedour MAA prior to the effectscommencement of 24 weeks of treatment with varying doses of OCA compared to placebo. This trial achieved its primary endpoint, whichthe formal review procedure. In June 2020, we believe establishesreceived a proof-of-concept of OCA in a second cholestatic liver disease. We plan to discuss these results with regulatory authorities to formulatecomplete response letter (“CRL”) from the FDA stating that our future development plansNDA for OCA in PSC. In October 2015, we initiated a Phase 2 clinical trial, known as the CARE trial, of OCA in pediatric patients with biliary atresia. This trial will evaluate the effects of 11 weeks of OCA treatment where patients with biliary atresia are randomized to varying doses of OCA or a control group receiving only their current treatment. We have completed a Phase 1 clinical trial of our second product candidate to enter clinical development, called INT-767, a dual FXR and TGR5 agonist, in healthy volunteers. In order to streamline operating expenses, we plan to deprioritize our development program in INT-767 for the foreseeable future.
Our current patents for OCA are scheduled to expire at various times through 2033. Our current plan is to commercialize OCA ourselves in the United States, Europe and certain other target markets for the treatment of PBC,liver fibrosis due to NASH and other indications primarily by targeting physicians who specialize in the treatment of liver and intestinal diseases, including both hepatologists and gastroenterologists. We own worldwide rights to OCA except for Japan, China and Korea, where we have exclusively licensed OCA to Sumitomo Dainippon Pharma Co., Ltd., or Sumitomo Dainippon along with an option to exclusively license OCA in certain other Asian countries. We own or have rights to various trademarks, copyrights and trade names used in our business, including Ocaliva.
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Our net loss forcould not be approved in its present form. The CRL indicated that, based on the nine months ended September 30, 2017 and 2016 was approximately $249.1 million and $292.8 million, respectively. Asdata the FDA had reviewed, the FDA has determined that the predicted benefit of September 30, 2017, we had an accumulated deficit of approximately $1.4 billion. Substantially all our net losses resulted from costs incurred in connection with our research and development programs and from selling, general and administrative costs associated with our operations.
We expect to continue to incur significant expenses and operating losses for at least the next several years as we:
We anticipate that we will need to raise additional capital to commercialize OCA based on a worldwide basissurrogate histopathologic endpoint remains uncertain and continue our research and development activities in relationdoes not sufficiently outweigh the potential risks to OCA and our other pipeline candidates. Until we are able to consistently generate profits from our operations and become profitable, we expect to finance our operating activities through a combination of equity offerings, debt financings, government or other third-party funding, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. Our failure to raise additional capital or enter into such other arrangements as and when needed would have a negative impact on our financial condition and our ability to develop our product candidates.
Our principal executive offices are in New York, New York. We also have administrative offices in San Diego, California and London, United Kingdom.
Recent Developments
On October 23, 2017, we announced additional results from the Phase 2 AESOP trial evaluating OCAsupport accelerated approval for the treatment of patients with PSC.liver fibrosis due to NASH. At that time, the FDA recommended that we submit additional post-interim analysis efficacy and safety data from the ongoing REGENERATE trial in support of potential accelerated approval and that the long-term outcomes phase of the trial should continue. We had our end of review meeting with the FDA in October 2020 to discuss the FDA’s risk-benefit assessment in the CRL based on its review of the available data, as well as our proposed resubmission of our NDA for the treatment of liver fibrosis due to NASH. The meeting was constructive and the FDA provided us with helpful guidance regarding supplemental data we can provide to further characterize OCA’s efficacy and safety profile that could support resubmission based on our Phase 3 REGENERATE 18-month biopsy data, together with a safety assessment from our ongoing studies.
AESOP isAs part of our product development activities, we expect to continue to invest in evaluating the potential of OCA in progressive non-viral liver diseases. We are currently conducting a 24-week, double-blind, placebo-controlled, dose-rangingPhase 3 clinical trial in NASH patients with compensated cirrhosis, known as the REVERSE trial. In January 2020, we announced that we completed enrollment of the REVERSE trial with over 900 patients randomized. We are evaluating the efficacy, safety and safetytolerability of OCA compared to placebo in 77 patients with PSC. Patients were randomized to one of three treatment groups: placebo, OCA 1.5-3 mg, and OCA 5-10 mg (with dose titration occurring at the 12-week midpoint). OCA achieved the primary endpoint of the AESOP trial: patients receiving 5 mg of OCA daily with the option to titrate to 10 mg achieved a statistically significant reduction in ALP as compared to placebo at week 24 (p<0.05). The results from this dose-ranging study suggest that 5 mg may be the optimal titrated dose of OCA in this patient population.
| (U/L) | Placebo (N = 25) | OCA 1.5-3 mg (N = 25) | OCA 5-10 mg (N = 26) | |||||||||
| Mean Baseline ALP | 563 | 423 | 429 | |||||||||
| Least Squares (LS) Mean Change from Baseline in ALP at Week 12 | -53 | -57 | -135 | * | ||||||||
| LS Mean Change from Baseline in ALP at Week 24 | -27 | -105 | -110 | *† | ||||||||
| LS Mean Percent Change from Baseline at Week 24 | +1% | -22 | %* | -22 | %* | |||||||
* p<0.05
† Primary endpoint was ALP change for OCA 5-10 mg compared to placebo at week 24.
Patients in the OCA 1.5-3 mg group achieved statistically significant reductions in ALP versus placebo as measured by LS mean percent change from baseline at week 24. By week 24, ALP increased 1% in the placebo group and decreased by 22% in both the OCA 1.5-3 mg and OCA 5-10 mg groups (p<0.05).
In AESOP, a significant proportion of patients used ursodiol, with 48%, 48% and 46% of patients on placebo, OCA 1.5-3 mg and OCA 5-10 mg, respectively, receiving ursodiol at baseline. In a post-hoc analysis examining the effects of OCA in the presence and absence of ursodiol, ALP reductions were observed with OCA regardless of treatment with ursodiol. Patients receiving OCA monotherapy had greater reductions in ALP at week 12 and week 24 as compared to patients who received OCA in addition to ursodiol. At week 12, patients in the OCA 5-10 mg group receiving OCA monotherapy achieved a 30% LS mean reduction in ALP as compared to a 16% reduction in patients receiving OCA in combination with ursodiol. At week 24, LS mean reductionsbezafibrate in ALPpatients with PBC in a Phase 2 study outside of the United States, and we have an open Investigational New Drug (“IND”) application with the FDA and are in the OCA 5-10 mg groupprocess of initiating a second Phase 2 study in the United States, with the longer-term goal of developing and seeking regulatory approval for a fixed dose combination regimen in this indication and potentially may study this combination in other liver diseases. In addition, we have other compounds in early stages of research and development in our pipeline, including our INT-787 compound, an FXR agonist. We have been evaluating INT-787 in preclinical studies, and recently initiated a first-in-human clinical trial.
Recent Developments
Debt Refinancing, Retirement, and New Money Investment
In August 2021, we agreed with a limited number of institutional holders of our 2023 Convertible Notes and our 2026 Convertible Notes maturing May 15, 2026, to exchange existing notes of both series at a discount for new 2026 Convertible Secured Notes maturing February 15, 2026, and secured by a first priority security interest in substantially all assets of Intercept Pharmaceuticals, Inc. and of any subsidiaries that meet certain threshold requirements to become guarantors. The noteholders (1) exchanged $306.5 million of 2023 Convertible Notes for $292.4 million of new notes, (2) exchanged $114.7 million of 2026 Convertible Notes for $90.0 million of new notes, and also (3) subscribed to buy $117.6 million of new notes for cash. We thereby issued $500.0 million of 2026 Convertible Secured Notes at an interest rate of 3.50%. We received cash proceeds of $117.6 million. We also paid our financial advisory fee by issuing 769,823 new shares of common stock. Further, in connection with the exchange and sale, we bought back approximately 4.5 million shares of common stock for $75.8 million in cash.
In September 2021, we agreed with certain institutional holders to buy back $39.9 million of our 2023 Convertible Notes at a discount.
On account of these transactions, we reduced our 2023 Convertible Notes outstanding by approximately 75% from $460.0 million to $113.7 million.
Employee Stock Option Exchange
With the intention to help us motivate and retain non-executive employees, we launched on August 16, 2021, and closed on September 17, 2021, an offer to exchange eligible out-of-the-money employee stock options for a lesser number of new options with at-the-money strike prices. Following expiration of the exchange offer, out of 703,967 eligible options, we accepted for exchange 612,080 options and exchanged them for 338,848 new options, granted effective September 20, 2021, with a strike price of $15.18, the closing stock price on that day. The original options have been cancelled. Original options that had already vested were 25%exchanged for new options vesting one year from the new grant date, subject to the employee’s continued employment. Original options that had not already vested were exchanged for new options vesting
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two years from the new grant date, subject to the employee’s continued employment. New options will expire after 6.5 years.
Ocaliva Label Update
In 2020 the FDA notified us that, in the course of its routine safety surveillance, in May of that year it began to evaluate a newly identified safety signal, or NISS, regarding liver disorder for Ocaliva which the FDA classified as a potential risk, focused on a subset of the cirrhotic, or more advanced, PBC patients who have taken Ocaliva. In May 2021, the NISS process was concluded and we aligned with the FDA on updated Ocaliva prescribing information in the United States, and Ocaliva is now contraindicated for patients receiving with PBC and decompensated cirrhosis, a prior decompensation event, or compensated cirrhosis with evidence of portal hypertension, in addition to the existing contraindication for complete biliary obstruction.
OCA monotherapyfor Liver Fibrosis due to NASH
We have had multiple formal interactions with the FDA regarding our NASH development program. While we have made progress, significant work remains and 14% for patients receiving OCA in combinationalignment with ursodiol.
| - UDCA | + UDCA | |||||||||||||||||||||||
| Placebo | OCA 1.5-3 mg | OCA 5-10 mg | Placebo | OCA 1.5-3 mg | OCA 5-10 mg | |||||||||||||||||||
| LS Mean Percent Change from Baseline in ALP at Week 12 | -5 | % | -12 | % | -30 | % | -1 | % | -1 | % | -16 | % | ||||||||||||
| LS Mean Percent Change from Baseline in ALP at Week 24 | -7 | % | -19 | % | -25 | % | 19 | % | -15 | % | -14 | % | ||||||||||||
Pruritusthe FDA is a common symptomkey dependency for a potential resubmission of PSCour NDA seeking accelerated approval of OCA for the treatment of liver fibrosis due to NASH. We are conducting a comprehensive safety assessment from our ongoing studies and wasare generating and analyzing biopsy data that will be the most common adverse event observed in AESOP, occurring in 46%, 60%subject of upcoming interactions with the FDA, which will inform our decision-making with respect to a potential resubmission. We also continue to work collaboratively with the EMA on its assessment of our MAA, and 67%have received a “clock stop” of patientsthe review of OCA for NASH fibrosis in the placebo,European Union to allow us to focus on executing on the feedback we have received. As with our NASH program in the United States, we expect that the safety and efficacy data we are generating and analyzing will inform our regulatory and decision-making process with respect to OCA 1.5-3 mgfor NASH in Europe.
COVID-19
In March 2020, we announced new initiatives intended to ensure business continuity and OCA 5-10 mg groups, respectively.support our employees during the coronavirus (“COVID-19”) global pandemic, while continuing the critical activities necessary to bring our approved medicines to patients. With respect to our ongoing clinical trials, we are continuing to closely monitor the latest developments regarding the COVID-19 pandemic and together with our contract research organizations, study sites and other partners, have taken measures intended to minimize disruption to these studies. With respect to our supply chain, we have been working with our third-party manufacturers, distributors and other partners to manage our supply chain activities and mitigate disruptions to our product supplies. To protect the health of our employees and their families and communities, and in accordance with guidance issued by the U.S. Centers for Disease Control and Prevention, the World Health Organization and local authorities, our global workforce has been largely working remotely and we have leveraged digital communication technologies where appropriate to facilitate interactions with patients, healthcare professionals and our other stakeholders. We are preparing for a return of our workforce to our offices in the coming months and continuing to return to in-person interactions for our salesforce, as local regulations permit and taking into account the latest public health guidance on social distancing, sanitation, and other practices, while maintaining some flexibility for our employees for remote work when appropriate.
A two-year open-label extensionIn addition, we continue to closely evaluate the impact of AESOP remains ongoing. Of those patients who completedCOVID-19 on our ability to effectively market, sell and distribute Ocaliva for PBC. The long-term effects of COVID-19 are unknown and we cannot presently predict the double-blind phaseduration, scope or severity of the AESOP trial, 97% chosepotential effects of COVID-19 on our operations, including our clinical trials, regulatory submissions and reviews, supply chain or our ability to participate ingenerate product sales from Ocaliva or, if approved, OCA for liver fibrosis due to NASH, and any such effects could have a material adverse impact on our business, results of operation and financial condition. See “—Risks Related to the open-label extension phase.Development and the Regulatory Review and Approval of Our Products and Product Candidates” and “—Risks Related to the Commercialization of Our Products” below.
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Financial Overview
Revenue
We commenced our commercial launch of Ocaliva for use inthe treatment of PBC in the United States in June 2016. In December 2016, the European Commission granted conditional approval for Ocaliva for the treatment of PBC and we commenced our European commercial launch in January 2017. In MaySince January 2017, HealthOcaliva has also received regulatory approval in several of our target markets outside the United States and Europe, including (but not limited to) Canada, grantedIsrael, and Australia. We sell Ocaliva to a conditional approval for Ocaliva in PBC and we commencedlimited number of specialty pharmacies which dispense the product directly to patients. The specialty pharmacies are referred to as our commercial launch in July 2017.customers.
Revenue is recognized when the four basic criteria of revenue recognition are met: (1) persuasive evidence that an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured. When the revenue recognition criteria are not met, we defer the recognition of revenue by recording deferred revenue on the balance sheet until such time that all criteria are met.
Product Revenue, Net
We recognize revenue upon delivery of Ocaliva to our customers. We provide the right of return to our customers for unopened product for a limited time before and after its expiration date. Prior to July 2017, given our limited sales history for Ocaliva and the inherent uncertainties in estimating product returns,
Under Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”), we had determined that the shipments of Ocaliva made to our customers did not meet the criteria for revenue recognition at the time of shipment. Accordingly, we recognized revenue when the product was sold through to our customers, provided all other revenue recognition criteria were met. We invoiced our customers upon shipment of Ocaliva to them and recorded accounts receivable, with a corresponding liability for deferred revenue equal to the gross invoice price. We then recognized revenue when Ocaliva was sold through as specialty pharmacies dispensed product directly to the patients (sell-through basis).
We re-evaluated our revenue recognition policy in the third quarter of 2017, which included the accumulation and review of customer related transactions since our commercial launch in the second quarter of 2016. We now believe we have accumulated sufficient data to reasonably estimate product returns and, therefore, we will now effectively recognize revenue at the time of shipment to our customers (sell-in basis)
During the third quarter of 2017, we recorded an adjustment related to this change in estimate to recognize previously deferred revenue. The net effect was an increase in net sales of Ocaliva of $4.1 million for the three and nine months ended September 30, 2017. We also established a new reserve of $0.7 million during third quarter of 2017 related to future returns from our customers under our various contracts
We recognized net sales of Ocaliva of $40.9 million and $4.7 million for the three months ended September 30, 2017 and 2016, respectively, and $91.9 million and $4.8 million for the nine months ended September 30, 2017 and 2016, respectively.
We have written contracts with each of our customers that have a single performance obligation — to deliver products upon receipt of a customer order — and these obligations are satisfied when delivery occurs whenand the customer receives Ocaliva. We evaluate the creditworthiness of each of our customers to determine whether collection is reasonably assured. In order to conclude that the price is fixed and determinable, we must be able to (i) calculate our gross product revenues from the sales to our customers and (ii) reasonablyWe estimate our net product revenues. We calculatevariable revenue by calculating gross product revenues based on the wholesale acquisition cost that we chargescharge our customers for Ocaliva. We estimateOcaliva, and then estimating our net product revenues by deducting from our gross product revenues (i) trade allowances, such as invoice discounts for prompt payment and customer fees, (ii) estimated government rebates and discounts related to Medicare, Medicaid and other government programs, and (iii)(ii) estimated costs of incentives offered to certain indirect customers including patients.
Licensing Revenue
patients and (iii) trade allowances, such as invoice discounts for prompt payment and customer fees.
We recognize revenue derived from our collaborative agreementsrecognized net sales of Ocaliva of $92.8 million and $79.5 million for the development and commercialization of certain of our product candidates. In March 2011, we entered into an exclusive licensing agreement with Sumitomo Dainippon for the development of OCA in Japan, China and Korea. Under the terms of the agreement, we have received up-front payments of $16.0 million, including $1.0 million upon the exercise by Sumitomo Dainippon of its option to add Korea to its licensed territories, and may be eligible to receive up to approximately $300.0 million in additional payments for development, regulatory and commercial sales milestones for OCA in the licensed territories. As ofthree months ended September 30, 2017, we have achieved $6.0 million of the development2021 and regulatory milestones.
For accounting purposes, the up-front payments are recorded as deferred revenue2020, respectively and amortized over time and milestone payments are recognized once earned. We recognized $1.3$271.1 million and $6.3$229.4 million respectively, in license revenue resulting from milestone payments and the amortization of the up-front payments under the collaboration agreement for the nine months ended September 30, 20172021 and 2016. 2020, respectively.
We anticipatehave received paragraph IV certification notice letters from several generic drug manufacturers indicating that we will recognize revenueeach such company has submitted to the FDA an Abbreviated New Drug Application (“ANDA”) seeking approval to manufacture and sell a generic version of approximately $1.8 million per year through 2020,our 5 mg and 10 mg dosage strengths of Ocaliva® (obeticholic acid) for PBC prior to the expiration of certain patents protecting Ocaliva. We have initiated patent infringement suits against each of these generic drug manufacturers in the United States District Court for the amortizationDistrict of Delaware. While we intend to vigorously defend and enforce our intellectual property rights protecting Ocaliva, we can offer no assurance as to when the relevant up-front collaboration payments from Sumitomo Dainippon.lawsuits will be decided, whether the lawsuits will be successful, or that a generic equivalent of Ocaliva will not be approved and enter the market before the expiration of such patents. See Note 17 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for more information.
Selling, General and Administrative Expenses
Our selling, generalWe have incurred and administrative expenses, excluding the one-time net expense of $45.0 million attributable to the settlement of a purported securities class action lawsuit in 2016, have increased and we expect to continue to incur significant selling, general and administrative expenses due toas a result of, among other initiatives, the commercialization of Ocaliva for PBC in the United States, Europethe United Kingdom, the European Union and certainour other countries,target markets. In addition, we have incurred significant selling, general and administrative expenses and may in the future incur similar expenses in connection with the preparation for the potential commercialization of OCA in PBC infor liver fibrosis due to NASH, if approved, and our other international marketsfuture approved products, if any, and development activities for OCA in indications other than PBCany maintenance of our general and other product candidates. We further plan on expanding our operations bothadministrative infrastructure in the United States and abroad, which will increase our selling, general and administration expenses. We believe that these activities will result in costs related to the hiring of additional personnel, fees for outside consultants, lawyers and accountants, and the maintenance of facilities. We have also incurred and expect to continue to incur increased costs to comply with corporate governance, internal controls, compliance and similar requirements applicable to public companies with expanding operations and biopharmaceutical companies undertaking worldwide product launches.abroad.
Research and Development Expenses
Since our inception, we have focused significant resources on our research and development activities, including conducting preclinical studies and clinical trials, manufacturingpursuing regulatory approvals and engaging in other product development efforts and activities related to regulatory filings for our product candidates.activities. We recognize research and development expenses as they are incurred.
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Our research and development expensesTable of Contents
We have increasedincurred and we expect to continue to incur significant expenses due to our preclinical studies and clinical trials and other research and development efforts. We anticipate that our research and development expenses will be substantialas a result of, among other initiatives, our clinical development programs for the foreseeable future as we continue the development of OCA for the treatment of PBC NASH and PSC and other indications and to further advance the development ofNASH, our other product candidates, subject to the availability of additional funding.
earlier stage research programs and our regulatory approval efforts.
Results of Operations
Comparison of the Three Months Ended September 30, 20172021 and 2016
2020
The following table summarizes our results of operations for each of the three months ended September 30, 20172021 and 2016, together with the changes in those items in dollars:2020:
| | | | | | |
| | Three Months Ended September 30, | ||||
|
| 2021 |
| 2020 | ||
| | (in thousands) | ||||
Revenue: |
| |
|
| |
|
Product revenue, net | | $ | 92,827 | | $ | 79,521 |
Total revenue | |
| 92,827 | |
| 79,521 |
| | | | | | |
Operating expenses: | |
|
| |
| |
Cost of sales | |
| 658 | |
| 1,826 |
Selling, general and administrative | |
| 53,339 | |
| 70,619 |
Research and development | |
| 45,048 | |
| 48,858 |
Restructuring | | | 2 | | | 13,381 |
Total operating expenses | |
| 99,047 | |
| 134,684 |
| | | | | | |
Other income (expense): | |
|
| |
|
|
Interest expense | |
| (14,095) | |
| (12,091) |
Gain on extinguishment of debt | | | 16,511 | | | — |
Other income, net | |
| 172 | |
| 785 |
Total other income (expense), net | |
| 2,588 | |
| (11,306) |
Net loss | | $ | (3,632) | | $ | (66,469) |
| Three Months Ended September 30, | Dollar Change | |||||||||||
| 2017 | 2016 | |||||||||||
| (In thousands) | ||||||||||||
| Revenue: | ||||||||||||
| Product revenue, net | $ | 40,889 | $ | 4,732 | $ | 36,157 | ||||||
| Licensing revenue | 445 | 445 | - | |||||||||
| Total revenue | 41,334 | 5,177 | 36,157 | |||||||||
| Operating expenses: | ||||||||||||
| Cost of sales | 172 | - | 172 | |||||||||
| Selling, general and administrative | 61,356 | 52,802 | 8,554 | |||||||||
| Research and development | 45,977 | 35,411 | 10,566 | |||||||||
| Total operating expenses | 107,505 | 88,213 | 19,292 | |||||||||
| Operating loss | (66,171 | ) | (83,036 | ) | 16,865 | |||||||
| Other income (expense): | ||||||||||||
| Interest expense | (7,354 | ) | (7,065 | ) | (289 | ) | ||||||
| Other income, net | 924 | 1,286 | (362 | ) | ||||||||
| (6,430 | ) | (5,779 | ) | (651 | ) | |||||||
| Net loss | $ | (72,601 | ) | $ | (88,815 | ) | $ | 16,214 | ||||
Revenues
Product revenue, net was approximately $40.9$92.8 million and $4.7$79.5 million for the three months ended September 30, 20172021 and 2016,2020, respectively. We commenced our commercial launch in the United States for Ocaliva in PBC in June 2016, and in certain European countries and Canada in 2017. We recognized product revenue, net of $36.2 million and $4.7 million in the United States and in ex-U.S. countries, respectively, during the three months ended September 30, 2017. For the three months ended September 30, 2021 and 2020, product revenue, net was comprised of U.S. Ocaliva net sales of $66.6 million and $58.6 million, respectively, and ex-U.S. Ocaliva net sales of $26.2 million and $20.9 million, respectively. We commenced our commercial launch of Ocaliva for the treatment of PBC in the United States and certain European countries in June 2016 and January 2017, respectively. Since January 2017, Ocaliva has also received regulatory approval in several of our target markets outside the United States and 2016, licensing revenue was approximately $445,000Europe, including (but not limited to) Canada, Israel, and $445,000, respectively, which resulted from the recognition of development and regulatory milestones and amortization of the up-front payments under the collaboration agreement with Sumitomo Dainippon.Australia.
Cost of sales
Cost of sales was $172,000 and $0 for the three months ended September 30, 2017 and 2016, respectively, due to the commercial launch in the United States for Ocaliva in PBC in June 2016 and in certain European countries in 2017.
Selling, general and administrative expenses
Selling, general and administrative expenses were $61.4$0.7 million and $52.8$1.8 million for the three months ended September 30, 20172021 and 2016,2020, respectively. The $8.6 million net increase between periods isOur cost of sales for the three months ended September 30, 2021 and 2020 consisted primarily due to an increase in personnel-related costs of $4.5 million to support our commercialpackaging, labeling, materials and international initiativesrelated expenses.
Selling, general and an increase of $5.8 million in indirectadministrative expenses (rent, travel
Selling, general and legal costs), partially offset by decreased expenses of approximately $1.7 million in Ocaliva commercialization activities and market research.
Research and development expenses
Research and developmentadministrative expenses were $46.0$53.3 million and $35.4$70.6 million for the three months ended September 30, 20172021 and 2016, respectively, representing a2020, respectively. The $17.3 million net increasedecrease between periods was primarily driven by decreases in expenses relating to our launch preparation activities associated with the potential approval and commercialization of $10.6 million. This net increase in researchOCA for liver fibrosis due to NASH.
39
Research and development expense primarily reflects increases in OCA researchexpenses
Research and development activities of approximately $13.2 million, partially offset by a decrease in indirect costs of $2.6 million.
Interest expense
Interest expense was $7.4expenses were $45.0 million and $7.1$48.9 million for the three months ended September 30, 20172021 and 2016, respectively due to the issuance of our 3.25% convertible senior notes due 2023, or Convertible Notes, in July 2016.2020, respectively. The $3.9 million net decrease between periods was primarily driven by lower NASH development costs and personnel costs.
Restructuring expenses
Other income, net
Other income, net was $924,000Restructuring expenses were $0.0 million and $1.3$13.4 million infor the three months ended September 30, 20172021 and 2016,2020 respectively. The $362,000 decrease isbetween periods was driven primarily attributable to decreased interest income earned on cash, cash equivalentsby the completion of the 2020 Workforce Plan earlier this year.
Interest expense
Interest expense was $14.1 million and investment securities, which decreased compared to the prior year period primarily due to the sales of investment securities during$12.1 million for the three months ended September 30, 2017.2021 and 2020, respectively. Interest expense in 2020 and prior to August 2021 was based on our original principal amounts outstanding for the 2023 Convertible Notes and 2026 Convertible Notes. In August and September 2021, we partially retired those notes and issued new 2026 Convertible Secured Notes.
Other income, net
Other income, net was $16.7 million and $0.8 million for the three months ended September 30, 2021 and 2020, respectively. The $15.9 million net increase between periods was primarily driven by the gains on the extinguishment of debt related to the exchange of debt and repurchase of 2023 Convertible Notes.
Income taxes
For the three months ended September 30, 20172021 and 2016,2020, no income tax expense or benefit was recognized. Our deferred tax assets are comprised primarily of net operating loss carryforwards. We maintain a full valuation allowance on our deferred tax assets since we have not yet achieved sustained profitable operations. As a result, we have not recorded any income tax benefit since our inception.
40
Comparison of the Nine Months Ended September 30, 20172021 and 20162020
| | | | | | |
| | Nine Months Ended September 30, | ||||
|
| 2021 |
| 2020 | ||
| | (in thousands) | ||||
Revenue: |
| |
|
| |
|
Product revenue, net |
| $ | 271,064 |
| $ | 229,422 |
Total revenue |
| | 271,064 |
| | 229,422 |
| | | | | | |
Operating expenses: |
| |
|
| |
|
Cost of sales | | | 2,086 | | | 4,555 |
Selling, general and administrative |
| | 170,265 |
| | 262,537 |
Research and development |
| | 133,606 |
| | 139,587 |
Restructuring | | | (86) | | | 13,381 |
Total operating expenses |
| | 305,871 |
| | 420,060 |
| | | | | | |
Other income (expense): |
| |
|
| |
|
Interest expense |
| | (39,103) |
| | (35,801) |
Gain on extinguishment of debt | | | 16,511 | | | — |
Other income, net |
| | 2,253 |
| | 3,706 |
Total other (expense), net |
| | (20,339) |
| | (32,095) |
Net loss | | $ | (55,146) | | $ | (222,733) |
The following table summarizes our results of operations for each of the nine months ended September 30, 2017 and 2016, together with the changes in those items in dollars:
| Nine Months Ended September 30, | Dollar Change | |||||||||||
| 2017 | 2016 | |||||||||||
| (In thousands) | ||||||||||||
| Revenue: | ||||||||||||
| Product revenue, net | $ | 91,933 | $ | 4,807 | $ | 87,126 | ||||||
| Licensing revenue | 1,336 | 6,336 | (5,000 | ) | ||||||||
| Total revenue | 93,269 | 11,143 | 82,126 | |||||||||
| Operating expenses: | ||||||||||||
| Cost of sales | 548 | - | 548 | |||||||||
| Selling, general and administrative | 189,363 | 197,382 | (8,019 | ) | ||||||||
| Research and development | 134,001 | 102,292 | 31,709 | |||||||||
| Total operating expenses | 323,912 | 299,674 | 24,238 | |||||||||
| Operating loss | (230,643 | ) | (288,531 | ) | 57,888 | |||||||
| Other income (expense): | ||||||||||||
| Interest expense | (21,840 | ) | (7,065 | ) | (14,775 | ) | ||||||
| Other income, net | 3,388 | 2,807 | 581 | |||||||||
| (18,452 | ) | (4,258 | ) | (14,194 | ) | |||||||
| Net loss | $ | (249,095 | ) | $ | (292,789 | ) | $ | 43,694 | ||||
Revenues
Product revenue, net was approximately $91.9$271.1 million and $4.8$229.4 million for the nine months ended September 30, 20172021 and 2016,2020, respectively. For the nine months ended September 30, 2021 and 2020, product revenue, net was comprised of U.S. Ocaliva net sales of $192.1 million and $169.0 million, respectively, and ex-U.S. Ocaliva net sales of $79.0 million and $60.4 million, respectively. We commenced our commercial launch inof Ocaliva for the United States for Ocaliva intreatment of PBC in June 2016, and in certain European countries and Canada in 2017. We recognized product revenue, net of $83.8 million and $8.1 million in the United States and certain European countries in ex-U.S. countries, respectively, duringJune 2016 and January 2017, respectively. Since January 2017, Ocaliva has also received regulatory approval in several of our target markets outside the nine months ended September 30, 2017. For each of the nine months ended September 30, 2017United States and 2016, licensing revenue was approximately $1.3 millionEurope, including (but not limited to) Canada, Israel, and $6.3 million, respectively, which resulted from the recognition of development and regulatory milestones and amortization of the up-front payments under the collaboration agreement with Sumitomo Dainippon.Australia.
Cost of sales
Cost of sales was $548,000 and $0 for the nine months ended September 30, 2017 and 2016, respectively, due to the commercial launch in the United States for Ocaliva in PBC in June 2016 and in certain European countries in 2017.
Selling, general and administrative expenses
Selling, general and administrative expenses were $189.4$2.1 million and $197.4$4.6 million for the nine months ended September 30, 20172021 and 2016,2020, respectively. The $8.0 million net decrease between periods isOur cost of sales for the nine months ended September 30, 2021 and 2020 consisted primarily due to the one-time net expense of $45.0 million attributable to the settlement of a purported securities class action lawsuit in 2016 pluspackaging, labeling, materials and related legalexpenses.
Selling, general and administrative expenses of $2.9 million in 2016, along with a decrease in consultant spend of $2.2 million. These decreases were partially offset by increased expenses of approximately $22.4 million in additional personnel-related costs to support our commercial
Selling, general and international initiatives, $16.2 million in Ocaliva commercialization activities and market research and indirect expenses (rent, travel and product-related legal costs) of $3.5 million.
Research and development expenses
Research and developmentadministrative expenses were $134.0$170.3 million and $102.3$262.5 million for the nine months ended September 30, 20172021 and 2016, respectively, representing a2020, respectively. The $92.2 million net increasedecrease between periods was primarily driven by decreases in expenses relating to our launch preparation activities associated with the potential approval and commercialization of $31.7 million. This net increase in researchOCA for liver fibrosis due to NASH.
Research and development expense primarily reflects increases in OCA researchexpenses
Research and development activities of approximately $33.3 million to support our development activities, partially offset by a decrease of $750,000 of compensation-related costs and indirect costs of $850,000.
Interest expense
Interest expense was $21.8expenses were $133.6 million and $7.1$139.6 million for the nine months ended September 30, 20172021 and 2016, respectively due to the issuance2020, respectively. The $6.0 million net decrease between periods was primarily driven by lower NASH development costs and lower personnel costs.
41
Restructuring expenses
Other income, net
Other income, net was $3.4Restructuring expenses were $(0.1) million and $2.8$13.4 million infor the nine months ended September 30, 20172021 and 2016,2020 respectively. The $0.6decrease between periods was driven primarily by the completion of the 2020 Workforce Plan earlier this year.
Interest expense
Interest expense was $39.1 million and $35.8 million for the nine months ended September 30, 2021 and 2020, respectively. Interest expense in 2020 and prior to August 2021 was based on our original principal amounts outstanding for the 2023 Convertible Notes and 2026 Convertible Notes. In August and September 2021, we partially retired those notes and issued new 2026 Convertible Secured Notes.
Other income, net
Other income, net was $18.8 million and $3.7 million for the nine months ended September 30, 2021 and 2020, respectively. The $15.1 million net increase isbetween periods was primarily attributable to interest income earneddriven by the gains on cash, cash equivalents and investment securities, which increased comparedthe extinguishment of debt related to the prior year period primarily due to the net proceeds from the issuanceexchange of ourdebt and repurchase of 2023 Convertible Notes in July 2016.Notes.
Income taxes
For the nine months ended September 30, 20172021 and 2016,2020, no income tax expense or benefit was recognized. Our deferred tax assets are comprised primarily of net operating loss carryforwards. We maintain a full valuation allowance on our deferred tax assets since we have not yet achieved sustained profitable operations. As a result, we have not recorded any income tax benefit since our inception.
Liquidity and Capital Resources
Sources of Liquidity
As of September 30, 2017, we had an accumulated deficit of $1.4 billion. We anticipate that we will continue to incur losses for at least the next several years. We expect that our research and development and selling, general and administrative expenses will continue to be significant and, as a result, we will need additional capital to fund our operations, which we may seek to obtain through a combination of equity offerings, debt financings, government or other third-party funding, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements.
We have funded our operations primarily through the sale of common stock, preferred stock, convertible notes and warrants and payments received under our collaboration agreements totaling approximately $1.4 billion (net of issuance costs of $46.1 million). As of September 30, 2017, we had cash, cash equivalents and investment securities of $492.7 million. Cash in excess of immediate requirements is invested in accordance with our investment policy, primarily with a view to liquidity and capital preservation. Currently, our funds are held in cash and money market bank accounts and investments, all of which have maturities of less than two years.
Cash Flows
The following table sets forth the significant sources and uses of cash for the periods set forth below:indicated:
| | | | | | |
| | Nine Months Ended September 30, | ||||
|
| 2021 |
| 2020 | ||
| | (in thousands) | ||||
Net cash (used in) provided by: |
| |
|
| |
|
Operating activities | | $ | (45,492) | | $ | (154,051) |
Investing activities | |
| 55,398 | |
| 132,973 |
Financing activities | |
| 2,083 | |
| (537) |
Effect of exchange rate changes | |
| (678) | |
| (1,674) |
Net increase (decrease) in cash, cash equivalents and restricted cash | | $ | 11,311 | | $ | (23,289) |
| Nine Months Ended September 30, | ||||||||
| 2017 | 2016 | |||||||
| (In thousands) | ||||||||
| Net cash provided by (used in): | ||||||||
| Operating activities | $ | (188,943 | ) | $ | (252,979 | ) | ||
| Investing activities | 262,380 | (86,309 | ) | |||||
| Financing activities | 2,077 | 413,780 | ||||||
Operating Activities.Net cash used in operating activities of approximately $188.9$45.5 million during the nine months ended September 30, 20172021 was primarily a result of our $249.1$55.1 million net loss, a net decrease in operating assets and liabilities of $33.5 million and a gain of $16.5 million on extinguishments of debt, partially offset by a net increase of $41.6$25.5 million in stock-based compensation, $9.6$11.9 million for accretion of the discount on ourthe 2023 Convertible Notes, $2.8$7.0 million for accretion of the amortizationdiscount on the 2026 Convertible Notes, $3.0 million for accretion of investment premiumthe discount on the 2026 Convertible Secured Notes, $4.3 million for non-cash operating lease costs and $3.3$2.6 million of depreciation.
Cash flows for the nine months ended September 30, 2021 include cash receipts of $4.2 million reflecting payments from HMRC for the U.K. R&D tax credit claims.
Net cash used in operating activities of $253.0approximately $154.1 million during the nine months ended September 30, 20162020 was primarily a result of our $292.8$222.7 million net loss offset by the add-back of non-cash expenses of $27.0 million for stock-based compensation, the amortization of investment premium of $3.7 million and a net increasedecrease in operating assets and liabilities of $3.5 million.$6.6
42
million, partially offset by $44.4 million in stock-based compensation, $12.3 million for accretion of the discount on the 2023 Convertible Notes, $7.0 million for accretion of the discount on the 2026 Convertible Notes $4.6 million for non-cash operating lease costs and $2.3 million of depreciation. Cash flows for the nine months ended September 30, 2020 include cash receipts of $20.7 million reflecting payments from HMRC for the U.K. R&D tax credit claims.
Investing Activities. For the nine months ended September 30, 2017,2021, net cash provided by investing activities primarily reflects the salesales and maturities of investment debt securities of $398.5$334.2 million, partially offset by the purchase of investment debt securities of $127.0 million and $9.2 million of capital expenditures related to the build out of our new corporate office.
$278.4 million.
For the nine months ended September 30, 2016,2020, net cash used inprovided by investing activities primarily reflects the salesales and maturities of investment debt securities of $361.0$417.6 million, partially offset by the purchase of investment debt securities of $443.3 million and $4.0 million of capital expenditures related to our offices.$282.6 million.
Financing Activities. Net cash provided by financing activities in the nine months ended September 30, 20172021, primarily consisted of $117.6 million of proceeds from the sale of 2026 Convertible Secured Notes, offset by payments of $75.8 million for the repurchase of common stock and $38.1 million for the repurchase of 2023 Convertible Notes.
Net cash used in financing activities in the nine months ended September 30, 2020 consisted primarily of $2.1$1.8 million from payments of employee withholding taxes related to stock-based awards offset by $1.3 million of net proceeds from the exercise of options to purchase common stock.
Net cash provided by financing activities in the nine months ended September 30, 2016 consisted primarily of $447.7 million from the proceeds of the issuance of Convertible Notes, net of issuance costs and $4.4 million from the exercise of options to purchase common stock, partially offset by $38.4 million of payments for capped call transactions and associated costs.
Future Funding Requirements
WhileAs of September 30, 2021, we commenced our commercial launch of Ocaliva for usehad $428.8 million in PBC in the United States, Europecash, cash equivalents, restricted cash and other jurisdictions where it has received marketing approval, we cannot predict the period, if any, in which material net cash inflows from sales of OCA or our other product candidates can sustain our operations.investment debt securities. We currently expect to continue to incur significant expenses in connection with our ongoing development activities, particularly as we continue the research, development and clinical trials of, and seek regulatory approval for, our product candidates.
We have incurred and expect to incur additional costs associated with our plans to further expand our operations in the United States, Europe and in certain other countries. In addition, subject to obtaining regulatory approval of any of our product candidates, we expect to incur significant commercialization expenses for product sales, marketing, manufacturing and distribution. As part of our longer-term strategy, we also anticipate incurring expenses in connection with increases in our product development, scientific, commercial and administrative personnel and expansion of our infrastructure in the United States and abroad. We may also engage in activities that involve potential in- or out-licensing of products or technologies or acquisitions of other products, technologies or businesses. We anticipate that we will need substantial additional funding in connection with our continuing operations.
As of September 30, 2017, we had $492.7 million in cash, cash equivalents and investment securities. We currently project adjusted operating expenses will fall in the middle of our previously guided range of $380 million to $420 million in the fiscal year ending December 31, 2017, which excludes stock-based compensation and other non-cash items.2021. These expenses are planned to support, among other initiatives, the continued commercialization of Ocaliva infor PBC in the United States and our other markets, theour continued clinical development of OCA for OCA in PBC NASH and PSCNASH and our other earlier stage pipelineresearch and development programs. We may make additional investments over 2017 asAlthough we believe that our business evolves. Our adjusted operating expense estimateexisting capital resources, together with our net sales of Ocaliva for 2017 is higher than our adjusted operating expenses for 2016, reflecting continued investment in clinical development programs and commercialization activities.
Adjusted operating expense is a financial measure not calculated in accordance with U.S. generally accepted accounting principles, or GAAP. For the nine months ended September 30, 2016, adjusted operating expense also excludes a one-time $45 million net expense for the settlement of a purported class action lawsuit. Other than the net class action lawsuit settlement amount, which is a one-time expense, we anticipate that stock-based compensation expensePBC, will represent the most significant non-cash item that is excluded in adjusted operating expenses as compared to operating expenses under GAAP. See “Non-GAAP Financial Measures” for more information.
Due to the many variables inherent to the development and commercialization of novel therapies and our rapid growth and expansion, we currently cannot accurately and precisely predict the duration beyond mid-2018 over which we expect our cash and cash equivalents to be sufficient to fund our anticipated operating expensesrequirements for the next twelve months following the filing of this report, we may need to raise additional capital to fund our operating requirements beyond that period. While we have retired approximately 75% of our 2023 Convertible Notes, we still have $113.7 million of them scheduled to mature on July 1, 2023, and $615.3 million of convertible notes scheduled to mature in 2026, all of which will need to be paid off or refinanced, if not converted. Furthermore, in light of our receipt of the CRL from the FDA in June 2020 with respect to our NDA for OCA for liver fibrosis due to NASH and the numerous risks and uncertainties associated with pharmaceutical product development and commercialization, any delays in, or unanticipated costs associated with, our development, regulatory or commercialization efforts could significantly increase the amount of capital expenditurerequired by us to fund our operating requirements. However,Accordingly, we currently believemay seek to access the public or private capital markets whenever conditions are favorable, to issue new securities, or to refinance or repurchase existing securities, even if we do not have an immediate need for additional capital at that time.
Our forecasts regarding the period of time that our cash and cash equivalentsexisting capital resources will be sufficient for us to:
Accordingly, we will continue to require substantial additional capital in connection with our continuing operations, including continuing our commercialization plans and our research and development activities and building our global infrastructure to support these activities.
The amount and timing of our future funding requirements, both near and long-term, will depend on a variety of factors, many of which are outside of our control. Such factors including:
include, but are not limited to, those factors listed above under “Cautionary Note Regarding Forward-Looking Statements”.
We have no committed external sources of funding. Until such time, if ever, as we can consistently generate profits from our operationsfunding and become profitable, we expect to finance our cash needs through a combination of equity offerings, debt financings, government or other third-party funding, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interests of our common stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through government or other third-party funding, marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties,may not be available when we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or to grant licensesneed them on terms that are acceptable to us, or at all. If adequate funds are not available to us, we may not be favorableable to us.
make scheduled debt payments on a timely basis, or at all, and may be required to delay, limit, reduce or cease our operations.
Contractual Obligations and Commitments
ThereAside from the convertible notes transactions described above, there have been no material changes to our contractual obligations and commitments outside the ordinary course of business from those disclosed under the heading “Management’s Discussion
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and Analysis of Financial Condition and Results of Operations-Contractual Obligations and Commitments”Operations—Contractual Obligations” in our Annual Report on Form 10-K for the year ended December 31, 2016.2020.
Our updated contractual obligations for principal and interest payments due on our Convertible Notes as of September 30, 2021, are as follows: $23.5 million due in less than 1 year, $156.0 million due in one to three years, and $643.2 million due in three to five years.
Off-Balance Sheet Arrangements
As of September 30, 2017,2021, we did not have any off-balance sheet arrangements as defined under the rules of the Securities and Exchange Commission.arrangements.
Item 3. Quantitative and Qualitative DisclosureDisclosures About Market Risk
Risk.
Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of U.S. interest rates and there have been no material changes sinceto our market risk from that disclosed under the caption “Quantitative and Qualitative Disclosures about Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2016.Report.
Item 4. Controls and Procedures
Procedures.
Evaluation of Disclosure Controls and Procedures
Our disclosure controls are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, or the Exchange Act, are recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. In designing and evaluating our disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as(as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), required by Rule 13a-15(b) or 15d-15(b) of September 30, 2017,the Exchange Act, our principal executive officerChief Executive Officer and principal financial officerChief Financial Officer have concluded that as of such date,the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were adequate and effective.
Changes in Internal Control overOver Financial Reporting
There were no changes in our internal control over financial reporting that occurred during theour most recent fiscal quarter ended September 30, 2017 identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II
OTHER INFORMATION
Item 1. Legal ProceedingsProceedings.
On September 27, 2017,For a purported shareholder class action, styled Judith DeSmet v. Intercept Pharmaceuticals, Inc., Mark Pruzanski and Sandip S. Kapadia was filed in the United States District Court for the Southern District of New York, naming us and certaindescription of our officers as defendants. This lawsuit was filed by a stockholder who claims to be suing on behalf of anyone who purchased or otherwise acquired our securities between May 31, 2016 and September 20, 2017. The lawsuit alleges that we made material misrepresentations and/or omissions of material fact in our public disclosures during the period from May 31, 2016 and September 20, 2017, in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder. The alleged improper disclosures relate to statements regarding our business, operational and compliance policies. The plaintiff seeks unspecified monetary damages on behalf of the putative class and an award of costs and expenses, including attorney’s fees. Additional complaints may be filed against us and our directors and officers relatedsignificant legal proceedings, see Note 17 to our disclosures.
We believe that we have valid defenses to the claimsunaudited condensed consolidated financial statements included elsewhere in the lawsuitthis Quarterly Report on Form 10-Q and intend to defend ourselves vigorously. At this time, no assessment can be made as to the likely outcome of this lawsuit or whether the outcome will be material to us. Therefore, we have not accrued for any loss contingencies related to this lawsuit.incorporated by reference herein.
Item 1A. Risk FactorsFactors.
Investing in our securities involves a high degree of risk. The following risk factors and other information included in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2020 should be carefully considered.considered before deciding whether to invest in our securities. The risks and uncertainties described below and in our other filings are not the only ones we face. Additional risks and uncertainties not presently known to us or that we presently deem less significant may also impair our business operations. Please see the “Forward-Looking Statements” section of this Quarterly Report on Form 10-Q for a discussion of some of the forward-looking statements that are qualified by these risk factors. If any of the following risks, or such unknown risks, occur, our business, financial condition, results of operations and future growth prospects could be materially and adversely affected. In that case, the market price of our securities could decline, and you may lose all or part of your investment.
Risks Related to Our Financial Position and Need for Additional Capital
We are currently dependent on the successful commercialization of Ocaliva® (obeticholic acid or OCA),Ocaliva for primary biliary cholangitis, or PBC. To the extent Ocaliva is not commercially successful, our business, financial condition and results of operations may be materially and adversely affected and the price of our common stock may decline.
Ocaliva is our only drug that has been approved for sale and it has only been approved for the treatment of PBC in combination with ursodiolUDCA in adults with an inadequate response to ursodiolUDCA or as monotherapy in adults unable to tolerate ursodiol.UDCA.
Our ability to generate profits from operations and become profitable will dependcurrently depends on the commercial success of commercial sales of Ocaliva.Ocaliva for PBC. However, the successful commercialization of Ocaliva infor PBC is subject to many risks. We are currently undertaking our first commercial launch withhave not launched or commercialized a drug before Ocaliva, in PBC, and there is no guarantee that we will be able to do so successfully. There are numerous examples of unsuccessful product launches and commercial efforts, as well as failures to meet expectations of market potential, including by pharmaceutical companies with moregreater experience and resources than us.
The commercial success of Ocaliva for PBC depends on the extent to which patients, physicians and payers accept and adopt Ocaliva as a treatment for PBC, and we do not know whether our or others’ estimates in this regard will be accurate. While we continue to conduct various activities, such as profiling of our customers, to better understand how physicians care for PBC patients, PBC is an orphan disease in which Ocaliva represented the first new therapy in approximately 20 years. As such, there is significant uncertainty in the degree of market acceptance that Ocaliva will have infor PBC. For example, if the patient population suffering from PBC is smaller than we estimate, or even if the patient population matches our estimateestimates but Ocaliva is not widely accepted as a treatment for PBC, the commercial potential of Ocaliva for PBC will be limited. Physicians may not prescribe Ocaliva and patients may be unwilling to use Ocaliva if coverage is not provided or reimbursement is inadequate to cover a significant portion of the cost. Additionally, the use of Ocaliva in a non-trial setting may result in the occurrence of unexpected or a greater incidence of side effects, adverse reactions or misuse that may negatively affect the commercial prospects of Ocaliva.Ocaliva for PBC. Furthermore, any negative development in any other development program offor OCA or our failure to satisfy the post-marketing regulatory commitments and requirements to which we are or may become subject including the completionsubmission of data from our Phase 4 COBALT trial or any other study to assess the clinical benefit of Ocaliva in PBC may materially and adversely impact the commercial results and potential of Ocaliva.Ocaliva for PBC. In May 2021, we updated the Ocaliva prescribing information in the United States and Ocaliva is now contraindicated for patients with PBC and decompensated cirrhosis, a prior decompensation event, or compensated cirrhosis with evidence of portal hypertension, in addition to the existing contraindication for complete biliary obstruction. Corresponding limitations on the use of Ocaliva in our potential patient population, or similar safety concerns, could reduce our sales. See “—Risks Related to the Development and the Regulatory Review and Approval of Our Products and Product Candidates” and “—Risks Related to the Commercialization of Our Products” below.
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As a result, we cannot foresee ifit is uncertain whether Ocaliva net sales for PBC will ever be accepted as a therapy in PBC that eventually results in revenues that can sustain operations. Itour operations and it may take the passage of a significant amount of time to generate sufficient revenues tobefore Ocaliva net sales for PBC sustain operations even ifour operations. Furthermore, Ocaliva becomes accepted as a therapy in PBC. Furthermore, because Ocaliva is still undergoing regulatory review in a number of jurisdictions outside of the United States and the European Union, we may not be able to commercialize Ocaliva inreceive regulatory approval for PBC in such other jurisdictions beyond those in which it is currently approved, which may also limit our prospects. If the commercialization of Ocaliva for PBC is unsuccessful or perceived to be disappointing,unsuccessful, the long-term prospects of Ocaliva andfor PBC, as well as the long-term prospects of our company, may be significantly harmed.materially and adversely affected.
We have never been profitable. We expect to incur losses for the foreseeable future, and we may never achieve or sustain profitability.
We have never been profitable and do not expect to be profitable in the foreseeable future. We have incurred net losses of $412.8$274.9 million, $226.4$344.7 million and $283.2$309.2 million for the years ended December 31, 2016, 20152020, 2019 and 2014, respectively, and $249.1 million and $292.8 million for the nine months ended September 30, 2017 and 2016,2018, respectively. To date, we have financed our operations primarily through public offerings and private placements of our securities, offeringssales of product and payments received under our licensing and collaboration agreements. At September 30, 2017,2021, we had $492.7$428.8 million in cash, cash equivalents, restricted cash and investment debt securities.
We have devoted substantially all of our resources to ourthe development efforts relating toof our product candidates, including conductingthe conduct of our clinical trials, the launch and commercialization of our product candidates, providingOcaliva for PBC, preparation for a potential launch of OCA for liver fibrosis due to NASH and general and administrative support for these operations, protectingincluding the protection of our intellectual property and engaging in activities to prepare for and commercially launch Ocaliva in PBC.property.
We expect to continue to incur losses for the foreseeable future, and we expect these losses to increasebe significant as we, continue to commercialize Ocaliva for PBC in jurisdictions where marketing approval has been received,among other things, develop and seek regulatory approval for and prepareour product candidates, including OCA for liver fibrosis due to commercially launch Ocaliva for PBC in jurisdictions without marketing approval, develop and seekNASH, maintain our regulatory approvals for OCA in nonalcoholic steatohepatitis, or NASH, and other indications, and add infrastructure and personnel in the United States and internationally to supportcommercialize our product development and commercialization efforts and operations as a public company.approved products. We believe our prospects and ability to significantly grow revenues will be dependent on our ability to successfully develop and commercialize OCA for indications other than PBC, such as NASH, and primary sclerosing cholangitis, or PSC.to identify strategic business development opportunities to leverage our capabilities in rare diseases. As a result, we expect a significant amount of resources to continue to be devoted to our development programs for OCA.OCA and to developing our pipeline.
As part of our product development activities, we anticipate that we will continue our Phase 4 COBALT trial of OCA in PBC,currently expect to continue our Phase 3 clinical program of OCA infor liver fibrosis due to NASH, including theour Phase 3 REGENERATE trial in non-cirrhotic NASH patients with liver fibrosis due to NASH through clinical outcomes for verification and continue the developmentdescription of OCA in PSC. We also expect to continue the development of OCA in additional diseases, such as biliary atresia, a rare pediatric disease characterized by deficient bile duct developmentclinical benefit and our Phase 3 REVERSE trial for which we initiated a Phase 2 trial in OCA called CARE. Our overall development program for OCA in NASH is expected to include a number of trials, such as the Phase 2 clinical trial, referred to as the CONTROL trial, to assess the lipid metabolic effects of OCA and the effects of concomitant statin administration in NASH patients for which topline results were reported in July 2017. Furthermore, we completed a Phase 1 clinical trial for INT-767, an earlier stage product candidate.with compensated cirrhosis. Our expenses could increase if we are required by the U.S. Food and Drug Administration, or FDA or the European Medicines Agency, or EMA to perform studies or trials in addition to those currently expected, if our current trials are modified for any reason, or if there are any issues or delays in completing our clinical trials or the development of any of our product candidates.candidates, due to COVID-19 or otherwise. For example, in June 2020 we received a CRL from the FDA with respect to our NDA for OCA for liver fibrosis due to NASH. The CRL indicated that, based on the data the FDA had reviewed, the FDA has determined that the predicted benefit of OCA based on a surrogate histopathologic endpoint remains uncertain and does not sufficiently outweigh the potential risks to support accelerated approval for the treatment of patients with liver fibrosis due to NASH. The FDA recommended that we submit additional post-interim analysis efficacy and safety data from the ongoing REGENERATE trial in support of potential accelerated approval and that the long-term outcomes phase of the trial should continue. Although we are in discussions with the FDA with respect to the potential resubmission of our NDA seeking accelerated approval of OCA for the treatment of liver fibrosis due to NASH, there is no assurance that we will be successful or that OCA will be approved for liver fibrosis due to NASH on an accelerated basis, or at all. Accordingly, our previously anticipated U.S. commercial launch of OCA for liver fibrosis due to NASH has been postponed, we do not expect to generate revenues for this indication until it has been approved, and we may incur significantly greater costs than previously anticipated in connection with the development of OCA for liver fibrosis due to NASH.
We intend to continue to develop OCA and our other existing product candidates, alone or in combination, for non-viral liver diseases. If OCA or any of our other product candidates fails in clinical trials or does not gain or maintain regulatory approval, or if they doOCA or any of our other product candidates does not achieve market acceptance, we may never become profitable. Our net losses and negative cash flows have had, and will continue to have, an adverse effect on our stockholders’ equity and working capital. Because of the numerous risks and uncertainties associated with pharmaceutical product development and commercialization, we are unable to accurately predict with certainty the timing or amount of increasedour expenses,
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whether such expenses may increase, or when, or if, we will be able to achieve profitability. The amount of our future net losses will depend, in part, on the rate ofour future growth of our expenses, whether and by how much such expenses increase and our ability to generate revenues.
We will require substantial additional funding, which may not be available to us on acceptable terms, orif at all, and, ifall. If adequate funds are not so available to us, we may require usbe required to delay, limit, reduce or cease our operations.
We are currently advancingdeveloping OCA through clinical development for multipleadditional indications, including NASH, and other product candidates through various stages of clinical and preclinical development. Developing pharmaceutical products, including conducting preclinical studies and clinical trials, is expensive. If, for example, the FDA, EMA or other regulatory authorities require that we perform additional studies beyond those that we currently expect, our expenses could increase materially beyond what we currently anticipate, and the timing of any potential product approval may be delayed.
In addition, subject to obtaining regulatory approval of any of our product candidates, we expecthave incurred and anticipate that we will continue to incur significant commercialization expenses forresearch and development, product sales, marketing, manufacturing and distribution. We have incurred and anticipate incurring significantdistribution expenses as we continuerelating to commercializethe commercialization of Ocaliva infor PBC. As part of our longer-term strategy, we also anticipate incurringthat we will incur significant expenses in connection with increases in our productresearch and development scientific, commercialefforts, the commercialization of our other products such as OCA for liver fibrosis due to NASH, if approved, and the maintenance of our general and administrative personnel and expansion of our facilities and infrastructure in the United States and abroad. We expect to incur additional costs associated with operating as a public company and further plan on expanding our operations in the United States, Europe and in certain other countries. We may also engage in business development activities that involve potential in- or out-licensing of products or technologies or acquisitions of other products, technologies or businesses.
As of September 30, 2017,2021, we had $492.7$428.8 million in cash, cash equivalents, restricted cash and investment debt securities. We currently project adjustedexpect to continue to incur significant operating expenses will fall in the middle of our previously guided range of $380 million to $420 million in the fiscal year ending December 31, 2017, which excludes stock-based compensation and other non-cash items.2021. These expenses are planned to support, among other initiatives, the continued commercialization of Ocaliva infor PBC in the United States and our other markets, andour continued clinical development forof OCA infor PBC and NASH and our other earlier stage pipeline programs. We may make additional investments over 2017 as our business evolves. Accordingly, we will continue to require substantial additional capital in connection with our continuing operations, including continuing our clinical development and commercialization activities, despite having started to generate revenues from product sales. Because successful development and commercialization of our products and product candidates is uncertain, we are unable to estimate the actual funds required to complete the research and development and commercializationprograms. Although we believe that our existing capital resources, together with our net sales of our products and product candidates.
Adjusted operating expense is a financial measure not calculated in accordance with U.S. generally accepted accounting principles, or GAAP. We anticipate that stock-based compensation expenseOcaliva for PBC, will represent the most significant non-cash item that is excluded in adjusted operating expenses as compared to operating expenses under GAAP. See “Non-GAAP Financial Measures” for more information.
Due to the many variables inherent to the development and commercialization of novel therapies, such as the risks described in this “Risk Factors” section of this quarterly report on Form 10-Q, and our rapid growth and expansion, we currently cannot accurately or precisely predict the duration beyond mid-2018 over which we expect our cash and cash equivalents to be sufficient to fund our anticipated operating expensesrequirements for the next twelve months, we may need to raise additional capital to fund our operating requirements beyond that period. Furthermore, in light of our receipt in June 2020 of a CRL from the FDA with respect to our NDA for OCA for liver fibrosis due to NASH and the numerous risks and uncertainties associated with pharmaceutical product development and commercialization, any delays in, or unanticipated costs associated with, our development, regulatory or commercialization efforts could significantly increase the amount of capital expenditurerequired by us to fund our operating requirements. However,Accordingly, we currently believemay seek to access the public or private capital markets whenever conditions are favorable, even if we do not have an immediate need for additional capital at that time.
Our forecasts regarding the period of time that our cash and cash equivalentsexisting capital resources will be sufficient for us to:
Accordingly, we will continue to require substantial additional capital in connection with our continuing operations, including continuing our commercialization plans and our research and development activities and building our global infrastructure to support these activities.
The amount and timing of our future funding requirements, both near and long-term, will depend on a variety of factors, many of which are outside of our control. Such factors including:
include, but are not limited to, those factors listed above under “Cautionary Note Regarding Forward-Looking Statements”.
We have no committed external sources of funding.funding and additional funds may not be available when we need them on terms that are acceptable to us, or at all. If adequate funds are not available to us, we are unablemay not be able to obtain fundingmake scheduled debt payments on a timely basis, weor at all, and may be required to significantly curtaildelay, limit, reduce or cease our planned activities, including research and development programs and commercialization activities.operations.
Raising additional capital may cause dilution to our stockholders, restrict our operations or require us to relinquish rights to our technologies or product candidates.
Until such time,Unless and until we generate sufficient cash flow from sales of our products, including Ocaliva for PBC and, if ever, as we can generate substantial product revenues,approved, OCA for liver fibrosis due to NASH, we expect to seek additional fundingfinance our future cash needs through a combination ofpublic or private equity offerings,or debt financings, government or other third-party funding, marketing and distribution arrangements andor other collaborations, strategic alliances and licensing arrangements.arrangements, or a combination of these sources. Additional funding may not be available to us on acceptable terms, orif at all.
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The terms of any future financing may adversely affect the holdings or the rightsinterests of our security holders. Toexisting securityholders. For example, to the extent that we raise additional capital through the sale of equity or convertible debt securities, our stockholders’ ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. We also could be required to seek funds through arrangements with licensing or collaborative partners or otherwise that may require us to relinquish rights to some of our technologies or product candidates or otherwise agree to terms unfavorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.
We have a limited operating history as a commercial organization, which may make it difficult to predict our future performance, and we expect to continue to face a number of factors that may cause operating results to fluctuate.
We are a biopharmaceutical company with a limited operating history as a commercial entity. Prior to the commercial launch of Ocaliva for PBC in the United States in June 2016 and certain European countries in 2017, our operations were limited to developing our technology and undertaking preclinical studies and clinical trials of our product candidates and engaging in pre-commercial activities for Ocaliva in PBC. We do not have approval for any of our other product candidates.
While we commercially launched Ocaliva for PBC in the United States, Europe and certain other jurisdictions, we will need to conduct further activities to develop and cultivate a sustainable market for our drug in this orphan disease. These efforts will continue to be expensive and time-consuming, and we cannot be certain that we will be able to successfully develop a market. For example, we will need to conduct significant sales and marketing activities in jurisdictions where Ocaliva receives marketing approval. In the event we are unable to effectively develop and maintain a market for Ocaliva in PBC, our ability to effectively commercialize Ocaliva would be limited, and we would not be able to generate product revenues successfully.
Furthermore, our financial condition and operating results have varied significantly in the past and are expected to continue to significantly fluctuate from quarter-to-quarter or year-to-year due to a variety of factors, many of which are beyond our control. Factors relating to our business that may contribute to these fluctuations include:
Risks Related to the Development and the Regulatory Review and
Approval of Our Products and Product Candidates
We cannot be certain ifwhether Ocaliva will receive full approval for PBC in jurisdictions where it has previously received accelerated or conditional approval, or that Ocaliva will be approved for PBC in other jurisdictions.any jurisdictions beyond those in which it is currently approved. Furthermore, OCA may fail to becomenot be approved on an accelerated basis, or at all, for NASH or any other indication beyond PBC and we may not be able to successfully receive regulatory approval for any other product candidate. Without regulatory approval, we will not be able to market and commercialize our product candidates.
The development, testing, manufacture, packaging, labeling, storage, approval, promotion, advertising, distribution, marketing and export and import, among other things, of aour products and product candidate and issues relating to its approval and marketingcandidates are subject to extensive regulation by the FDA in the United States, the EMA in Europe and various regulatory authorities in other countries, with regulations differing from country to country. We are not permitted to market our product candidates in the United States or Europe until we receive approval of a New Drug Application, or NDA, from the FDA, or a Marketing Authorization Application, or MAA, from the EMA,European Commission, respectively. Currently, our ability to generate revenue related to product sales will dependdepends on the successful marketing of Ocaliva for PBC andin the development andjurisdictions in which it has received regulatory approval. In the future, our ability to generate product sales in addition to those of Ocaliva for PBC will depend on whether we are successful in obtaining regulatory approval of OCA for the treatment NASH and our other product candidates.
candidates, including OCA for liver fibrosis due to NASH.
Ocaliva is our only drug that has been approved for sale.sale and it has only been approved for the treatment of PBC in combination with UDCA in adults with an inadequate response to UDCA or as monotherapy in adults unable to tolerate UDCA. In the United States, Ocaliva has beenwas approved for PBC under the accelerated approval pathway. Accelerated approval was granted for OCA inOcaliva for PBC based on a reduction in alkaline phosphatase;ALP; however, an improvement in survival or disease-related symptoms has not yet been established. Continued approval of Ocaliva for this indication may bePBC in the United States is contingent upon the verification and description of clinical benefit in confirmatory trials. Our Phase 4 COBALT confirmatory outcomes trial may failtrials and our satisfaction of our other post-marketing regulatory requirements. Any failure by us to show aconfirm the clinical benefit for OCA in PBC or may not satisfy the requirements of the regulatory authorities for other reasons.
As part of the post-marketing requirements, our COBALT trial includes a cross-section of PBC patients with early, moderately advanced and advanced disease according to the so-called Rotterdam criteria. We have agreed to evaluate the safety and efficacy of Ocaliva in patients with moderatefor PBC due to severe hepatic impairment and as monotherapy in patients with PBC. Finally, we have also agreed to develop and characterize a lower dose formulationCOVID-19 or other factors may jeopardize the continued approval of Ocaliva to allow for once daily dosing in patients with moderate or advanced hepatic impairment.
PBC.
We commenced our commercial launch of Ocaliva for PBC in certain European countries in 2017 afterfollowing the European Commission grantedCommission’s grant of conditional approval for Ocaliva for the treatment of PBC. Thein December 2016. Our marketing authorization in the European Union is conditionedwas granted on the condition of the successful completion of the COBALT trial and a trialour “401 trial” evaluating the safety and efficacy of Ocaliva in patients with moderate to severe hepatic impairment.impairment, although we are in discussions with the EMA with respect to the future of our post-marketing commitments.
In MaySince January 2017, Ocaliva has also received regulatory approval in several of our target markets outside the United States and Europe, including (but not limited to) Canada, Israel, and Australia, and we received a marketing authorization with conditions for Ocaliva in PBC in Canada. We also plancontinue to apply forpursue marketing approval of Ocaliva for PBC in certainour other international target markets. If obtained, continued approval of Ocaliva for PBC in such jurisdictions may be contingent upon the verification and description of clinical benefit in confirmatory trials. Any delay or failure in satisfying the post-marketing regulatory commitments and requirements to which we are or may become subject, including our COBALT trial, may jeopardize the continued approval of Ocaliva for PBC in the United States, European Union and other jurisdictions. In some markets acrosswhere regulatory approval has been obtained for Ocaliva, discussions with national public health system authorities regarding reimbursement are ongoing.
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In regard to our ongoing COBALT trial, changes to our Ocaliva label with respect to patients with PBC with decompensated cirrhosis (e.g., Child-Pugh Class B or C), a prior decompensation event, or compensated cirrhosis with evidence of portal hypertension have influenced modifications to our study design overall and as a result of the world.changes to the U.S. prescribing information we also removed from the trial subjects in the United States who are now excluded from the scope of the label. We have also agreed with the FDA and the EMA to terminate our 401 trial, in light of the exclusion of patients with PBC with decompensated cirrhosis from the Ocaliva label in the U.S. While we remain blinded to safety and efficacy data in these trials, the Data Monitoring Committee (“DMC”) reviewed the unblinded results of a pre-specified interim efficacy analysis of the COBALT trial and separately reviewed unblinded safety and pharmacokinetic data from both the COBALT and 401 trials. Following these reviews, the DMC stated that it was not feasible to continue the COBALT trial as designed and noted the challenges in enrolling and maintaining placebo-controlled post-marketing studies in this rare disease setting. No acute safety concerns were noted by the DMC. Given the feasibility concerns noted by the DMC as well as the potential confounding impact of subjects discontinuing treatment and/or transitioning from investigational product to commercial drug during clinical trials, we discussed with the FDA and the EMA proposed modifications to the COBALT trial, and we notified the FDA and the EMA of the DMC’s recommendation. Based on discussions with both the FDA and EMA, which are ongoing, we intend to close-out the COBALT trial. We will continue to generate placebo controlled data from the COBALT trial as well as data from studies utilizing real world evidence, which we expect will include outcomes data from the Phase 3 POISE long-term extension study, in support of a broader evidence data package. We expect the data generation process to take several quarters and plan to submit this data package to the FDA and the EMA in 2022. If this data package does not support fulfillment of our post-marketing obligations, we may not be able to maintain our previously granted marketing approvals of Ocaliva for PBC.
Ocaliva is not approved for any indication other than PBC. We currently have no other products approved for sale and we cannot guarantee that we will ever have additional marketable products or that our productsOCA will be approved for use in additional indications.indications such as NASH. NDAs and MAAs must include extensive preclinical and clinical data and supporting information to establish the product candidate’s safety and effectiveness for each desired indication. NDAs and MAAs must also include significant information regarding the chemistry, manufacturing and controls for the product. Obtaining approval of ana NDA or ana MAA is a lengthy, expensive and uncertain process, and we may not be successful in obtaining approval. The FDA and the EMA review processes can take years to complete and approval is nevernot guaranteed. Even after the submission of ana NDA, to the FDA the FDA mustmay decide whethernot to accept or reject the submission for filing. In addition,filing and review or may determine that the submission does not support approval. For example, in June 2016, eligible members2020 we received a CRL from the FDA with respect to our NDA for OCA for liver fibrosis due to NASH. The CRL indicated that, based on the data the FDA had reviewed, the FDA had determined that the predicted benefit of OCA based on a surrogate histopathologic endpoint remains uncertain and does not sufficiently outweigh the potential risks to support accelerated approval for the treatment of patients with liver fibrosis due to NASH. The FDA recommended that we submit additional post-interim analysis efficacy and safety data from the ongoing REGENERATE study in support of potential accelerated approval and that the long-term outcomes phase of the electoratestudy should continue. Similarly, there are a number of factors that may result in delays in the United Kingdom decided by referendum to leaveEMA’s review process following the submission of a MAA. We have received a “clock stop” in the European Union or Brexit. Since a significant proportion of the regulatory frameworkreview of OCA for NASH fibrosis to allow us to focus on executing on the feedback we have received from the EMA in its assessment of our MAA. Ultimately, the EMA may determine that our submission does not support approval on a conditional basis, or at all. The United Kingdom is derived fromleft the European Union directiveson January 31, 2020, in what is often referred to as “Brexit,” and regulations, the referendum could materially changeend of the regulatory regimetransition period was December 31, 2020. Thus, Brexit came into effect on January 1, 2021, at which time the existing centrally approved marketing authorization for Ocaliva was automatically converted into a UK marketing authorization by the UK medicines regulator, MHRA (the so-called “grandfathering” process). Over time, Brexit may result in material changes to the regulations applicable to us. Continuing threats from COVID-19, including additional waves of infections, could also affect the operations of the FDA, EMA and other health authorities, which could delay our operations,clinical development efforts and the review and approval of our product candidates, including OCA for liver fibrosis due to NASH.
As is the case with respect tothe approval of Ocaliva for PBC, any future approvals or our other product candidates.
Approvalspotential future approvals may also be conditional upon the completion of one or more clinical trials. In addition, delays in approvals or rejections of marketing applications in the United States, Europe or other countries may be based upon many factors, including, for example, regulatory requests for additional analyses, reports, data, preclinical studies and clinical trials, regulatory endpoint requirements, regulatory questions regarding safety or risk-benefit profile, different interpretations of data and results, changes in regulatory policy during the period of product development and the emergence of new information regarding
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our product candidates or otherapproved products. RegulatoryInitial and continued regulatory approval is also dependent on successfully passing regulatory inspection of our company,requirements applicable to us, our clinical sites and our key vendors, including requirements that we and to ensure compliancesuch parties comply with applicable good clinical, pharmacovigilance, laboratory and manufacturing practices regulation.regulations. Critical findings could jeopardize or delay the approval of the NDAour NDAs or MAA.MAAs or impair our ability to maintain our marketing approvals.
We will also be requiredPrior to receiving regulatory approval, we must finalize the negotiations and discussions onproduct label for each of our product labels for the respective jurisdictionscandidates in each jurisdiction in which we seek regulatory approval. Even if aour product is approved, the FDA, EMA or the EMA, as the case may be,other applicable regulatory authorities may limit the indications or uses for which theour product may be marketed, require extensive warnings on the product labeling or require expensive and time-consuming clinical trials, risk mitigation programs such as a REMS, monitoring or reporting as conditionsa condition of approval. Also, regulatory approval for anyour approved products may be withdrawn. In addition, obtaining regulatory approval for the marketing of our product candidates may be withdrawn. Regulatory authorities in countries outside of the United States and Europe also have requirements for approval of drug candidates with which we must comply prior to marketing in those countries. Obtaining regulatory approval for marketing of a product candidate in one country does not ensure that we will be able to obtain regulatory approval for such product in any other country.
WeIn order to obtain and/or maintain regulatory approval for OCA for indications other than PBC, we will need to complete a number ofadditional clinical trials and other studies for the continued developmentstudies. For example, in connection with our Phase 3 clinical program of OCA in indications other than PBC. For example,for liver fibrosis due to NASH, we are currently have ongoingconducting our Phase 3 REGENERATE trial in patients with liver fibrosis due to NASH through clinical outcomes for verification and description of OCA in non-cirrhoticclinical benefit and our Phase 3 REVERSE trial for NASH patients with liver fibrosis. We also intend to conduct additional trials in NASH, such as one in NASH patients withcompensated cirrhosis. In each of these cases, ourOur ability to obtain and maintain the regulatory approvals necessary to commercialize our product candidatesOCA for indications other than PBC, including NASH, will depend on our ability to successfully design, conduct and complete these additional trials, as well as assemble various other datathe efficacy, safety and risk-benefit profile of OCA demonstrated by such trials and our ability to complete ourprepare and submit complex regulatory filings for OCA in the relevant indication or patient population.
accordance with applicable regulatory requirements.
There can be no assurance that weOCA will be able to receive marketing approval on an accelerated or conditional basis, or at all, for OCA in PBC in jurisdictions where it ishas not yet been approved or for NASH in any jurisdiction, or that any of our other product candidates will receive marketing approval for OCAany indication in NASH or any other indication.jurisdiction. We cannot predict whether our clinical trials and studies as tofor our product candidates, including OCA for PBC, NASH or any other indication, or patient population will be successful, or whether regulatorsregulatory authorities will agree with our conclusions regardingrelating to the preclinical studies and clinical trials and studies we have conducted to dateconduct, or whether such regulatory authorities will require us to conduct additional studiesclinical trials or trials.studies. For example, while OCA received breakthrough therapy designation from the FDA in January 2015 for the treatment of NASH patients with liver fibrosis and we filed a NDA in the United States and a MAA in Europe based on the results from the 18-month analysis of our Phase 3 REGENERATE trial in patients with liver fibrosis due to NASH, we do not know if one pivotal clinical trial will be sufficient for marketing approval or if regulatorsregulatory authorities in the United States, the European Union, or any of our other target markets will ultimately agree to a surrogate endpoint for accelerated approval ofapprove OCA for the treatment of NASH. While the interim analysis for the REGENERATE trial will be basedliver fibrosis due to NASH on a histological endpoint as was the case in the Phase 2b clinical trial for the treatment of NASH, known as the FLINT trial, sponsored by the U.S. National Institute of Diabetes and Digestive and Kidney Diseases,an accelerated or NIDDK, a part of the National Institutes of Health, ourconditional basis, or at all. Our Phase 3 REGENERATE trial has different trial designs. For example, upon the finalization of a protocol amendment underway, the primary endpoint for the interim analysis for REGENERATE may be achieved based on one of: (i) the proportion of OCA-treated patients relative to placebo achieving at least one stage of liver fibrosis improvement with no worsening of NASH or (ii) the proportion of OCA-treated patients relative to placebo achieving NASH resolution with no worsening of liver fibrosis. Furthermore, we selected a definition for NASH resolution for the trial, which defines a responder as a patient achieving a histologic score of 0 for ballooning and 0 or 1 for inflammation. The REGENERATE trial will also remainremains blinded after the interim analysis and is expected to continue to follow patients until the occurrence of a pre-specified number of adverse liver-related clinical events,outcomes, including progression to cirrhosis, to confirmfor verification and description of clinical benefit on a post-marketing basis. While the statistical analysis planned for our REGENERATE trial is designed based on the data from the FLINT trial, the differences in the two trials may limit the utility of using FLINT as a basis for the design of the REGENERATE trial.
Furthermore, the Phase 2 dose ranging trial of OCA in 200 adult NASH patients in Japan conducted by our collaborator, Sumitomo Dainippon, did not meet its primary endpoint with statistical significance. In this trial, there was a dose dependent, although not statistically significant, increase in the percentage of OCA treated patients compared to placebo who achieved the primary endpoint (p=0.053). In addition, no difference was seen in fibrosis improvement in the OCA groups compared to placebo. The baseline characteristics between the patients in the Japanese Phase 2 trial conducted by Sumitomo Dainippon were distinct in a number of ways from those of the Western patients included in the Phase 2b FLINT trial conducted by NIDDK. For example, differences were observed among the patient population at baseline in relation to gender mix and metabolic factors like weight, diabetes status, dyslipidemia and hypertension. While our REGENERATE trial was designed based on the results of the FLINT trial and is anticipated to enroll a predominantly Western NASH patient population, the results of the FLINT trial may not be replicated in our REGENERATE trial. There is no assurance that Sumitomo Dainippon will initiate any registrational trials in NASH and the results of any additional trial conducted by Sumitomo Dainippon may not be an improvement as compared to those from the Phase 2 trial on Japanese NASH patients.
benefit.
If we are unable to obtain approval from the FDA, the EMA or other regulatory agenciesapproval for OCA for PBC in the jurisdictions in which it is not currently approved or obtain regulatory approval in the United States, European Union and our other product candidates,jurisdictions for OCA for other indications, such as NASH, or if, subsequent to approval, we are unable to successfully commercialize OCA orfor our other product candidates, we willmay not be able to generate sufficient revenue to become profitable or to continue our operations.
We are developing product candidates for the treatment of rare diseases or diseases for which there are no or limited therapies, such as PBC NASH and PSC,NASH, and for some of which there is little clinical experience, and our development approach involves new endpoints and methodologies. As a result, there is increaseda heightened risk that we will not be able to gain agreement with regulatory authorities regarding an acceptable development plan, that the outcome of our clinical trials will not be favorable or that, even if favorable, regulatory authorities may not find the results of our clinical trials to be sufficient for marketing approval.
We are focused on developing therapeutics for the treatment of rare diseases and diseases for which there are no or limited treatments. As a result, the design and conduct of our clinical trials for these diseases and other indications we may pursue will beis subject to increasedheightened risk.
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In the United States, the FDA generally requires two adequate and well-controlled pivotal clinical trials to approve ana NDA. Furthermore, for full approval of ana NDA, the FDA requires a demonstration of efficacy based on a clinical benefit endpoint. Under Subpart H regulations, theThe FDA canmay grant accelerated approval based on a surrogate endpoint reasonably likely to predict clinical benefit. Even if results fromthough our planned pivotal clinical trials for a specific indication, such as our Phase 3 REGENERATE trial of OCA in patients with liver fibrosis due to NASH and our Phase 3 REVERSE trial for NASH patients with compensated cirrhosis, may achieve their primary endpoints and are highly significant and we believe reasonably believed by us to be likely to predict clinical benefit, the FDA may not accept the results of such trials and grant accelerated approval ofor approve our product candidate on an accelerated basis, or at all. It is also possible that the FDA may refuse to accept for filing and review any regulatory application we submit for regulatory approval in the United States. Even if our regulatory application is accepted for review, there may be delays in the FDA’s review process and the FDA may determine that such indication.
regulatory application does not contain adequate clinical or other data or support the approval of the product candidate. In such a case, the FDA may issue a CRL that may require that we conduct and/or complete additional clinical trials and preclinical studies or provide additional information or data before it will reconsider our application for approval. For example, in June 2020 we received a CRL from the FDA regarding our NDA for OCA for liver fibrosis due to NASH. The CRL indicated that, based on the data the FDA had reviewed, the FDA had determined that the predicted benefit of OCA based on a surrogate histopathologic endpoint remains uncertain and does not sufficiently outweigh the potential risks to support accelerated approval for the treatment of patients with liver fibrosis due to NASH. The FDA recommended that we submit additional post-interim analysis efficacy and safety data from the ongoing REGENERATE study in support of potential accelerated approval and that the long-term outcomes phase of the study should continue. The requirements imposed by the FDA may be substantial, expensive and time-consuming, and there is no guarantee that we will continue to pursue any such application or that the FDA will ultimately decide that any such application supports the approval of the product candidate on an accelerated basis, or at all. The FDA may also refer any regulatory application to an advisory committee for review and recommendation as to whether, and under what conditions, the application should be approved. While the FDA is not bound by the recommendation of an advisory committee, it considers such recommendations carefully when making decisions.
Even if we receive accelerated approval for any of our product candidates, we may be required to conduct or complete a post-approval clinical outcomes trial to confirm the clinical benefit of thesuch product candidatecandidates by demonstrating the correlation of biochemicalthe surrogate endpoint therapeutic response in patients with a significant reduction in adverse clinical outcomes over time. If a confirmatoryFor example, interim analysis results at 18 months in our Phase 3 REGENERATE trial were based on surrogate endpoints and the impact on clinical outcomes has not been confirmed. The REGENERATE trial is required,ongoing for verification and description of clinical benefit of OCA for liver fibrosis due to NASH. There can be no assurance that the clinical outcomes portion of our REGENERATE trial will confirm that the surrogate endpoint used as the basis of the regulatory submissions we may behave made or expect to make seeking approval of OCA for liver fibrosis due to NASH will eventually show an adequate correlation with clinical outcomes. In addition, as a condition of the accelerated approval of Ocaliva for PBC in the United States, we are required to have the trial be substantially underway at the time we submit an NDA. It is possible that our NDA submissionconduct a clinical outcomes study with respect to Ocaliva for regulatory approval will not be accepted by the FDA for review or, even if it is accepted for review, that there may be delays in the FDA’s review process and that the FDA may determine that our NDA does not merit the approval of the product candidate, in which case the FDA may require that we conduct and/or complete additional clinical trials and preclinical studies before it will reconsider our application for approval.
PBC. Following discussions with regulatory authorities, we initiated our COBALT clinical outcomes confirmatory trial infor PBC in December 2014 prior to the approval of Ocaliva. The COBALT trial includes a cross-section of PBC patients with early, moderately advanced and advanced disease according to the so-called Rotterdam criteria. We have agreed to evaluate the safety and efficacy of Ocaliva in patients with moderate to severe hepatic impairment and as monotherapy in patients withfor PBC. We have agreed to similar requirements with the EMA as part of the conditional approval of Ocaliva in PBC in Europe. We may be required to conduct other post-marketing studies based on our regulatory interactions with other regulatory agencies across the world. There can be no assurance that our COBALT trial or other trials conducted as part of our post-marketing obligations will confirm that the surrogate endpointsendpoint used for accelerated approval of Ocaliva for PBC will eventually show an adequate correlation with clinical outcomes.
Furthermore, in regard to our ongoing COBALT trial, changes to our Ocaliva label with respect to patients with PBC with decompensated cirrhosis (e.g., Child-Pugh Class B or C), a prior decompensation event, or compensated cirrhosis with evidence of portal hypertension have influenced modifications to our study design overall and as a result of the changes to the U.S. prescribing information we also have removed from the trial subjects in the United States who are now excluded from the scope of the label. In addition, while we remain blinded to safety and efficacy data in this trial, the DMC reviewed the unblinded results of a pre-specified interim efficacy analysis of the COBALT trial and reviewed unblinded safety and pharmacokinetic data. Following these reviews, the DMC stated that it was not feasible to continue the COBALT trial as designed and noted the challenges in enrolling and maintaining placebo-controlled post-marketing studies in this rare disease setting. No acute safety concerns were noted by the DMC. Given the feasibility concerns noted by the DMC and the potential confounding impact of subjects discontinuing treatment and/or transitioning from investigational product to commercial drug during clinical trials, we discussed with the FDA and the EMA proposed modifications to the COBALT trial, and we notified the FDA and the EMA of the DMC’s recommendation. Based on discussions with both the FDA and EMA, which are ongoing, we intend to close-out the COBALT trial. We will continue to generate placebo controlled data from the COBALT trial as well as data from studies utilizing real world evidence,
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which we expect will include outcomes data from the Phase 3 POISE long-term extension study, in support of a broader evidence data package. We expect the data generation process to take several quarters and plan to submit this data package to the FDA and the EMA in 2022. If any such trial fails to show such adequate correlation,this data package does not support fulfillment of our post-marketing obligations, we may not be able to maintain our previously granted marketing approvals of Ocaliva for PBC. Similarly, if approved based on a surrogate endpoint, continued approval of OCA for Ocalivaother indications, or of any of our other product candidates, may be contingent upon the verification and description of clinical benefit in PBC.
confirmatory trials.
Our marketing authorization in the European Union for Ocaliva for the treatment of PBC is not a full approval andapproval. Instead, it is conditional on the conduct of certain post-approval studies.studies including the COBALT trial. Our ability to obtain and maintain conditional marketing authorization of Ocaliva for PBC in the European Union will beis limited to specific circumstances and subject to several conditions and obligations if obtainedthat we may be unable to satisfy in whole or at all, including the completion of one or more clinical outcomeoutcomes trials to confirm the clinical benefit of Ocaliva infor PBC. Conditional marketing authorizations based on incompleteinterim clinical data may be granted for a limited number of listed medicinal products for human use, including products designated as orphan medicinal products under European Union law, if (1)(i) the risk-benefitbenefit-risk balance of the product is positive, (2)(ii) it is likely that the applicant will be in a position to provide the required comprehensive clinical trial data (3)post-authorization, (iii) an unmet medical needsneed will be fulfilled by the product and (4)(iv) the benefit to public healthpatients of the product’s immediate availability on the market of the medicinal product outweighs the risk inherent in the fact that additional data are still required. Specific obligations, including with respectobligations relating to the timely and successful completion of ongoing or new studies and with respect to the collection of pharmacovigilance data, may be specified in the conditional marketing authorization. Conditional marketing authorizations are valid for one year, and may be renewed annually, if the risk-benefitbenefit-risk balance remains positive, and after an assessment of the need for additional or modified conditions.
Although we have successfully renewed our conditional marketing authorization in the European Union in the past, there can be no assurance that we will be able to continue to do so in the future. Failure to renew our conditional marketing authorization would prevent us from continuing to market Ocaliva for PBC in the European Union.
Our ongoing Phase 3 REGENERATE trial of OCA in non-cirrhotic NASH patients with liver fibrosis due to NASH incorporates an interim primary surrogate endpoint that may serve as the basis for a supplemental NDA filing for accelerated approval in the United States and as the basis for a conditional approval in Europe.the European Union. Accelerated approval in the United States and conditional approval in the European Union for OCA infor liver fibrosis due to NASH are subject to similar risks as discussed above in relation to OCA for PBC. TheIn the primary endpoint inefficacy analysis of the Phase 2b FLINTREGENERATE trial, ofonce-daily OCA in NASH patients was based on liver biopsy and was defined as an improvement of two or more points in the NAFLD activity score (a system of scoring the histopathological features in the liver), or NAS,25 mg met, with no worsening of liver fibrosis. In contrast, upon the finalization of a protocol amendment underway,statistical significance, the primary endpoint foragreed with the interim analysis for REGENERATE may be achieved based on one of: (i) the proportionFDA of OCA-treated patients relative to placebo achievingfibrosis improvement by at least one stage of liver fibrosis improvement with no worsening of NASH or (ii)(defined as no worsening of hepatocellular ballooning, no worsening of lobular inflammation and no worsening of steatosis) at the planned 18-month analysis. Although a numerically greater proportion of OCA-treated patients relativein both OCA treatment groups compared to placebo achievingachieved the primary endpoint of NASH resolution with no worsening of liver fibrosis. Furthermore, we selected a definition for NASH resolutionfibrosis in the primary efficacy analysis, this result did not reach statistical significance. As agreed with the FDA, in order for the trial, which defines a responder as a patient achieving a histologic scoreprimary objective to be met, the study was required to achieve one of 0 for ballooning and 0 or 1 for inflammation. Currently, other biopharmaceutical companies are enrolling or have initiated trialsthe two primary endpoints. Notwithstanding the results of the REGENERATE 18-month analysis, the CRL issued by the FDA in certain subpopulations of NASH patientsJune 2020 indicated that, based on different endpoints from those in the FLINT and REGENERATE trials. Althoughdata the FDA acknowledged at recent workshops the possibility of granting accelerated approval for NASH therapies using surrogate endpoints, with potential examples including histological improvement, using the NAS or another scoring system, histological resolution of NASH, or improvements in fibrosis in pre-cirrhotic patients with NASH,had reviewed, the FDA did not provide any formal regulatory guidancehad determined that the predicted benefit of OCA based on approvable endpoints and may not accept a surrogate histopathologic endpoint for OCAremains uncertain and does not sufficiently outweigh the potential risks to support accelerated approval for the treatment of NASH.
It is possible that if we seek marketing approval of OCA for non-cirrhotic NASH patients with liver fibrosis based ondue to NASH. The FDA recommended that we submit additional post-interim analysis efficacy and safety data from the interim resultsongoing REGENERATE study in support of potential accelerated approval and that the long-term outcomes phase of the study should continue. Although we are in discussions with the FDA with respect to the potential resubmission of our REGENERATE trial, our NDA submission may not be accepted by the FDA for review or, even if accepted for review, there may be delays in the FDA’s review process and the FDA may determine that our NDA does not merit theseeking accelerated approval of OCA for the treatment of non-cirrhoticliver fibrosis due to NASH, patients. Thethere is no assurance that we will be successful or that OCA will be approved for liver fibrosis due to NASH on an accelerated basis, or at all. Furthermore, in November 2018, the EMA issued a draft position paper in which it presented its preliminary views with respect to various NASH clinical development matters, including with respect to potential surrogate endpoints, and requested comments thereon by August 2019. Although we did not reach agreement with the EMA on the definition and analysis of a surrogate endpoint prior to the readout of the 18-month analysis of the REGENERATE trial, we believe that the totality of the REGENERATE interim analysis data supports the MAA we filed with the EMA. However, the data that we have submitted to the EMA may not ultimately be found by the EMA to be sufficient for marketing approval on a conditional basis, or at all. In June 2019, the FDA issued new draft guidance on the development of drugs for the treatment of NASH patients with compensated cirrhosis. Although we believe that, if successful, our Phase 3 REVERSE trial will support a regulatory submission seeking accelerated approval of OCA for
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liver fibrosis due to NASH with compensated cirrhosis in the U.S., we do not know if achievement of the primary endpoint will ultimately be found sufficient by the FDA for approval on an accelerated basis, or at all.
While OCA received breakthrough therapy designation from the FDA in January 2015 for the treatment of NASH patients with liver fibrosis and we have filed a NDA in the United States and a MAA in Europe for approval of OCA for liver fibrosis due to NASH based on the results from the 18-month interim analysis of our Phase 3 REGENERATE trial, we do not know if one pivotal clinical trial will be sufficient for marketing approval or if regulatory authorities in the United States, the European Union, or any of our other target markets will approve OCA for liver fibrosis due to NASH on an accelerated or conditional basis, or at all. There may be delays in the FDA and EMA review processes and the FDA and/or the EMA may also require that we continue our Phase 3 REGENERATE trial until its full completion to assess the potential benefits of OCA treatment on liver-related and other clinical outcomes. Our regulatory pathway for OCA for the treatment of NASH will depend upon our ongoing discussions with the FDA and the EMA. As a result, we may face difficulty in designingestablishing an acceptable registration strategy aroundwith respect to our Phase 3 REGENERATE or anyand REVERSE trials, as well as other trials we may conduct in differentother subpopulations of NASH patients. In addition, since the design of the REGENERATE trial deviates from that of the FLINT trial, there is an increased risk that the results of the REGENERATE trial would differ from the FLINT results.
If we continue the developmentPrior to any approval of OCA for liver fibrosis due to NASH or OCA for PBC in PSC, we intend to seek marketing approval based on a surrogate endpoint. The FDA and EMA have not validated any surrogate endpoint as a basis for seeking approval in PSC and any surrogate endpoint we select may ultimately not be accepted by the regulatory agencies.
The EMA and regulatory authorities in other countriesjurisdictions in which we may seekit is not currently approved or the approval for, and market, OCA orof our other product candidates, the FDA, EMA or other applicable regulatory authorities may require additional preclinical studies and/or clinical trials, prior to granting approval. Itwhich may be expensive and time consuming to conduct and complete additional preclinical studies and clinical trials that the FDA, EMA and other regulatory authorities may require us to perform. Ascomplete. Consequently, any such any requirement by the FDA, EMA or other regulatory authorities that we conduct additional preclinical studies or clinical trials could materially and adversely affect our business, financial condition and results of operations. Furthermore, even if we were to receive regulatoryany such approval, of OCA forany risk mitigation programs such as a REMS, and any related restrictions, limitations and/or warnings contained in the treatment of anylabel of our targeted indications, the labeling for our product candidates in the United States, Europe or other countries in which we have received or seek approval may include limitations thatapproved products could impact theour commercial success ofin our product candidates.target markets including with respect to future revenues generated by Ocaliva.
Delays or difficulties in the commencement, enrollment and completion of our clinical trials and studies could result in increasedincrease our product development costs to us and delay, limit or limit our ability to obtainprevent us from obtaining regulatory approval for OCA and our other product candidates.
Delays or difficulties in the commencement, enrollment and completion of our clinical trials and studies could increase our product development costs and limit or limit theprevent us from obtaining or maintaining regulatory approval offor OCA and our other product candidates. We are currently have underwayconducting a number of clinical trials, including our Phase 4 COBALT clinical outcomes confirmatory trial of OCA inOcaliva for PBC, our Phase 3 REGENERATE trial of OCA in patients with liver fibrosis due to NASH through clinical outcomes in order to confirm clinical benefit and our Phase 23 REVERSE trial of OCA for NASH patients with compensated cirrhosis. We are also conducting our CARE trial of OCA in biliary atresia. We continue to work towards expanding our overall NASH development program with additional trials and studies, including a Phase 3 trial in NASHpediatric patients with cirrhosis, which we expect to initiate inbiliary atresia as a part of an EMA-approved pediatric investigation plan (“PIP”) supporting the second halfconditional approval of 2017, and we plan on conducting additional development activities in other diseases.Ocaliva for PBC. The results from these clinical trials and our other clinical trials and studies may not be available when we expect oranticipate and we may be required to conduct additional clinical trials or preclinical studies not currently planned in order for our product candidates, including OCA for PBC and NASH, to receive approval for OCA as a treatment forbe approved or to maintain approvals in the related indication.U.S., Europe or the other jurisdictions in which our products are approved. In addition, our clinical programs are subject to a number of variablesrisks and contingencies,uncertainties, such as the results of other trials, patient enrollmentsenrollment, safety issues or regulatory interactions that maycould result in a change of trial design or timing. Any delays or difficulties in timing. As such,completing one of our clinical trials could increase our product development costs and limit or prevent us from obtaining or maintaining regulatory approval. Consequently, we do not know whether anyour current or future clinical trials or studies of OCA or our other product candidates will begin on time or will be completed on schedule, if at all.
The commencement, enrollment and completion of our clinical trials canand studies may be delayed, suspended or suspendedotherwise adversely affected for a variety of reasons, including:
| our inability to obtain sufficient funds |
| our inability to reach agreements on acceptable terms with prospective |
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| clinical holds, other regulatory objections to our commencing or continuing a clinical trial or |
| our discussions with the FDA, EMA or |
| our inability to identify and maintain a sufficient number of trial sites, many of which may already be engaged in other clinical trial programs, including some that may be for the same indications targeted by our product candidates; |
| our inability to obtain approval from institutional review boards or |
| any DMC recommendation that our clinical trials be modified, suspended or terminated due to safety, lack of efficacy or other reasons; |
| ● | severe or unexpected drug-related adverse |
| our inability to timely manufacture, or obtain from our contract manufacturers, sufficient quantities of |
| any difficulty recruiting, |
For example, our Phase 3 REGENERATE trial is a large and complex Phase 3complicated clinical trial in a disease without any approved therapies and involves serial liver biopsies.biopsies over many years. While we announced topline results from the completion18-month analysis of enrollment ofour pivotal Phase 3 REGENERATE trial in February 2019, the interim analysis cohortstudy is currently planned to continue through clinical outcomes in May 2017,order to confirm clinical benefit and continuously evaluate and implement a variety of options to complete enrollment as quickly as possible, there can be no assurance that we will be able to enrollretain a sufficient number of patients in the full study cohort or complete the clinical outcomes trial in accordance with the study protocol or on a timely basis.basis, if at all. Enrolling and retaining patients in such trials is challenging and there can be no assurance that we will complete the clinical outcomes trial in accordance with the study protocol or on a timely basis, if at all. As we engage in other large and complicated trials and trials in advanced disease populations, we may experience a number of complicationschallenges that may negatively affect or delay our plans or ourand development programs.
We have in the past experienced difficulties enrolling and retaining patients enrolled in our clinical trials. Difficulties in enrolling and retaining patients, including due to COVID-19, may delay our clinical trials or result in negative or inconclusive outcomes, and we or our collaborators may decide, or regulatory authorities may require us, to conduct additional clinical trials or additional analyses of existing clinical trials. Any delay or compromises with respect to the validity of our clinical trials may have a material adverse effect on our business or decrease our competitive position relative to other biotechnology or pharmaceutical companies with whom we compete.
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In addition, if we or any of our collaborators are required to conduct additional preclinical or clinical trialsstudies or other preclinical studies ofdevelopment work on our product candidates beyond thosethat contemplated, our ability to obtain regulatory approval of these product candidates and generate revenue from their sales would be similarly harmed.
Continuing threats from COVID-19, including additional waves of infections, could materially and adversely affect our clinical trials.
COVID-19 is a global pandemic, affecting the U.S., Europe, and other countries in which we are engaged in, or plan to engage in, clinical development activities. We continue to closely monitor the latest developments regarding the COVID-19 pandemic and, together with our contract research organizations, study sites and other partners, have taken measures intended to minimize disruptions and protect and retain patients enrolled in our clinical trials, including, where appropriate, the use of telemedicine, home care visits, direct delivery of investigational product and other measures. Notwithstanding our efforts, some of the sites participating in our clinical trials have been affected by site closings or reduced capacity, particularly in regions that are experiencing heightened impact from COVID-19. While we continue to monitor the latest developments regarding the COVID-19 pandemic closely, if there was a meaningful negative impact on the data capture or data quality of any of our clinical trials, such trials may not be successful or we could be required to repeat, extend the duration of, increase the size of, or otherwise modify such trials, which could prevent or significantly delay the potential commercialization of our product candidates and require greater expenditures. We cannot at this time predict with certainty the scope of the impact of COVID-19 on our ability to execute our clinical trials. We may experience issues due to COVID-19 that could severely impact our clinical trials, including:
| delays, interruptions or difficulties in the enrollment, scheduling and retention of patients in our clinical trials; |
| ● | delays, interruptions or difficulties in the conduct of key clinical trial activities, such as clinical trial site monitoring and inspection readiness activities; |
| ● | trial conduct issues, including protocol deviations (e.g., failure to timely collect liver biopsies or other required laboratory data), data capture issues and data quality issues; |
| ● | delays or interruptions in the supply or administration of investigational product to patients in our clinical trials; |
| ● | delays or interruptions in the supply of necessary equipment or materials to clinical sites; |
| ��� | delays or difficulties obtaining approvals from regulatory authorities, institutional review boards or ethics committees of clinical trial protocols and related clinical documentation (or amendments and addendums thereto); |
| ● | delays, interruptions or difficulties in clinical site initiations, including in connection with the recruitment of clinical site investigators and clinical site staff; |
| ● | the redeployment of healthcare resources, including clinical site investigators and clinical site staff supporting the conduct of our clinical trials, to assist in the treatment of COVID-19 patients; |
| ● | the diversion of human capital, including employees, independent contractors, vendors and other third parties, otherwise focused on the conduct of our clinical trials due to sickness, safety concerns or government or employer imposed travel or working restrictions; |
| ● | new federal, state and local government regulations or guidance that require us to change the way we conduct our clinical trials, require the interruption or termination of our clinical trials or that result in significant and unexpected new costs; |
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| ● | delays or difficulties in interactions with regulatory authorities, institutional review boards, ethics committees and key consultants and vendors due to layoffs, temporary leaves, terminations or other actions limiting available employee resources; and |
| ● | the refusal of regulatory authorities to accept clinical trial data from clinical trials that have been negatively affected by COVID-19. |
Any such delay, interruption or issue could materially and adversely affect our business, financial condition and results of operations.
Clinical failureFailure can occur at any stage of clinical development. The results of earlier clinical trials are not necessarily predictive of future results and any product candidate we Sumitomo Dainippon or our potential future collaborators advance through clinical trials, including OCA, may not have favorable results in later clinical trials or receive or maintain regulatory approval.
Clinical failure can occur at any stage of our clinical development. Clinical trials may produce negative or inconclusive results, and we or our collaborators may decide, or regulators may require us, to conduct additional clinical trials or preclinical studies. In addition, data obtained from trials and studies are susceptible to varying interpretations, and regulators may not interpret our data as favorably as we do, which may delay, limit or prevent regulatory approval. Success in preclinical studies and early clinical trials does not ensure that subsequent clinical trials will generate the same or similar results or otherwise provide adequate data to demonstrate the efficacy and safety of aour product candidate.candidates. A number of companies in the pharmaceutical industry, including those with greater resources and experience than us, have suffered significant setbacks in Phase 3 clinical trials and at other stages of clinical development, even after seeing promising results in earlier clinical trials.
In addition, the design of a clinical trials, including trial endpoints, protocols and statistical analysis plans, can determine whether its resultssuch trials will support approval of a product approvals, and flaws in the design of a clinical trialsuch trials may not become apparent until the clinical trial issuch trials are well-advanced. We may be unable to design and execute a clinical trialtrials to support regulatory approval. Further, clinical trials of potential productsproduct candidates often reveal that it is not practical or feasible to continue development efforts. If OCA or our other product candidates are found to be unsafe or lack sufficient efficacy for any indication, we will not be able to obtain or maintain regulatory approval for them, and our prospects and business may be materially and adversely affected.
In some instances, there canThere may be significant variability in the safety and/or efficacy results betweenwe see in different trials of the samestudying OCA or our other product candidatecandidates due to numerous factors, including differences in the underlying disease being studied, changes or differences in trial protocols or statistical analysis plans, differences in the composition of the patient populations or clinical trial sites, differences in adherence to the dosing regimen and other aspects of the trial protocols and differences in the rate of dropoutdropouts among clinical trial participants. We do not know whether any Phase 2, Phase 3 or other clinical trials we or any of our collaborators may conduct on our product candidates will demonstrate consistent or adequate efficacy and safety to obtain regulatoryor result in the approval to marketof our product candidates.candidates by regulatory authorities. If we are unable to bring any of our current or future product candidates to market, or to acquire any marketed, previously approved products or maintain approval for our approved products, our ability to create long-term stockholder value will be limited.
Although Ocaliva has received accelerated approval in the United States and conditional approval in the European Union, its full approval depends on the results of post-marketing clinical trials, including the Phase 4 COBALT trial. We cannot assure you that these trials will demonstrate a correlation of biochemical therapeutic response in patients taking Ocaliva with a significant reduction in adverse clinical events over time.
In December 2014, we received comprehensive datasets from the Phase 2b FLINT trial for the treatment of NASH, which met its primary endpoint with statistical significance. In October 2015, we announced that the Phase 2 dose ranging trial of OCA in the200 adult NASH patients in Japan conducted by our former collaborator, Sumitomo Dainippon, Phase 2 trial did not meet its primary endpoint with statistical significance. In thisthe Sumitomo Dainippon trial, there was a dose dependent, although not statistically significant, increase in the percentage of OCA treatedOCA-treated patients compared to placebo who achieved the primary endpoint (p=(p = 0.053). In addition, no difference was seen in fibrosis improvement in the OCA groups compared to placebo. The Sumitomo Dainippon Phase 2 trial in NASH conducted in Japan by our collaborator Sumitomo Dainippon involved different doses of OCA being administered to the trial subjects than those utilized in FLINT.the Phase 2b FLINT trial. Furthermore, the baseline characteristics between the patients in the Japanese Phase 2 dose ranging trial conducted by Sumitomo Dainippon were distinct in a number of ways from those of the Western patients included in FLINT. Whilethe Phase 2b FLINT trial.
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In February 2019, we announced topline results from the 18-month analysis of our pivotal Phase 3 REGENERATE trial in patients with liver fibrosis due to NASH. In the primary efficacy analysis, once-daily OCA 25 mg met, with statistical significance, the primary endpoint agreed with the FDA of fibrosis improvement by at least one stage with no worsening of NASH (defined as no worsening of hepatocellular ballooning, no worsening of lobular inflammation and no worsening of steatosis) at the planned 18-month analysis. Although a numerically greater proportion of patients in both OCA treatment groups compared to placebo achieved the primary endpoint of NASH resolution with no worsening of liver fibrosis in the primary efficacy analysis, this result did not reach statistical significance. As agreed with the FDA, in order for the primary objective to be met, the study was designed based on the resultsrequired to achieve one of the FLINT trial and is anticipated to enroll a predominantly Western NASH patient population, the results of the FLINT trial may not be replicated in our REGENERATE trial. In addition, since the design of the REGENERATE trial deviates from that of the FLINT trial, there is an increased risk thattwo primary endpoints. Notwithstanding the results of the REGENERATE trial would differ18-month analysis, the CRL issued by the FDA in June 2020 indicated that, based on the data the FDA had reviewed, the FDA had determined that the predicted benefit of OCA based on a surrogate histopathologic endpoint remains uncertain and does not sufficiently outweigh the potential risks to support accelerated approval for the treatment of patients with liver fibrosis due to NASH. The FDA recommended that we submit additional post-interim analysis efficacy and safety data from the FLINT results. Even thoughongoing REGENERATE study in support of potential accelerated approval and that the long-term outcomes phase of the study should continue. Although we are in discussions with the FDA with respect to the potential resubmission of our NDA seeking accelerated approval of OCA has been grantedfor the treatment of liver fibrosis due to NASH, there is no assurance that we will be successful or that OCA will be approved for liver fibrosis due to NASH on an accelerated basis, or at all. While OCA received breakthrough therapy designation byfrom the FDA in January 2015 for the treatment of NASH patients with liver fibrosis and we filed a NDA in the United States and a MAA in Europe for approval of OCA for liver fibrosis due to NASH based on the results from the 18-month analysis of our Phase 3 REGENERATE trial in patients with liver fibrosis due to NASH, we do not know if one pivotal clinical trial will be sufficient for marketing approval or if regulatorsregulatory authorities in the United States, the European Union, or any of our other target markets will agree to a surrogate endpoint for accelerated approval ofapprove OCA for liver fibrosis due to NASH on an accelerated or conditional basis, or at all. Additionally, interim analysis results at 18 months were based on surrogate endpoints and the treatment of NASH. As a result, it may take longer than anticipated to initiate and complete theimpact on clinical outcomes has not been confirmed. Our Phase 3 REGENERATE trial or our Phase 3 program in NASHremains ongoing through clinical outcomes for other patient subpopulations.verification and description of clinical benefit of OCA for liver fibrosis due to NASH.
Our product candidates may have undesirable side effects which may delay or prevent marketing approval, or, if approval is received, require that our product candidates toproducts be taken off the market require them toor include new or additional safety warnings or otherwisewarnings. Any such events may limit their sales.our existing and future product sales and materially and adversely affect our business, financial condition and results of operations.
OCA has been shown to be a potent agonist of the farnesoid X receptor, or FXR.FXR agonist. With the exception of the endogenous human bile acid chenodeoxycholic acid or CDCA, and cholic acid, there are no approved FXR agonists and the adverse effects from long-term exposure to this drug class are unknown. Unforeseen side effects from any of our product candidates, including OCA, could arise either during clinical development or, if approved, after the approved product has been marketed.
Serious adverse events, including deaths, in patients taking OCA have occurred in clinical trials and in the post-marketing setting, and we cannot assure you that additional serious adverse events in patients taking OCA in clinical trials or in the post-marketing setting will not occur.
The most common side effects observed in clinical trials of OCA infor PBC were pruritus, or itching, fatigue, headaches, nausea, constipation and diarrhea. In our Phase 3 POISE trial, pruritus, generally mild to moderate, was the most frequently reported adverse event associated with OCA treatment for PBC and was observed in 38% of patients on placebo, 70% of patients in the OCA 10 mg OCA group and 56% of patients in the OCA titration group (5 mg to 10 mg). Eight patients discontinued due to pruritus, of whom none were in the placebo group, seven (10%) patients were in the OCA 10 mg OCA group and one (1%) patient was in the OCA titration group. Pruritus also has been observed in other clinical trials of OCA. Decreases in high density lipoprotein HDL cholesterol were also observed during treatment in theour Phase 3 POISE trial. In our Phase 2 trials for OCA infor PBC, a dose-response relationship was observed forin the occurrence of liver-related adverse reactions, including jaundice, ascites and primary biliary cholangitis flare with dosages of OCA of 10 mg once daily to 50 mg once daily (up to 5-times the highest recommended dosage), as early as one month after starting treatment with OCA. The European label for Ocaliva also notes that elevations in alanine amino transferase and aspartate aminotransferase were observed in patients treated with OCA.
Ocaliva is contraindicated for PBC patients with complete biliary obstruction in the United States and the European Union. For patients with moderate or severe hepatic impairment (Child Pugh B or C cirrhosis), who represent approximately 3% of PBC patients, the U.S. label for Ocaliva in PBC includes an adjustment in the dosing regimen and the EU label recommends an adjusted dosing regimen due to potential exposure levels in this population. For patients with HDL reductions and no response to Ocaliva after one year at the maximum tolerated dose, the U.S. label asks prescribing physicians to weigh the risks against the benefits of continuing treatment.
In the course of our post-marketing pharmacovigilance activities, deaths have been reported in PBC patients with moderate or severe hepatic impairment. In an analysis performed by us and in consultation with the FDA, we concluded
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that certain of these patients were prescribed once daily doses of Ocaliva, which is seven times higher than the recommended weekly dose in such patients. As a result, in September 2017, we issued a dear healthcare providerDear Health Care Provider (“DHCP”) letter, and the FDA also subsequently issued theirits own drug safety communication to reinforce recommended label dosing. Both communications remind healthcare providers of the importance of the recommended reduced dosing of Ocaliva in PBC patients with moderate or severe hepatic impairment, while reiterating the importance of close monitoring of PBC patients for progression of their disease and the occurrence of liver-related adverse reactions. In addition to the DHCP letter, we have takentook actions to enhance education about appropriate use of Ocaliva. These initiatives include:included: reeducating physicians on the label, with a focus on ensuring appropriate dosing for patients with moderate or severe hepatic impairment; enhancing monitoring of patients for liver-related adverse reactions; and completing adjudication of alladjudicating reported cases of serious liver injury, including in patients with no or mild hepatic impairment. PursuantIn February 2018, we announced that the Ocaliva label in the United States had been updated by the FDA to include a boxed warning and a dosing table that reinforced the FDA'sthen-existing dosing schedule for patients with Child-Pugh Class B or C or decompensated cirrhosis. In addition, the FDA issued an updated drug safety communication to accompany the revised label. We remain focused on the safety of all of the patients using Ocaliva within and outside of our ongoing clinical studies and have engaged with relevant regulatory authorities to ensure that the Ocaliva label sufficiently reinforces the importance of appropriate dosing in patients with advanced cirrhosis.
In 2020 the FDA notified us that, in the course of its routine safety surveillance, in May of that year it began to evaluate a newly identified safety signal, or NISS, regarding liver disorder for Ocaliva which the FDA classified as a potential risk, focused on a subset of the cirrhotic, or more advanced, PBC patients who have taken Ocaliva. In May 2021, the NISS process was concluded and we have been workingaligned with the FDA on updatesupdated Ocaliva prescribing information in the United States, and Ocaliva is now contraindicated for patients with PBC and decompensated cirrhosis, a prior decompensation event, or compensated cirrhosis with evidence of portal hypertension, in addition to the label to better ensure appropriateexisting contraindication for complete biliary obstruction. This issue, and safe useany other safety concerns associated with Ocaliva, perceived or real, may adversely affect the successful development and commercialization of Ocaliva and anticipate the updated label by early 2018. These events may cause decreased demand for our product candidates and lossapproved products, including Ocaliva, and materially and adversely affect our business including future revenue generated by Ocaliva.
In the 18-month analysis of revenues.
Based on informationour pivotal Phase 3 REGENERATE trial in patients with liver fibrosis due to NASH, the safety population included 1,968 randomized patients who received at least one dose of investigational product (OCA or placebo) with exposures up to 37 months. Adverse events were generally mild to moderate in severity and the most common were consistent with the known profile of OCA. The frequency of serious adverse events was similar across treatment groups (11% in placebo, 11% in OCA 10 mg and 14% in OCA 25 mg), and no serious adverse event occurred in > 1% of patients in any treatment group. There were 3 deaths in the manuscriptstudy (2 in placebo: bone cancer and cardiac arrest and 1 in OCA 25 mg: glioblastoma) and none were considered related to treatment. The most common adverse event reported was dose-related pruritus (19% in placebo, 28% in OCA 10 mg and 51% in OCA 25 mg). The incidence of pruritus across all three treatment groups was highest in the first three months and decreased thereafter. The large majority of pruritus events were mild to moderate, with severe pruritus occurring in a small number of patients (< 1% in placebo, < 1% in OCA 10 mg and 5% in OCA 25 mg). A higher incidence of pruritus-associated treatment discontinuation was observed for OCA 25 mg (< 1% in placebo, < 1% in OCA 10 mg and 9% in OCA 25 mg). According to the clinical study protocol, investigator assessed severe pruritus mandated treatment discontinuation. Consistent with observations from previous NASH studies, OCA treatment was associated with an increase in low density lipoprotein (“LDL”) cholesterol, with a peak increase of 22.6 mg/dL at 4 weeks and subsequently reversing and approaching baseline at month 18 (4.0 mg/dL increase from baseline). Triglycerides rapidly and continually decreased in the OCA treatment groups through month 18. There were few and varied serious cardiovascular events and incidence was balanced across the three treatment groups (2% in placebo, 1% in OCA 10 mg and 2% in OCA 25 mg). In patients with type 2 diabetes, OCA treatment was associated with an early transient increase in fasting glucose and hemoglobin A1c with return to levels similar to placebo by month 6. No clinically meaningful changes were noted in non-diabetic patients.
With respect to hepatobiliary events, more patients (3%) on OCA 25 mg experienced gallstones or cholecystitis compared to < 1% on placebo and 1% on OCA 10 mg. While hepatic serious adverse events were rare (< 1% incidence in each of the three treatment groups), more occurred in the OCA 25 mg group with no pattern attributable to OCA.
In the Phase 2b FLINT trial, published in November 2014, pruritus occurred more frequently in the OCA treatment group than in the placebo treatment group (23% vs. 6%, p < 0.001)0.0001) and at a higher grade (predominately moderate pruritus), but resulted in only one patient discontinuation in the. OCA treatment group. In the FLINT trial, OCA treatment was
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also associated with changes in serum lipid levels, including increases in total cholesterol and LDL cholesterol and a decrease in HDL cholesterol, that were observed within 12 weeks of initiating treatment, peaked and then decreased in magnitude while on treatment, and reversed further during the 24-week post-treatment period. As previously disclosed, theseThese changes in cholesterol levels, along with achieving the achievement of pre-defined efficacy criteria, played a role in the decision of the FLINT data and safety monitoring board to terminate the treatment phase of the Phase 2b FLINT trial, and the publication of the FLINT results has noted the need for further study of these changes. There were two patient deaths in the Phase 2b FLINT trial, and neither death was considered related to OCA treatment.
InFurthermore, the Phase 2 dose ranging trial of OCA in 200 adult NASH patients in Japan conducted by our former collaborator, Sumitomo Dainippon, did not meet statistical significance for the primary endpoint. The primary endpoint in the Sumitomo Dainippon trial was histologic improvement defined as at least a two-point improvement in the nonalcoholic fatty liver disease activity score with no worsening of fibrosis. In this trial, there was a dose dependent, although not statistically significant, increase in the percentage of OCA-treated patients compared to placebo who achieved the primary endpoint (p = 0.053). In addition, no difference was seen in fibrosis improvement in the OCA groups compared to placebo.
In December 2015, we initiated a Phase 2 clinical trial, known as the CONTROL trial, to characterize the lipid metabolic effects of OCA and cholesterol management effects of concomitant statin administration in NASH patients. CONTROL enrolled 80 NASH patients who were naïve to statin therapy or had undergone a statin washout period. The study included a 16-week double-blind phase followed by an optional long-term safety extension (“LTSE”) phase of the trial. OCA treatment in the absence of statin therapy over the first four weeks resulted in an increase in LDL across all OCA treatment groups, while the placebo group was relatively unchanged. Treatment with atorvastatin beginning at week four and continuing through week 16 reversed OCA-related increases in LDL to below baseline levels in all OCA treatment groups. Dose-dependent pruritus was the most common adverse event in patients treated with OCA, occurring in 5% of patients on placebo, 5% of patients in the OCA 5 mg OCA group, 10% of patients in the OCA 10 mg OCA group and 55% of patients in the OCA 25 mg OCA group. All adverse events were mild to moderate and two patients discontinued treatment in the OCA 25 mg OCA group due to pruritus. Over 95% of the patients completing the double-blind phase of CONTROL enrolled in the long-term safety extensionLTSE phase of the trial.
During the ongoing LTSE phase of CONTROL, there has beenwas one patient deathdeath. This patient was a 64 year-old male with a history of NASH associated liver cirrhosis, morbid obesity (BMI >40) and type 2 diabetes. At baseline, this patient had blood tests consistent with impaired liver function (e.g., low LDL and low platelets). The patient was randomized to placebo for the double-blind phase of the study. Early in the double-blind phase, the patient had serum biochemistry changes consistent with worsening hepatic impairment (e.g., albumin decline and bilirubin was increasing). Atorvastatin was started per protocol and then stopped early due to the patient’s persistently low LDL levels. The patient later enrolled in the LTSE phase and began receiving OCA 25 mg treatment. Over the following four months, the patient’s serum biochemistry remained consistent with ongoing hepatic impairment. Approximately five months after starting the LTSE phase, the patient developed severe protracted diarrhea, which resulted in weight loss of 30 pounds over the ensuing one-month period. Both an infectious cause and possible inflammatory bowel disease were suspected, and the patient subsequently was started on broad spectrum antibiotics and steroid therapy. Due to the diarrhea, the principal investigator stopped treatment with OCA and discontinued the patient from the study. Concurrently, the patient reported jaundice and was found to have significantly elevated serum bilirubin and ALP, while other liver enzymes remained relatively stable. Over the ensuing two-week period, various diagnostic tests and procedures were performed (e.g., magnetic resonance cholangiopancreatography to investigate possible gallstone bile duct obstruction) and the patient continued receiving a number of other medications, including the ongoing course of steroid therapy. During this time, the patient continued to deteriorate and was hospitalized with acute renal and liver failure. Whilefailure, complicated by severe metabolic acidosis. The patient rapidly progressed to multi-organ system failure, sepsis and death. The principal investigator determined that the events leading to the patient’s death were unlikely related to OCA. Despite the numerous confounding factors in this case, given the contemporaneous administration of OCA during the patient’s ongoing deterioration, we determined that it could not be ruled out that this wasthese events were possibly related to treatment, the principal investigator andtreatment. Subsequent to our determination, the independent data safety monitoring committee separately evaluated the case and determined that the events leading to the patient’s death waswere unlikely related to OCA.
In our Phase 2 AESOP trial of OCA in PSC, pruritus was the most common adverse event, occurringin 46% of patients on placebo, 60% of patients in the 1.5 mg to 3 mg OCA group and 67% of patients in the 5 mg to 10 mg OCA group, with the severity increasing with dose. One (4%) patient in the 1.5 mg to 3 mg OCA group and three (12%) patients in the 5 mg to 10 mg OCA group discontinued OCA due to pruritus compared to none in the placebo group.
Additional or unforeseen side effects fromrelating to OCA or any of our other product candidates could arise either during clinical development or, if approved, after the approved product has been marketed. With the approval of Ocaliva for PBC
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in PBC,the United States, the European Union, and certain of our other target markets, OCA will beis currently used in an environment that is less rigorously controlled than in clinical studies. If new side effects are found, if known side effects are shown to be more severe than previously observed or if OCA is shown to have other unexpected characteristics, we may need to abandon our development of OCA for PBC, NASH PSC, biliary atresia and other potential indications. Furthermore, our commercial effortssales of Ocaliva for Ocaliva in PBC may be materially and adversely affected.
The range and potential severity of possible side effects from systemic therapies is significant. The results of our current or future clinical trials may show that our product candidates, including OCA, cause undesirable or unacceptable side effects, which could interrupt, delay or halt clinical trials, and result in a delay of, or failure to obtain, marketing approval from the FDA and other regulatory authorities, or result in marketing approval from the FDA and other regulatory authorities with restrictive label warnings.
warnings or result in the withdrawal of previously granted marketing approvals.
In addition, our drugproduct candidates are being developed as potential treatments for severe, life threatening diseases and, as a result, our trials will necessarily be conducted in a patient populationpopulations that will beare more prone than the general population to exhibit certain disease states or adverse events. For example, as we expand our overall NASH development program, we intend to conduct trials in advanced patient populations, such as in our planned Phase 3 REVERSE trial in NASH patients with cirrhosis.compensated cirrhosis has expanded our NASH development program into a more advanced NASH patient population and accordingly imposes certain eligibility requirements for uptitration, as well as certain monitoring requirements thereafter. Ocaliva is usedprescribed in patients suffering from various stages of PBC, which can be life threatening, and patients may suffer from other concomitant illnesses that may increase the likelihood of certain adverse events. It may be difficult to discern whether certain events or symptoms observed during our clinical trials or inby patients using commercial product were dueour approved products are related to our drugsproduct candidates or drug candidatesapproved products or some other factor, resulting in our companyfactor. As a result, we and our development programs beingmay be negatively affected even if such events or symptoms are ultimately determined to be unlikely related to our drugs and drug candidates.product candidates or approved products. We further cannot assure you that additional or more severe adverse side effects with respectrelated to OCA or our other product candidates will not developbe observed in futureour clinical trials or in the commercial use, whichsetting. If observed, such adverse side effects could delay or preclude regulatory approval of OCA, limit commercial use or limit its commercial use.
result in the withdrawal of previously granted marketing approvals.
If we or others later identify undesirable or unacceptable side effects caused by our productsproduct candidates or product candidates:
products:
| ● | we may be required to modify or include additional dosage and administration instructions, warnings and precautions, contraindications, boxed warnings, limitations, restrictions or other statements in the |
| we may be required to |
| we may be subject to limitations on how we may promote |
| sales of |
| regulatory authorities may require us to take our approved |
| we may be subject to regulatory investigations, government enforcement actions, litigation or product liability claims; and |
| our products may become less competitive or our reputation may suffer. |
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Breakthrough therapy designation for OCA may not lead to faster development or regulatory processes nor does itor increase the likelihood that the FDA will approve OCA will receive marketing approval for NASH.
the treatment of NASH patients with fibrosis.
If a drug is intended for the treatment of a serious or life-threatening condition and preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development, the FDA may grant a breakthrough therapy designation. Breakthrough therapy designation is intended to facilitate the development, and expedite the review, of such drugs, but the breakthrough therapy designation does not assure any such qualification or ultimate marketing approval by the FDA.
In January 2015, we received breakthrough therapy designation for OCA infor the treatment of NASH patients with liver fibrosis. However, there is no guarantee that the receipt of breakthrough therapy designation will result in a faster development process, review or approval of OCA for OCA in fibroticliver fibrosis due to NASH patients or increase the likelihood that OCA will be granted marketing approval for fibrotic NASH patients. Likewise,patients with liver fibrosis. Notwithstanding our receipt of breakthrough therapy designation, in June 2020 we received a CRL from the FDA with respect to our NDA for OCA for liver fibrosis due to NASH. Although we are in discussions with the FDA with respect to the potential resubmission of our NDA seeking accelerated approval of OCA for the treatment of liver fibrosis due to NASH, there is no assurance that the outcome of these discussions will lead to resolution of the issues identified in the CRL or that if we resubmit our NDA that it will be approved. Similarly, any future breakthrough therapy designation forrelating to any other potential indication of OCA or our other product candidates will neither guaranteesguarantee a faster development process, review or approval nor improvesimprove the likelihood of the grant of marketing approval by the FDA for any such potential indication of OCA compared to drugs considered for approval under conventional FDA procedures. In addition, the FDA may withdraw any breakthrough therapy designation at any time. WeWhile we may seek a breakthrough therapy designation for otherone or more of our product candidates butin the future, we can give no assurance that the FDA may notwill grant this status to any of our proposed product candidates.such status.
We may not be able to obtain or, if approved, maintain orphan drug exclusivity for our approved products or product candidates, if approved, which wouldcould cause our revenues to suffer.
Regulatory authorities in some jurisdictions, including the United States and Europe, may designate drugs and biologics for relatively small patient populations as orphan drugs. Under the Orphan Drug Act, the FDA may designate a product as an orphan drug if it is a drug or biologic intended to treat a rare disease or condition, which is generally defined as a patient population of fewer than 200,000 individuals annually in the United States.
OCA has received orphan drug designation in the United States and the European Union for the treatment of PBC and PSC.
Generally, if a product with an orphan drug designation subsequently receives the first marketing approval for the indication for which it has such designation, the product is entitled to a period of marketing exclusivity, which precludes the EMAFDA or the FDAEMA from approving another marketing application for the same product for that timeduring the exclusivity period. The applicable exclusivity period is seven years in the United States and ten years in Europe. The European exclusivity period can be reduced to six years if a product no longer meets the criteria for orphan drug designation or if the product is sufficiently profitable so that market exclusivity is no longer justified.
Orphan drug exclusivity may be lost if the FDA or EMA determines that the request for designation was materially defective or if the manufacturer is unable to assure a sufficient quantity of the product to meet the needs of patients with the rare disease or condition. In addition, it is possible that orphan marketingthe European exclusivity attaching to the marketing authorization willperiod can be reduced to six years if, at the end of the fifth year, following the receipt of marketing authorization, the EMA and the Committee for Orphan Medicinal Products determineit is established that the product does not satisfyno longer meets the requisite criteria including demonstration of significant clinical benefit (having regard to requirements set out in the applicable EU regulations and guidance) where it is shown based on the available evidence thatfor orphan drug designation because, for example, the product is sufficiently profitable not to justify not to maintain the marketingmaintenance of market exclusivity.
TheAny failure to maintain orphan drug status may impact our ability to receive a premium price for OCA or our other products and may subject us to mandatory price discounts in Europe. In addition, our ability to launchEurope and result in Europe may be delayed and we may losethe loss of other benefits, such as tax exemptions for sales. As such, the loss of orphan drug status may have a negative effect on our ability to successfully commercialize our products, earn revenues and achieve profitability.
Even if we obtain orphan drug exclusivity for a product, that exclusivity may not effectively protect the product from competition because different products can be approved for the same condition. Even after an orphan drug is approved, the FDA andor EMA canmay subsequently approve the lateranother product for the same condition if the FDA or EMA concludes that the later product is clinically superior in that(i.e., it is shown to be safer, more effective or makes a major contribution to patient care.
Ifcare). Any inability to secure or maintain orphan drug status or the FDAexclusivity benefits of this status could have a material adverse impact on our ability to develop and EMAcommercialize our product candidates and other regulatory agencies do not approveapproved products.
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We rely entirely on third parties for the manufacturing facilities of our future contract manufacturers for commercial production on a timely basis or at all, we may not be able to commercialize anymanufacture of our product requirements for our preclinical studies and clinical trials, as well as our commercial supply of Ocaliva and, if approved, OCA for liver fibrosis due to NASH and our other product candidates, or commercializationand also depend on third-party vendors and CROs for certain of our clinical trial and product candidatesdevelopment activities. Our business could be delayed.
harmed if our third-party manufacturers fail to provide us with sufficient quantities of drug product, or fail to do so at acceptable quality levels or prices, or if our third-party vendors or CROs assisting us with our clinical trials and product development activities fail to comply with their contractual commitments or applicable regulatory obligations or if we lose our relationships with our third-party vendors and CROs.
We do not intend to manufacture the pharmaceutical products that we plan to sell.sell or the product candidates that we are developing. We currently have agreements with arely on third-party contract manufacturermanufacturers for the productionall of theour required raw materials, active pharmaceutical ingredientsingredient and the formulation of sufficient quantities of drugfinished product for our commercial sales and for our existing and anticipated clinical trials and preclinical studies that we plan to conduct prior to and after seeking regulatory approval. Ifstudies. Any inability by our contract manufacturer should ceasemanufacturers to continue to provide services to us for any reason, we likely would experience delays in advancingincluding due to COVID-19 and related public health safety measures and business closures and disruptions, could disrupt the supply chain for our pharmaceutical products and product candidates and materially and adversely affect our commercialization efforts and clinical trials while we identify and qualify one or more replacement suppliersdevelopment program, and we may be unable to obtainidentify, qualify and engage replacement suppliessuppliers on terms that are favorable to us.
us on a timely basis, if at all.
We currently have a long-term supply agreement with PharmaZell GMBHrely on our suppliers for the manufacture ofand commercial supply of API for Ocaliva.use in Ocaliva and, if approved, OCA for liver fibrosis due to NASH. We are currently dependent upon a limited number of suppliers, with whom we have contractual arrangements, although we are working on developing further sources of supply. While we have procured sufficient supplies of API for the commercial launchcommercialization of Ocaliva infor PBC and, if approved, OCA for liver fibrosis due to NASH that we believe will be sufficient to meet our requirements during the initial stages of a potential NASH launch, we may not be able to procure sufficient supplies of OcalivaAPI on a continuedan ongoing basis. WeIf these suppliers are also seekingunable to qualify one or more back-up suppliers for our active ingredients; however,provide adequate supply, we may not be able to enter into additionalmeet our long-term commercial supply agreementsrequirements of API for the manufacture of Ocaliva or, if approved, OCA withfor liver fibrosis due to NASH or other third-party manufacturers.indications on acceptable terms, or at all. We do not have agreements for long-term supplies of any of our product candidates other product candidates.than OCA. We currently obtain these supplies and services relating to our other product candidates from our third-party contract manufacturers on a purchase order basis.
Additionally, theThe facilities used by any contract manufacturer to manufacture OCA or any of our other product candidates must be theare subject of a satisfactoryto inspection beforeby the FDA or theand regulators in other jurisdictions approve the product candidate manufactured at that facility.jurisdictions. We are completely dependent on these third-party manufacturers for compliance with the requirements of U.S. and non-U.S. regulators for the manufacture of our finished products.products, including Ocaliva. If our manufacturers cannot successfully manufacture material that conformare unable to meet our requirements in accordance with our product specifications and applicable current good manufacturing practiceGood Manufacturing Practices (“cGMP”) requirements, of any governmental agency whose jurisdiction to which we are subject, our products or product candidates will not be approved or, if already approved, may be subject to recalls.
recall. In addition, if COVID-19 or related public health safety measures prevent the FDA, EMA or other relevant regulators from conducting manufacturing inspections or other regulatory activities with respect to manufacturing, it could significantly impact the ability of the FDA, EMA or such other regulators to timely review and process our regulatory submissions, which could have a material and adverse effect on our business and financial condition.
Reliance on third-party manufacturers entails risks to which we would not be subject if we manufactured the products orour product candidates and products ourselves, including:
| the possibility that we are unable to enter into or renew |
| the possible termination, breach or non-performance by our third-party manufacturers of |
| our inability to timely identify and qualify a replacement for any of our third-party manufacturers in the |
Any of these factors could causedisrupt the delay of approval or disruption of commercializationsupply of our productsproduct candidates or product candidates,approved products, cause us to incur higher costs, prevent us from commercializingdelay the approval of our products and product candidates successfullyor prevent or disrupt the supplycommercialization of our products after commercial launch. approved products.
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Furthermore, if any of our product candidates, including OCA for liver fibrosis due to NASH, are approved and our contract manufacturers fail to deliver the required commercial quantities of API or finished product on a timely basis and at commercially reasonable prices and we are unable to find one or more replacement manufacturers capable of production at a substantially equivalent cost, in substantially equivalent volumes and quality and on a timely basis, we would likely be unable to meet demand for our productssuch product candidate following its approval and could lose potential revenue. It may take several years to establish an alternative long-term source of supply and to have any such new source approved by the government agenciesregulatory authorities that regulate our products.products in the United States, the European Union and our other target markets.
We depend on third-party vendors and CROs for certain of our clinical trial and product development activities. If any of these providers fail to comply with their contractual commitments or applicable regulatory obligations, including due to COVID-19 and related public health safety measures and business closures and disruptions, our business could be materially and adversely affected. In addition, if we are unable to maintain our relationship with any one or more of these providers, we could experience a significant delay in both identifying another comparable provider and then contracting for its services, which could materially and adversely affect our clinical trial and product development efforts. We may be unable to retain an alternative provider on reasonable terms, or at all. Even if we locate an alternative provider, it is likely that such a provider will need additional time to respond to our needs and may not provide the same type or level of services as the original provider. Any third-party vendors and CROs that we retain are subject to the FDA’s regulatory requirements and similar foreign standards and we do not have control over compliance with these regulations by these providers. The FDA, EMA and other relevant regulatory authorities enforce these regulations through periodic inspections of trial sponsors, principal investigators and trial sites. If these regulations are not adhered to by these providers, or if such providers fail to timely correct any non-compliance or if COVID-19 or related public health safety measures prevent the FDA, EMA or other relevant regulatory authorities from conducting inspections or other regulatory activities, the commercialization and development of our product candidates receive regulatoryor approved products could be delayed, which could materially and adversely harm our business and financial condition.
Even though we have received conditional approval of Ocaliva for PBC, we willand our contract manufacturers are still be subject to strict, ongoing regulatory requirements governing manufacturingrequirements.
Even though we have received conditional approval of Ocaliva for the treatment of PBC in combination with UDCA in adults with an inadequate response to UDCA or as monotherapy in adults unable to tolerate UDCA, we and marketing of our products and, as a result, we could face future development and regulatory difficulties.
Our product candidates, if approved, will also becontract manufacturers are subject to ongoing regulatory requirements forrelating to, among other things, Ocaliva’s manufacturing, packaging, labeling packaging, storage, advertising, promotion, record-keeping and submission of safety and other post-market information.storage. In addition, approved products,we and our contract manufacturers and our contract manufacturers’ facilities are required to comply with extensive FDA and EMA requirements and the requirements of other similar agencies,regulatory authorities, including ensuringrequirements that quality control and manufacturing procedures conform to current Good Manufacturing Practices, or cGMPs. As such, we and our contract manufacturers are subject to continual reviewperiodic cGMP inspections and periodicother inspections to assess compliance with cGMPs. Accordingly, we and others with whom we workaudits required by law or industry standard and must continue to expend time, money and effort in all areas of regulatoryto ensure compliance includingwith applicable manufacturing, production and quality control.control requirements. We willare also be required to report certain adverse reactions and production problems, if any, to the FDA, and EMA and other similar agenciesregulatory authorities and to comply with certain requirements concerning advertising and promotion for our products. Promotional communications with respect to prescription drugs are subject to a variety of legal and regulatory restrictions and generally must be consistent with the information in the product’s approved label. Accordingly, we may not promote our approved products such as Ocaliva for indications or uses for which they are not approved.
If a regulatory agency discoversauthority such as the FDA identifies previously unknown problems with a product,one of our products, such as adverse events of unanticipated severity or frequency or problems with the facility where the product is manufactured, or disagrees with the promotion, marketing or labeling of a product,one of our products, it may impose restrictions on that product or us, including requiring withdrawal of the product from the market. IfIn addition, if we or our product candidatescontract manufacturers, other third-party vendors or collaborators fail to comply with applicable regulatory requirements, a regulatory agency may:
may, among other things:
| issue |
| mandate modifications to our promotional materials or require us to provide corrective information to healthcare practitioners; |
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| require us or our collaborators to enter into a consent decree or permanent injunction, which |
| recall our products; |
| ● | suspend any of our ongoing clinical studies; |
| ● | impose |
| withdraw regulatory |
| refuse to approve pending applications or supplements to approved applications filed by us |
| impose restrictions on our operations or those of our contract manufacturers, including costly new manufacturing requirements; or |
| seize or detain products. |
Risks Related to the Commercialization of Our Products
Reimbursement decisions by third-party payors may have an adverse effect on pricing and market acceptance
Sales of Ocaliva may be adversely affected by safety and labeling changes required by the FDA.
In the course of our post-marketing pharmacovigilance activities, deaths have been reported in PBC patients with moderate or severe hepatic impairment. In an analysis performed by us and in consultation with the FDA, we concluded that certain of these patients were prescribed once daily doses of Ocaliva, which is seven times higher than the recommended weekly dose in such patients. As a result, in September 2017, we issued a DHCP letter and the FDA also subsequently issued its own drug safety communication to reinforce recommended label dosing. Both communications remind healthcare providers of the importance of the recommended reduced dosing of Ocaliva in PBC patients with moderate or severe hepatic impairment, while reiterating the importance of monitoring PBC patients for progression of their disease and the occurrence of liver-related adverse reactions. In February 2018, we announced that the Ocaliva label in the United States had been updated by the FDA to include a boxed warning and a dosing table that reinforced the then-existing dosing schedule for patients with Child-Pugh Class B or C or decompensated cirrhosis. In addition, the FDA issued an updated drug safety communication to accompany the revised label. We remain focused on the safety of all of the patients using Ocaliva within and outside of our ongoing clinical studies and have engaged with relevant regulatory authorities to ensure that the Ocaliva label sufficiently reinforces the importance of appropriate dosing in patients with advanced cirrhosis.
In 2020 the FDA notified us that, in the course of its routine safety surveillance, in May of that year it began to evaluate a newly identified safety signal, or NISS, regarding liver disorder for Ocaliva which the FDA classified as a potential risk, focused on a subset of the cirrhotic, or more advanced, PBC patients who have taken Ocaliva. In May 2021, the NISS process was concluded and we aligned with the FDA on updated Ocaliva prescribing information in the United States, and Ocaliva is now contraindicated for patients with PBC and decompensated cirrhosis, a prior decompensation event, or compensated cirrhosis with evidence of portal hypertension, in addition to the existing contraindication for complete biliary obstruction. This issue, and any other safety concerns associated with Ocaliva, perceived or real, may adversely affect the successful development and commercialization of our product candidates and approved products, including Ocaliva, and materially and adversely affect our business including future revenue generated by Ocaliva.
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We are subject to uncertainty relating to pricing and reimbursement. Failure to obtain or maintain adequate coverage, pricing and reimbursement for Ocaliva for PBC, OCA for liver fibrosis due to NASH, if approved. If there is not sufficientapproved, or our other future approved products, if any, could have a material adverse impact on our ability to commercialize such products.
The availability and extent of coverage and reimbursement from governmental and private healthcare payors for our products, or theyincluding Ocaliva for PBC and, if approved, OCA for liver fibrosis due to NASH, and our ability to obtain adequate pricing for such products are not covered at all, it is less likelykey factors that they will be widely used.
Market acceptance and sales of any products or product candidates that we develop will depend on reimbursement policies and may be affected byaffect our future healthcare reform measures.commercial prospects. Government authorities and third-party payors, such as private health insurers and health maintenance organizations, decide which drugs they will cover and establish payment levels. We cannot be certain that reimbursementSales of our products depend and will depend substantially, both domestically and internationally, on the extent to which their cost will be available for Ocalivapaid by health maintenance, managed care, pharmacy benefit and similar healthcare management organizations or anyreimbursed by government health administration authorities, private health coverage insurers and other productsthird-party payors. Accordingly, the coverage and product candidates that we develop. Also, reimbursement policiesdecisions of such governmental and private healthcare payors could reduce the demand for, or the price paid for, our products. If these payors do not consider our products to be cost-effective alone, or relative to other approved therapies, they may not cover our products or, if they do, they may apply utilization management restrictions, high patient cost-sharing obligations, or restrict the level of reimbursement.
Third-party payors are increasingly challenging the prices charged for pharmaceuticals products, and many also limit reimbursement for newly-approved products and indications. Third-party payors often attempt to contain healthcare costs by demanding price discounts or rebates and limiting both the types and variety of drugs that they will cover and the amounts that they will pay for drugs. As a result, they may not provide adequate payment for our products. Similarly, the containment of healthcare costs has become a priority for federal and state governments and the pricing of pharmaceutical products has been a focus in this effort. The U.S. government, state legislatures and foreign governments have shown significant interest in implementing cost-containment programs, including price controls, restrictions on reimbursement, requirements for substitution of generic products and requirements to demonstrate a specific degree of improvement in terms of medical benefit compared to existing therapies. Adoption of price controls and cost-containment measures, and adoption of more restrictive policies in jurisdictions with existing controls and measures, could adversely affect our ability to successfully commercialize our products. In addition, we may be required to conduct post-marketing studies in order to demonstrate the cost-effectiveness of our products to payors’ satisfaction. Such studies might require us to commit a significant amount of management’s time and our financial and other resources and our products might not ultimately be considered cost-effective.
We do not know if Ocaliva for PBC will obtain and maintain broad acceptance from third-party payors in the jurisdictions in which it is, or may in the future be, approved. In addition, even if OCA for liver fibrosis due to NASH is approved, we do not know if it will obtain and maintain broad acceptance from third-party payors. The coverage determination process is a time-consuming and costly process that requires us to provide scientific and clinical support for the use of Ocaliva for PBC and, if approved, OCA for liver fibrosis due to NASH to each payor separately, with no assurance that coverage will be obtained or maintained. The market for a drug depends significantly on access to third-party payors’ drug formularies, or lists of medications for which third-party payors provide coverage and reimbursement. Third-party payors may refuse to include a particular drug in their formularies or restrict patient access to a branded drug when a less costly generic equivalent or other alternative is available, even if not approved for the indication for which the branded drug is approved. Due to there being no uniform policy of coverage and reimbursement in the United States among commercial payors, coverage and reimbursement for pharmaceutical products may differ significantly from payor to payor. If we are unable to obtain and maintain adequate coverage from third-party payors, the adoption of Ocaliva for PBC and, if approved, OCA for liver fibrosis due to NASH by physicians and patients may be limited. This in turn could affect our ability to successfully commercialize Ocaliva for PBC and, if approved, OCA for liver fibrosis due to NASH and have a material adverse impact our profitability, results of operations, financial condition and future success.
We cannot be certain that we will be able to obtain and maintain adequate coverage, pricing and reimbursement for our products, including Ocaliva for PBC, OCA for liver fibrosis due to NASH, if approved, or our other future approved products, if any. If coverage or reimbursement is not available or is available on a limited basis, or if we are unable to obtain and maintain adequate pricing, we may not be able to successfully commercialize Ocaliva for PBC, OCA for liver fibrosis due to NASH, if approved, or anyour other future approved products, or product candidates that we develop.if any.
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Legislative and regulatory healthcare reform may adversely affect our business.
In the United States, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 or MMA,(the “MMA”) changed the way Medicare covers and pays for pharmaceutical products. The legislation established Medicare Part D, which expanded Medicare coverage for outpatient prescription drug purchases by the elderly but provided authority for limiting the number of drugs that will be covered in any therapeutic class. The MMA also introduced a new reimbursement methodology based on average sales prices for physician-administered drugs. Any negotiated prices for our products covered by a Part D prescription drug plan will likely be lower than the prices we might otherwise obtain. Moreover, while the MMA applies only to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy and payment limitations in setting their own payment rates. Any reduction in payment that results from the MMA may result in a similar reduction in payments from non-governmental payors.
In March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act or collectively, ACA,(collectively, the “ACA”), became law in the United States. The goalAmong other things, the purpose of the ACA iswas to reduce the cost of health carehealthcare and substantially change the way health carehealthcare is financed by both governmental and private insurers. The ACA requires discounts under the Medicare drug benefit program and increased the rebates paid by pharmaceutical companies on drugs covered by Medicaid. The ACA also imposes an annual fee, which increases annually,each year, on sales by branded pharmaceutical manufacturers. Following the November 2016 U.S. electionsThe ACA has been challenged repeatedly in court, and the inauguration of President Trump, uncertainty exists about theits future of the coverage expansion provided by the ACA; while Congressional efforts to repealis uncertain. If the ACA have not yet resulted inis ultimately overturned or repealed, the passage of a bill, the President and congressional leaders continue to express interest in repealing these ACA provisions and replacing them with alternatives that may be less costly and provide state Medicaid programs and private health plans more flexibility. It is possible that these repeal and replacement initiatives, if enacted into law, could ultimately result in fewer individuals having health insurance coverage and/or in individuals having insurance coverage with less generous benefits. The scope of potential future legislation to repeal and replace ACA provisions is highly uncertain in many respects, and it is possible that some of the ACA provisions that generally hurt the research-based pharmaceutical industry could also be repealed along with ACA coverage expansion provisions; however, at this time the coverage expansion provisions of the ACA appear most likely to be repealed and replaced.
In addition, third-party payors attempt to contain health care costs by demanding price discounts or rebates and limiting both the types and variety of drugs that they will cover and the amounts that they will pay for drugs. As a result, they may not cover or provide adequate payment for our products. We might need to conduct post-marketing studies in order to demonstrate the cost-effectiveness of our products or any other future products to such payors’ satisfaction. Such studies might require us to commit a significant amount of management’s time and our financial and other resources. Our products might not ultimately be considered cost-effective. Adequate third-party reimbursement might not be available to enable us to maintain price levels sufficient to realize an appropriate returneffect on our investment in product development. The market for a drug will depend significantly on access to third-party payors’ drug formularies, or lists of medications for which third-party payors provide coverage and reimbursement. Third-party payors may refuse to include a particular branded drug in their formularies or otherwise restrict patient access to a branded drug when a less costly generic equivalent or other alternative is available, even if not approved for the indication for which the branded drug is approved. In addition, due to there being no uniform policy of coverage and reimbursement in the United States among commercial payors, coverage and reimbursement for pharmaceutical products may differ significantly from payor to payor.
We do not know if the price we have selected for Ocaliva will receive broad acceptance from third-party payors. The coverage determination process maybusiness could be a time-consuming and costly process that requires us to provide scientific and clinical support for the use of Ocaliva in PBC to each payor separately, with no assurance that coverage will be obtained. If we are unable to obtain adequate coverage of Ocaliva from third-party payors, the adoption of Ocaliva by physicians and patients as a treatment for PBC may be limited. This in turn could affect our ability to successfully commercialize Ocaliva and adversely impact our profitability, results of operations, financial condition and future success.
material.
Reimbursement in the European Union and many other territories must be negotiated on a country-by-country basis and in many countries thea product cannot be commercially launched until reimbursement is approved. The timing to complete the negotiation process in each country is highly uncertain. While we have been able to achieve rapid reimbursement decisions in some countries, as in the case in the United Kingdom, we expect that it may still require a number of months before we receive a reimbursement decision in many other countries. Even after a price is negotiated, countries frequently request or require adjustments to the price and other concessions over time or require approvals regionally. Reimbursement agencies (payors) in Europe are often more conservative than those in the United States and the reimbursement process is often slower since reimbursement decisions are made on a country-by-country basis.basis and may involve multiple government agencies in a given country. Prices for drugs in Europe are generally lower than in the United States and tend to decrease over time.
The United States and several other jurisdictions are considering, or have already enacted, a number of legislative and regulatory proposals to change thetheir healthcare systemsystems in ways that could affect our ability to sell our products profitably. Among policy makers and payors in the United States and elsewhere, there is significant interest in promoting changes in healthcare systems with the stated goals of containing healthcare costs, improving quality and/or expanding access to healthcare. In the United States, the pharmaceutical industry has been a particular focus of these efforts and has been significantly affected by major legislative initiatives. We expect to experience pricing pressures in connection with the sale of OCAOcaliva and anyour other future approved products, that we develop,if any, due to the trend toward managed healthcare, the increasing influence of health maintenance organizations and additional legislative proposals. Pricing pressures recently experienced by the pharmaceutical industry may be further exacerbated by legislative and policy changes under considerationproposed or considered by the Trump administration.executive branch and the United States Congress. In addition, it is possible that additional governmental action is taken to address pricing concerns arising in connection with COVID-19. We cannot predict the success or impact of any such current or future federal or state legislative efforts.
Ocaliva and our other product candidates,future approved products, if approved,any, may not achieve broad market acceptance among physicians, patients and healthcare payors, and as a result our revenues generated from their sales may be limited.
limited as a result.
The commercial success of Ocaliva orfor PBC, OCA for liver fibrosis due to NASH, if approved, and our other future approved products, or product candidates that we develop, if approved,any, will depend upon their acceptance among the medical community, including physicians,third-party payors, healthcare payorsproviders and patients.professionals and customers, including patients and patient advocacy groups. In order for Ocaliva to be commercially successful infor PBC, we will need to demonstrate its utility as a cost-effective treatment for PBC patients who have an inadequate response to UDCA or who are unable to tolerate ursodiol, referred to as second line treatment, and show that it is more effective than any other alternatives that may be developed as a second line treatment for PBC, particularly given the much higher price that we charge for Ocaliva compared to the price of generically available ursodiol.UDCA. Ocaliva also must be shown to be a safe and tolerable treatment in a commercial use setting as it is intended to be a lifetime therapy for patients eligible for treatment. We cannot be certain that Ocaliva for PBC, OCA for liver fibrosis due to NASH, if approved, or our other future approved products, if any, will achieve an adequate level of acceptance among the medical community, including physicians, healthcare payors and patients.
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In NASHaddition, we continue to closely evaluate the impact of COVID-19 on our ability to effectively market, sell and PSC, since theredistribute Ocaliva for PBC. The long-term effects of COVID-19 are currently no approved therapies, we do not know the degree to which OCA will be accepted as a therapy, even if approved.
unknown.
The degree of market acceptance of our product candidates will dependapproved products depends on a number of factors, including:
| limitations, warnings, precautions, boxed warnings, contraindications, restrictions or |
| changes in the standard of care or availability of alternative therapies at similar or lower costs for the targeted indications for any of our |
| limitations in the approved |
| demonstrated and perceived clinical safety and efficacy compared to |
| a lack of |
| sales, marketing and distribution support; |
| the availability of reimbursement from managed care plans and other third-party payors; |
| the timing of the market introduction |
| the degree of cost-effectiveness; |
| availability of alternative therapies at similar or lower cost, including |
| the extent to which our |
| whether and to what extent our |
| adverse publicity |
| the convenience and ease of administration of our |
| potential product liability |
| ● | the effects of COVID-19 and related public health safety measures and business closures and disruptions. |
In addition, the potential market opportunity for Ocaliva for PBC, OCA for liver fibrosis due to NASH, if approved, and our other future approved products, and product candidatesif any, is difficult to precisely estimate. While ursodiol is the established standard of care for PBC, a majority of patients while on therapy remain at ALP levels above the upper limit of normal, or ULN. According toFor example, our analysis of industry data in PBC, approximately 65% of patients treated with ursodiol experience elevated ALP levels, with approximately 35% of patients experiencing ALP levels greater than 1.67 times ULN. In addition, a small minority of PBC patients (estimated at approximately 3% of patients) are intolerant to ursodiol therapy. Our estimates of the potential market opportunity for Ocaliva for the treatment of PBC include a number of key assumptions related to prevalence rates, patients’ access to healthcare, diagnosis rates and patients’ response to or tolerance of OCA,Ocaliva, which are based on available literature and epidemiology research in PBC, our industry knowledge gained through market research and other methods, industry publications, third-party research reports and other surveys. While we believe that our internal assumptions are reasonable, no independent source has verified such assumptions. If any of these assumptions prove to be inaccurate, then the actual market for Ocaliva infor PBC could be smaller than our estimates of our potential market opportunity. If the actual market opportunity for Ocaliva for PBC, OCA for liver fibrosis due to NASH, if approved, or our product candidatesother future approved products,
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if any, is smaller than we expect, our product revenue may be limited.
limited and our financial condition and results of operations may be materially and adversely affected.
If Ocaliva for PBC, OCA for liver fibrosis due to NASH, if approved, or our product candidates areother future approved butproducts, if any, do not achieve an adequate level of acceptance by physicians, patients,among the medical community, andincluding physicians, healthcare payors and patients, sufficient revenue may not be generated from these products and we may not become or remain profitable. In addition, our efforts to educate the medical community and third-party payors on the benefits of Ocaliva for PBC, OCA for liver fibrosis due to NASH, if approved, and our product candidatesother future approved products, if any, may require significant resources and may never be successful.
We could incur significant liability if it is determined that we have limited sales, marketingimproperly promoted or distribution experience and we will have to invest in significant additional resources to develop those capabilities or enter into acceptable third-party sales and marketing arrangements.
We have limited sales, marketing or distribution experience as a commercial organization. The commercial launch ofare improperly promoting Ocaliva for PBC representsor any of our first product launch. We also plancandidates prior to commercialize Ocalivatheir approval.
Physicians are permitted to prescribe drug products for PBCuses that are not described in certainthe product’s labeling and that differ from those approved by the FDA or other countries outsideapplicable regulatory agencies. Off-label uses are common across medical specialties. Although the FDA and other regulatory agencies do not regulate a physician’s choice of treatments, the FDA and other regulatory agencies do restrict communications on the subject of off-label use. Companies are not permitted to promote drugs in a manner inconsistent with applicable regulatory guidance. The FDA, the U.S. Department of Justice (“DOJ”) and other regulatory and enforcement authorities actively enforce laws and regulations prohibiting the improper promotion of approved products, as well as the promotion of products for which marketing approval has not been obtained. A company that is found to have improperly promoted off-label uses will be subject to significant liability, including civil and administrative remedies as well as criminal sanctions. A significant number of pharmaceutical companies have received inquiries or been the subject of investigations by various governmental authorities in the United States and Europe ourselvesabroad. Both federal and state governments have levied large civil and criminal fines against companies for alleged improper off-label promotion, as well as promotion that is determined to be false or misleading, even if related to approved indications.
While we have implemented a corporate compliance program based on what we believe are current best practices, we cannot provide any assurance that governmental authorities, including the DOJ, SEC or FDA, will find that our business practices comply with all current or future administrative or judicial interpretations of potentially applicable laws and regulations. In addition, government and regulatory agencies may hold us responsible for any actions by our sales representatives and other employees or contingent workers to the extent that they do not comply with applicable laws and regulations. If we fail to comply with any of these laws and regulations, we could be subject to a targeted sales force if we receive marketing approval. We may utilizerange of penalties, including the servicesissuance of third-party collaboratorsan untitled letter, a warning letter, injunction, seizure, criminal and significant civil penalties, fines, damages, disgorgement, curtailment or restructuring of our operations, exclusion, disqualification or debarment from participation in certainfederally- or state-funded healthcare programs or other jurisdictions. Wesanctions or litigation, any of which could have not yet decideda material adverse impact on our commercialization strategy for OCA in other indicationsbusiness, financial condition and for our other product candidates. To develop internal sales, distribution and marketing capabilities, we have invested and expect to continue to invest significant additional amountsresults of financial and management resources.operations.
Recruiting and training a commercial organization is expensive and time consuming and could delay any product launch. If the commercial launch of a product candidate for which we recruit a sales force and establish marketing and distribution capabilities is delayed or does not occur for any reason, we would have prematurely or unnecessarily incurred these commercialization expenses. This may be costly, and our investment could be lost if we cannot retain or reposition our sales and marketing personnel.
For product candidates where we decide to perform sales, marketing and distribution functions ourselves or through third parties, we could face a number of additional risks, including:
We have a collaboration with Sumitomo Dainippon for the development and commercialization of OCA in Japan, China, South Korea and potentially other Asian countries, if approved, and may elect to seek additional strategic collaborators for our product candidates. We may have limited or no control over the sales, marketing and distribution activities of these third parties. Our future revenues may depend heavily on the success of the efforts of these third parties.
If we market products in a manner that violates healthcare fraud and abuse laws, or if we violate government price reporting or physician payment disclosure laws, we may be subject to civil or criminal penalties.
In addition to FDA restrictions on the marketing of pharmaceutical products, several other types of state and federal healthcare laws, commonly referred to as “fraud and abuse” laws, have been applied in recent years to restrict certain marketing practices in the pharmaceutical industry. Other jurisdictions such asincluding Europe have similar laws and are enacting more stringent regulations. These laws include false claims and anti-kickback statutes. If we market our products and our products are paid for by governmental programs, itIt is possible that some of our business activities could be subject to challenge under one or more of these laws.
Federal false claims laws generally prohibit any personanyone from knowingly and willingly presenting, or causing to be presented, aany claims for the payment for goods (including drugs) or services to third-party payers (including Medicare and Medicaid) that are false claim for paymentor fraudulent. The federal civil monetary penalties statute, likewise, imposes penalties against any person or entity that, among other things, is determined to the federal governmenthave presented or knowingly making, or causingcaused to be made,presented a claim to a federal health program that the person knows or should know is for an item or service that was not provided as claimed or is false statement to get a false claim paid. or fraudulent.
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The federal healthcare program anti-kickback statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration to induce, or in return for, purchasing, leasing, ordering or arranging forgenerate business, including the purchase lease or orderprescription of any healthcare item or servicea particular product covered by Medicare, Medicaid or other federally financed healthcare programs. This statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on the one hand and prescribers, purchasers or formulary managers on the other. Although there are several statutory exemptions and regulatory safe harbors protecting certain common activities from prosecution, the exemptions and safe harbors are drawn narrowly, and practices that involve remuneration intended to induce prescribing, purchasing or recommending may be subject to scrutiny if they do not qualify for an exemption or safe harbor. Most states also haveIn addition, such exemptions and safe harbors are subject to change from time to time.
The Health Insurance Portability and Accountability Act of 1996 (as amended by the Health Information Technology for Economic and Clinical Health Act, “HIPAA”) created additional federal criminal statutes that prohibit, among other things, knowingly and willfully executing, or regulations similarattempting to execute, a scheme to defraud any healthcare benefit program, or obtain, by means of false or fraudulent pretenses, or promises, any of the federal anti-kickback law and federal false claims laws, which apply to items and services coveredmoney or property owned by, Medicaid and other state programs, or in several states, applyunder the custody or control of, any healthcare benefit program, regardless of the payor. Administrative, civilpayor (e.g., public or private) and criminal sanctions may be imposedknowingly and willfully falsifying, concealing or covering up by any trick or device a material fact or making any materially false statement, in connection with the delivery of, or payment for, healthcare benefits, items or services. HIPAA also imposes significant requirements on the receipt and transfer of protected health information.
In addition, the federal transparency requirements under thesethe Physician Payments Sunshine Act require certain manufacturers of drugs, including us, for which payment is available under certain federal healthcare programs annually to report information related to payments and other transfers of value to physicians and teaching hospitals, and physician ownership and investment interests.
Finally, we must offer discounted pricing or rebates on Ocaliva and our future approved products, if any, under various federal and state laws.healthcare programs, and report specific prices to government agencies under healthcare programs. The calculations necessary to determine the prices reported are complex and the failure to report prices accurately may expose us to significant penalties.
There are foreign and state law equivalents of these laws and regulations, such as anti-kickback, false claims, transparency and data privacy and security laws, to which we are currently and/or may in the future be subject. We may also be subject to foreign and state laws that require manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures. Many of these laws differ from each other in significant ways, thus increasing the cost and complexity of our compliance efforts.
Over the past few years, aA number of pharmaceutical and other healthcare companies have been prosecuted under these laws for a variety of promotional and marketing activities, such as:including providing free trips, free goods, sham consulting fees and grants and other monetary benefits to prescribers; reporting inflated average wholesale prices that were then used by federal programs to set reimbursement rates; engaging in off-label promotion;improper promotional activities; and submitting inflated best price information to the Medicaid Drug Rebate Program to reduce liability for Medicaid rebates.
We will incur significant liability if it is determined thatIf we are promoting any “off-label” use of Ocaliva.
Physicians are permitted to prescribe drug products for uses that are not described in the product’s labeling and that differ from those approved by the FDA or other applicable regulatory agencies. Off-label usesour operations are common across medical specialties. Although the FDA and other regulatory agencies do not regulate a physician’s choice of treatments, the FDA and other regulatory agencies do restrict communications on the subject of off-label use. Companies are not permitted to promote drugs for off-label uses. Accordingly, we may not promote Ocaliva in the United States for use in any indications other than for the treatment of patients with PBC in combination with ursodiol in adults with an inadequate response to ursodiol or as monotherapy in adults unable to tolerate ursodiol. The FDA and other regulatory and enforcement authorities actively enforce laws and regulations prohibiting promotion of off-label uses and the promotion of products for which marketing approval has not been obtained. A company that is found to have improperly promoted off-label uses willbe in violation of any of the laws described above or any other governmental regulations that apply to us, we may be subject to penalties, including criminal and significant liability, including civil and administrative remedies as well as criminal sanctions. A significant numberpenalties, damages, fines, imprisonment, exclusion of pharmaceutical companies have been the target of inquiries and investigations by various governmental authorities in theproducts from reimbursement under United States federal or state healthcare programs, and abroad.
Notwithstanding the regulatory restrictions on off-label promotion, the FDAcurtailment or restructuring of our operations. Any penalties, damages, fines, curtailment or restructuring of our operations could materially and other regulatory authorities allow companiesadversely affect our ability to engage in truthful, non-misleading, and non-promotional scientific exchange concerning their products. We intend to continue engaging in medical education activities and communicate with healthcare providers in compliance with all applicable laws, regulatory guidance and industry best practices.
While we have implemented a corporate compliance program based on what we believe are the current best practices, we cannot provide any assurance that governmental authorities will find thatoperate our business practices comply with current or future administrative or judicial interpretationsand our financial results. Although compliance programs can mitigate the risk of potentially applicable lawsinvestigation and regulations. If we fail to comply with anyprosecution for violations of these laws, the risks cannot be entirely eliminated. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and regulations, we could be subject to a range of regulatory actions, including suspension or termination of clinical trials, the failure to approve a product candidate, restrictions ondivert our products or manufacturing processes, withdrawal of Ocaliva or other productsmanagement’s attention from the market, significant fines, disqualification or debarment from participation in federally-funded healthcare programs or other sanctions or litigation, any of which events may have a significant adverse impact on our business.
If anyoperation of our current strategic collaborators fails to perform its obligations or terminates its agreementbusiness. Moreover, achieving and sustaining compliance with us, the development and commercializationthese laws may prove costly.
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We currently have strategic collaborations in place relating to certain of our product candidates. We entered into an exclusive license agreement with Sumitomo Dainippon regarding the development and commercialization of Ocaliva for PBC and OCA for NASH in Japan, China and South Korea and provided Sumitomo Dainippon with an option to extend its exclusive license to different indications as well as certain other Asian countries. These strategic collaborations may not be scientifically or commercially successful due to a number of important factors, including the following:
If Sumitomo Dainippon fails to develop or effectively commercialize OCA, we may not be able to replace it with another collaborator. For example, there is no assurance that Sumitomo Dainippon will initiate any registrational trials in NASH and the results of any additional trial conducted by Sumitomo Dainippon may not be an improvement as compared to those from the Phase 2 trial on Japanese NASH patients. We may also be unable to obtain, on terms acceptable to us, a license from such strategic collaborator to any of its intellectual property that may be necessary or useful for us to continue to develop and commercialize a product candidate. Any of these events could have a material adverse effect on our business, results of operations and our ability to achieve future profitability, and could cause our stock price to decline.
We may not be successful in establishing, implementing and maintaining development and commercialization collaborations, which could adversely affect our ability to develop certain of our product candidates and our financial condition and operating results. If any strategic collaborator fails to perform its obligations under, or terminates, its agreement with us, our business could be substantially harmed.
Because developingDeveloping pharmaceutical products, conducting clinical trials, obtaining regulatory approval, expanding manufacturing capabilities and marketing approved products are expensive, complex and time-consuming undertakings. As a result, we have in the past entered into, and may in the future seek to enter into, collaborations with companies that have more experiencethird parties upon whom we may rely for financial resources and resources than we have. For example, we have entered into a collaboration with Sumitomo Dainippon for OCA.development, regulatory and commercialization expertise for selected products or product candidates and in selected jurisdictions. We may establish additional collaborations forwith respect to the development and commercialization of OCA in territories outside of those licensed by Sumitomo Dainipponvarious jurisdictions and for our other product candidates and research programs, including INT-767 and INT-777.candidates. Additionally, if any of our product candidates receives marketing approval, we may enter into sales and marketing arrangements with third parties with respect to our unlicensed territories. approved products in all or certain jurisdictions.
Our collaborators may fail to develop our product candidates or effectively commercialize our products for a variety of reasons, including a lack of sufficient resources, a decision not to devote the necessary resources due to internal constraints, such as limited cash or human resources, a change in strategic focus or a failure to obtain the necessary regulatory approvals.
If we are unable to maintain our existingenter into new arrangements or enter into any newmaintain such arrangements on acceptable terms, ifor at all, we may be unable to effectively market and sell our products in certain of our target markets. We expect to face competition in seeking appropriate collaborators. Moreover, collaboration and similar arrangements are complex and time consuming to negotiate, document and implement and they may require substantial resources to maintain. We may not be successful in our efforts to establish and implement collaborations or other alternative arrangements for the development of our product candidates.
When we collaborate with a third party for development and commercialization of a product candidate or approved product, we can expect to relinquish some or all of the control over the future success of that product candidate or approved product to the third party. For example, Sumitomo Dainippon has the exclusive rights to OCA in Japan, China and South Korea and a right of first refusal to license OCA in several other Asian countries. Our collaboration partner may not devote sufficient resources to thedevelopment or commercialization of our product candidates or may otherwise fail in their development or commercialization. The terms of any collaboration or other arrangement that we establish may not be favorable to us. In addition, any collaboration that we enter into including our collaboration with Sumitomo Dainippon, may be unsuccessful in the development and commercialization of our product candidates.unsuccessful. In some cases, we may be responsible for continuing preclinical and initial clinical development of a partnered product candidate or research program, under a collaboration arrangement, and the payment we receive from our collaboration partner may be insufficient to cover the cost of this development. If we are unable to reach agreements with suitable collaborators, for our product candidates, we would facemay incur increased costs and we may be forced to limit the number of ourproducts or product candidates we can commercially develop or the territories in which we can commercialize them and we might fail to commercialize products or programs for which a suitable collaborator cannot be found.them. If we fail to achieve successful collaborations, our operating results and financial condition willcould be materially and adversely affected.
If we fail to develop OCA for additional indications such as NASH, our commercial opportunity will be limited.
To date, we have focused the majority of our development efforts on the development of OCA. Among our other product candidates, only INT-767 is currently in clinical development. One of our strategies is to pursue clinical development of OCA infor liver fibrosis due to NASH and other progressive non-viral liver diseases, to the extent that we have sufficient funding.
funding to do so.
PBC is an orphan disease. Since Ocaliva is indicated for use in PBC in combination with ursodiol in adults with an inadequate response to ursodiol or as monotherapy in adults unable to tolerate ursodiol,disease and the potential market size for Ocaliva for PBC is expected to berelatively limited. Furthermore, because a significant proportion of PBC patients do not exhibit any symptoms at the time of diagnosis, PBC may be left undiagnosed for a significant period of time. Due to these factors, our ability to grow revenues will be dependent on our ability to increase market share and successfully develop and commercialize OCA for the treatment of additional indications. In particular, we believe that our future success will depend in large part on the results of our development of OCA for the treatment of NASH. Although NASH is believed to be one of the most prevalent chronic liver diseases worldwide, NASH may be left undiagnosed in patients for a long period of time and a definitive diagnosis of NASH is currentlyoften based on a histological assessment of a liver biopsy, which impacts the ability to easily identify patients. Furthermore, even if we are successful in developing and obtaining marketing approval of OCA for the treatment of NASH, we may not be able to commercialize OCA successfully.commercially successful.
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The completion of development, securing of approval and commercialization of OCA for additional indications such as liver fibrosis due to NASH will require substantial additional funding, is subject to numerous risks and is prone to the risks of failure inherent in drug development.we may not be successful. We cannot provide you any assurance that we will be able to successfully advance any of these indications through the development process. Even if we receive FDA or EMAregulatory approval to market OCA for the treatment of liver fibrosis due to NASH or any of theseother additional indications, we cannot assure you that any such additional indications will be successfully commercialized, widely accepted in the marketplace or more effective than other commercially available alternatives. If we are unable to successfully develop and commercialize OCA for theseliver fibrosis due to NASH or other additional indications, our commercial opportunity will be limited and our business prospects will suffer.
Risks Related to Our Business and Strategy
We depend on third-party contractors for a substantial portion of our operations and may not be able to control their work as effectively as if we performed these functions ourselves.
We outsource and plan to continue to outsource substantial portions of our operations to third-party service providers, including CROs for certain of our clinical trial and product development activities, and contract manufacturers for the production of API and finished drug product for our commercial sales, clinical trials and preclinical studies. We will likely also use the services of third-party vendors in connection with our future commercialization activities, including product sales, marketing and distribution. Our agreements with third-party service providers are typically on a study-by-study and/or project-by-project basis. Typically, we may terminate these agreements with notice and are responsible for the supplier’s previously incurred costs. In addition, a number of third-party service providers that we retain will be subject to the FDA’s and EMA’s regulatory requirements and similar standards outside of the United States and Europe and we do not have control over compliance with these regulations by these providers. If these providers do not adhere to applicable governing practices and standards, the commercialization of Ocaliva and our other approved products, if any, and the development of OCA and our other product candidates could be delayed or stopped, which could severely harm our business and financial condition.
Because we have relied on third parties, our internal capacity to perform these functions is limited. Outsourcing these functions involves the risk that third parties may not perform to our standards, may not produce results in a timely manner or may fail to perform at all. In addition, the use of third-party service providers requires us to disclose our proprietary information to these parties, which could increase the risk that this information will be misappropriated. There are a limited number of third-party service providers that have the specialized expertise required to achieve our business objectives. Identifying, qualifying and managing the performance of third-party service providers can be difficult, time-consuming and cause delays in our development programs. Despite our growth, we have limited internal resources available to identify and monitor third-party service providers. To the extent we are unable to identify, retain and successfully manage the performance of third-party service providers, our business may be materially and adversely affected. We may further be subject to the imposition of civil or criminal penalties if our third party service providers violate applicable law.
Our third-party service providers generally are not prohibited from providing their services to other biopharmaceutical companies, including companies that currently or may in the future compete with us. For example, certain of our third-party service providers and consultants may be able to develop intellectual property to which we do not have rights under our agreements and that may eventually be used to develop products that compete with our products. Although we generally have confidentiality and non-disclosure agreements in place with our third-party service providers and consultants, such third parties may be able to provide services to other companies without violating the terms of our agreements. In addition, although we may seek to enter into non-compete arrangements with our key third-party service providers, such arrangements are difficult to negotiate and we may be unable to successfully enter into or enforce such arrangements.
The effects of COVID-19 and related public health safety measures and business closures and disruptions may negatively impact our and our third-party service providers’ productivity, limit the conduct of business operations and impair our and our third-party service providers’ ability to conduct operations.
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We face rapid technological change and competition from other biotechnology and pharmaceutical companies and ourcompanies. Our operating results will suffer if we fail to compete effectively.
The biotechnology and pharmaceutical industries are intensely competitive and subject to rapid and significant technological change. We have competitors in the United States, Europe and other jurisdictions, including major multinational pharmaceutical companies, established biotechnology companies, specialty pharmaceutical and generic drug companies and universities and other research institutions. Many of our competitors have financial, sales and marketing, manufacturing and distribution, legal, regulatory and product development resources substantially greater financial and other resources, such as larger research and development staff and more experienced marketing and manufacturing organizations.than ours. Large pharmaceutical companies, in particular, have extensive experience in research, clinical testing, obtaining regulatory approvals, recruiting patients and manufacturing pharmaceutical products. These companies also have significantly greater research, sales and marketing capabilities and often have collaborative arrangements in our target markets with leading companies and research institutions.markets. Established pharmaceutical companies may also invest heavily to accelerate discovery and development of novel compounds or to in-license novel compounds that could make theour products or product candidates that we develop obsolete. As a result of all of these factors, our competitors may succeed in obtaining patent protection and/or FDA, EMA or EMAother regulatory approval or discovering, developing and commercializing drugs for the diseases that we are targeting before we do. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large, established companies.
Some of the pharmaceutical and biotechnology companies that we expect tomay compete with include Allergan Plc,89bio, Inc., AbbVie Inc., Acorda Therapeutics, Inc., Affimune Limited, Akero Therapeutics, Inc., Albireo Pharma, Inc., Altimmune, Inc., Arrowhead Pharmaceuticals, Inc., AstraZeneca plc, AcordaBlade Therapeutics, Inc., Boehringer Ingelheim GmbH, Bristol-Myers Squibb Company, Conatus PharmaceuticalsCan-Fite BioPharma Ltd., Cirius Therapeutics, Inc., CymabayCorcept Therapeutics Incorporated, CymaBay Therapeutics, Inc., Dr. Falk Pharma GmbH, Durect Corporation, Eli Lilly and Company, Enanta Pharmaceuticals, Inc., ENYO Pharma SAS,Forma Therapeutics, Inc. Galectin Therapeutics Inc., Galecto Biotech AB, Galmed Medical ResearchPharmaceuticals Ltd., Genfit SA, Genkyotex, Gilead Sciences, Inc., GlaxoSmithKline Immuronplc, GRI Bio, Inc., Hanmi Pharmaceutical Co., Ltd., Islet Sciences,Hepion Pharmaceuticals, Inc., HighTide Therapeutics Inc., Immuron Limited, Inventiva, Ionis Pharmaceuticals, Inc., Lipocine Inc., Madrigal Pharmaceuticals, Inc., MediciNova, Inc., Metacrine, Inc., MiNA Therapeutics,Mitsubishi Tanabe Pharma Corporation, Mirum Pharmaceuticals, Nash Pharmaceuticals Inc., NGM Biopharmaceuticals, Inc., NorthSea Therapeutics B.V., Novartis International AG, Novo Nordisk A/S, Shire plc,NuSirt Biopharma, Inc., Oramed Pharmaceuticals Inc., Pfizer Inc., Poxel SA, Sagimet Biosciences Inc., Second Genome, Inc., Sinew Pharma Inc., Terns Pharmaceuticals, Inc., Theratechnologies, Inc., Viking Therapeutics, Inc., Yaqrit International Ltd and Zydus Pharmaceuticals (USA) Inc. Bezafibrate,Although we have a fibrate that has not been approved for commercialization by the FDAlicense to develop and is only available outside ofcommercialize bezafibrate in the United States, bezafibrate has been studied in multiple clinical trials for the treatment of liver diseases including PBC and NASH. Genfit SA has an ongoing Phase 3 clinical trialNASH outside of GFT505, a dual PPAR alpha/delta agonist,the United States. Genfit’s elafibranor and CymaBay’s seladelpar are in NASH. Genfit is also studying GFT505late-stage studies for the treatment of PBC. Gilead Sciences, Inc. is conducting multiple Phase 3 clinical trialsNovo Nordisk’s semaglutide, Madrigal’s resmetirom, and Inventiva’s lanifibranor are currently in NASH patients of various disease severity with selonsertib, an inhibitor of the apoptosis signal-regulating kinase 1. Gilead Sciences, Inc. is also exploring additional studies in NASHlate-stage development for GS-0976, a small molecule allosteric inhibitor that acts at the protein-protein homodimer interface of acetyl-CoA carboxylases acquired from Nimbus Therapeutics, LLC, and an FXR agonist known as GS-9674. Gilead Sciences, Inc. is also studying a number of compounds in other liver diseases including PBC and PSC. Allergan Plc has an ongoing Phase 3 clinical trial of cenicriviroc, an immunomodulator that blocks C-C chemokine receptor type 2 and type 5, for the treatment of NASH. A number of other companies have trials in PBC, NASH and other liver diseases we are targeting.
In addition, many universities and private and public research institutesinstitutions may become active in our target disease areas. The results from our POISE and FLINTclinical trials and the approval of Ocaliva for PBC have brought more attention to our targeted indications and bile acid chemistry. As a result, we believe that additional companies and organizations may seek to compete with us in the future. Our competitors may succeed in developing, acquiring or licensing on an exclusive basis, technologies and drug products that are more effective or less costly than OCA or any other product candidates that we are currently developing or that we may develop, which could render our products or product candidates obsolete and noncompetitive.
Our ability to compete may also be affected because, in many cases, insurers or other third-party payors seek to encourage the use of generic products.
Off-label uses of other potential treatments may limit the commercial potential of our products and product candidates, especially given the pricing of Ocaliva and the anticipated pricing for our product candidates. For example, while fibrates are not approved for use in PBC, off-label use of fibrate drugs has been reported, though many fibrates are specifically contraindicated for use in PBC due to potential concerns over acute and long-term safety in this patient population.reported. In NASH, a number of treatments, including vitamin E (an antioxidant), insulin sensitizers (such as metformin)(e.g., metformin, pioglitazone), antihyperlipidemic agents (such as(e.g., gemfibrozil), pentoxifylline and ursodiol,UDCA, are used off-label. Although none of these treatments have been clearly shown in clinical trials to alter the course of the disease, in a previous study conducted by the NASH Clinical Research Network, similar improvements to those observed with OCA in the FLINT trial in certain histological measures of NASH were reported with vitamin E and pioglitazone. Various other treatments, both approved and unapproved, have been used in the other indications we are targeting.
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We believe that our ability to successfully compete will depend on, among other things:
| the results of our and our strategic collaborators’ clinical trials and preclinical studies; |
| our ability to recruit, enroll and |
| the efficacy, safety and |
| the speed at which we develop our product candidates; |
| our ability to design and successfully execute appropriate clinical trials; |
| our ability to maintain |
| the timing and scope of regulatory approvals, if any; |
| our ability to commercialize and market |
| the price of our products; |
| our ability to obtain adequate levels of reimbursement under private and governmental health insurance plans, including Medicare; |
| our ability to protect our intellectual property rights related to our products; |
| our ability to manufacture and sell commercial quantities of |
| the acceptance of our |
If our competitors market products that are more effective saferor safe or less expensive than our future products if any, or that reach the market sooner than our future products, if any, we may not achieve commercial success. In addition, the biopharmaceutical industry is characterized by rapid technological change. Because our research approach integrates many technologies, it may be difficult for us to stay abreast of the rapid changes in each technology.other technologies. If we fail to stay at the forefront of technological change, we may be unable to compete effectively. Technological advances or products developed by our competitors may render our technologies, products or product candidates obsolete, less competitive or not economical.
We depend on third-party contractors for a substantial portion of our operations and may not be able to control their work as effectively as if we performed these functions ourselves.
We outsource and plan to continue to outsource substantial portions of our operations to third-party service providers, including the conduct of preclinical studies and clinical trials, collection and analysis of data and manufacturing. Although we are currently commercializing Ocaliva using our internal commercial organization, we will likely use the services of third-party vendors in relation to our future commercialization activities, including product sales, marketing and distribution. Our agreements with third-party service providers are on a study-by-study and/or project-by-project basis. Typically, we may terminate the agreements with notice and are responsible for the supplier’s previously incurred costs. In addition, a number of third-party service providers that we retain will be subject to the FDA’s and EMA’s regulatory requirements and similar standards outside of the United States and Europe and we do not have control over compliance with these regulations by these providers. Consequently, if these providers do not adhere to applicable governing practices and standards, the development and commercialization of Ocaliva and our other product candidates could be delayed or stopped, which could severely harm our business and financial condition.
Because we have relied on third parties, our internal capacity to perform these functions is limited to management oversight. Outsourcing these functions involves the risk that third parties may not perform to our standards, may not produce results in a timely manner or may fail to perform at all. In the past, we experienced difficulties with a third-party contract manufacturer for OCA, including delays in receiving adequate clinical trial supplies as requested within the requested time periods. We subsequently replaced this manufacturer with other third-party contract manufacturers for OCA. It is possible that we could experience similar difficulties in the future. In addition, the use of third-party service providers requires us to disclose our proprietary information to these parties, which could increase the risk that this information will be misappropriated. There are a limited number of third-party service providers that specialize or have the expertise required to achieve our business objectives. Identifying, qualifying and managing performance of third-party service providers can be difficult, time consuming and cause delays in our development programs. Despite our recent growth, we currently have a small number of employees, which limits the internal resources we have available to identify and monitor third-party service providers. To the extent we are unable to identify, retain and successfully manage the performance of third-party service providers in the future, our business may be adversely affected. We may further be subject to the imposition of civil or criminal penalties if their conduct of clinical trials violates applicable law.
Our third-party service providers generally are not prohibited from providing their services to other biopharmaceutical companies, including companies that currently or may in the future compete with us. For example, certain of our third-party service providers and consultants may be able to develop intellectual property to which we are not entitled under our agreements which may eventually be used to develop products that compete with our products. Although we generally have confidentiality and non-disclosure agreements in place with our third-party service providers and consultants, such third parties may be able to provide services to other companies without violating the terms of our agreements. In addition, although we may seek to enter into non-compete arrangements with our key third-party service providers, such arrangements are difficult to negotiate and we may be unable to successfully enter into such arrangements.
A variety of risks associated with our international business operations and our planned international business relationships could materially and adversely affect our business.
We have a wholly-owned subsidiary in the United Kingdom which serves as our headquarters for our international operations. We have also formed a number of other wholly-owned subsidiaries in Europe and Canadajurisdictions outside of the United States in preparation for the anticipatedconnection with or in anticipation of our commercial launch of Ocaliva in PBCor other business activities in those jurisdictions. Although weWe are currently commercializing Ocaliva for PBC using a combination of our internal commercial organization we will likely useand third-party distributors, depending on the servicesjurisdiction. Our variety of third-party vendors in relation to our future commercialization activities, including product sales, marketing and distribution. In addition, we have entered into collaborations with Sumitomo Dainippon for the development of OCA, and we may enter into agreements with other third parties for the development and commercialization of OCA or our other product candidates in international markets. Our international operations and business relationships subject us to additional risks that may materially and adversely affect our business and ability to attain or sustain profitable operations,profitability, including:
| the enhanced anti-bribery and anti-corruption regimes now implemented in most European countries and elsewhere, including the UK Bribery Act and the escalation of investigations and prosecutions pursuant to such laws; |
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| ● | compliance with complex import and export control laws; |
| ● | restrictions on direct investments by foreign entities and country-specific trade restrictions; |
| ● | differing regulatory requirements for |
| ● | difficulties in staffing and managing international operations; |
| ● | the potential for reduced protection for our intellectual property rights; |
| the potential for third-party patent rights in countries outside of the United States; |
| cross border trade of medicines by third parties within the |
| unexpected changes in tariffs, trade barriers and regulatory |
| economic weakness, including inflation, or political instability, particularly in non-U.S. economies and markets, including |
| compliance with tax, employment, immigration and labor laws |
| compliance with data protection laws, including regimes relating to cross-border transfer mechanisms; |
| ● | taxes in other countries; |
| foreign currency fluctuations, which could result in increased operating expenses and reduced revenue, and other |
| potential for production shortages resulting from events affecting raw material supply or manufacturing capabilities abroad; |
| business interruptions resulting from geo-political actions, including war and terrorism, |
| ● | increasingly complex standards for complying with international laws and regulations that may differ substantially from country to country and may conflict with corresponding U.S. laws and regulations. |
For example, we do not knowSince the extentUnited Kingdom referendum on European Union membership in June 2016, there has been some political and economic uncertainty, including in the regulatory framework applicable to the operations of biotechnology and pharmaceutical companies, and this uncertainty may persist now that the impact thatof Brexit is being realized. There may be disruption and uncertainties in the Brexit will have on our business. As a resultfree movement of the Brexit, it is possible that Scotlandgoods, services and Northern Ireland may each conduct a referendum to decide whether to leavepeople between the United Kingdom. Furthermore, otherKingdom and the European countriesUnion, and at a more detailed level disruption to, and uncertainty regarding the application and interpretation of, national and international laws and regulations. There is now additional process and documentation required to move
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goods between the United Kingdom and the European Union, and we and our third-party supply chain partners may seekexperience delays, disruptions, and increased costs as a result. There may also be unforeseen consequences and uncertainties in cross border trade in goods and services, immigration and employment, data protection and digital trade, state aid and fair competition. Over the last few years our international business has undertaken significant planning and operational readiness work for Brexit involving business functions such as supply chain, quality, finance/tax, regulatory, pharmacovigilance and legal. Brexit could materially change the regulatory regime applicable to conduct referendaour operations, including with respect to continuing membership with the European Union. WeOcaliva for PBC and, if approved, OCA for liver fibrosis due to NASH and our other product candidates. Such consequences and uncertainties could make it more difficult and expensive for us to do not knowbusiness, complicate our clinical, manufacturing and regulatory strategies and impair our ability to what extent these changes will impactobtain and maintain regulatory approval for, and, if approved, commercialize, our business. Ourproducts and product candidates in Europe. In addition, our ability to continue to conduct our international business(ex-U.S.) operations out of the United Kingdom, where the headquarters for our international operations is located, may be materially and adversely affected. While we have undertaken a number of Brexit-related contingency planning initiatives, we cannot make any assurances regarding the extent to which our business may be adversely affected thereby.
In addition, we are subject to the anti-bribery and anticorruption laws of the United States (both those affecting domestic operations, and those affecting foreign operations, including the U.S. Foreign Corrupt Practices Act), as well as of foreign jurisdictions where we operate, including the UK Bribery Act. Generally, these laws prohibit paying or offering anything of value to a foreign government official for the purpose of obtaining or retaining business but they can also have a much wider, extraterritorial scope, as is the case with the UK Bribery Act, and include requesting, receiving, or accepting anything of value with the intention of obtaining an improper advantage, as well as include commercial bribery (i.e., private sector rather than public sector bribery). U.S. and foreign regulators have increased their enforcement of anti-bribery and anticorruption laws in recent years, and failure to comply with these laws could result in various adverse consequences, including:
| ● | the possible delay in approval or refusal to approve our product candidates; |
| ● | recalls, seizures or withdrawal from the market of an approved product; |
| ● | disruption in the supply or availability of our products or suspension of export or import privileges; |
| ● | the imposition of civil or criminal sanctions; |
| ● | the prosecution of executives overseeing our international operations; and |
| ● | damage to our reputation. |
Any significant impairment of our ability to develop our product candidates or sell our approved products outside of the United States could adversely impact our business and financial results.
ChangesOur business and operations would suffer in the event of system failures or security or data breaches due to cyber-attacks, or cyber intrusions, including ransomware, phishing attacks and other malicious intrusions.
In recent years, cybersecurity threats have become a greater risk and focus for companies. In particular, ransomware attacks, where a hacker locks and threatens to delete or disclose the victim’s data unless a ransom is paid, has become a major risk. We and our third-party service providers are at risk of cyber-attacks or cyber intrusions via the Internet, computer viruses, break-ins, malware, ransomware, phishing attacks, hacking, denial-of-service attacks or other attacks and similar disruptions from the unauthorized use of, or access to, computer systems (including from internal and external sources). These types of incidents continue to be prevalent and pervasive across industries, including in our effective income tax rateindustry. In addition, we expect information security risks to continue to increase due to the proliferation of new technologies and the increased sophistication and activities of organized crime, hackers, terrorists and other external parties, including foreign state actors.
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We are increasingly dependent on information technology systems and infrastructure, including mobile technologies, to operate our business. In the ordinary course of our business, we collect, process, store and transmit large amounts of confidential information, including intellectual property, proprietary business information and personal information. It is critical that we do so in a secure manner to maintain the confidentiality and integrity of such information. The size and complexity of our information technology systems, and those of third-party vendors with whom we contract, and the volume of data we retain, make such systems potentially vulnerable to breakdown, malicious intrusion, security breaches, ransomware, phishing, and other cyber-attacks. Our information security systems and those of our third-party vendors are subject to laws and regulations, or may become subject to new laws and regulations, requiring that we enact certain measures to protect the privacy and security of certain information we collect or use in our business. A security breach or privacy violation that leads to disclosure or modification of, or prevents access to, personal information or other protected information, whether caused by internal or external parties, could adversely affectharm our reputation, compel us to comply with federal and/or state breach notification laws and foreign law equivalents, subject us to notification requirements under certain agreements with third parties, subject us to mandatory corrective action, require us to verify the correctness of database contents and otherwise subject us to liability under laws and regulations that protect personal information, resulting in increased costs or loss of revenue. Similarly, the loss or unauthorized disclosure of clinical trial data from completed, ongoing or planned clinical trials could prevent us from obtaining regulatory approval or delay our regulatory approval efforts and significantly increase our costs to recover or reproduce the data.
If we are unable to prevent such security breaches or privacy violations or implement satisfactory remedial measures, our operations could be disrupted, and we may suffer negative impact to our reputation, financial loss and be subject to regulatory fines and penalties. In addition, breaches and other unauthorized data access can be difficult to detect, and any delay in identifying them may lead to increased harm of the type described above. Moreover, the reliance on remote working technologies by our employees and third-party partners due to COVID-19 and related public health safety measures and the prevalent use of mobile devices that access confidential and personal information increases the risk of data security breaches, which could lead to the loss of confidential information, personal information, trade secrets or other intellectual property. As cyber threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities. While we have implemented security measures to protect our data security and information technology systems, such measures may not prevent such events. Significant disruptions of our information technology systems or breaches of data security could have a material adverse effect on our business, financial condition and results of operations.
We are subject to income taxesvarious data protection laws and our business and operations would suffer in the event of violations of these laws.
In the United States, numerous federal and state laws, including, without limitation, HIPAA, state security breach notification laws, state health information privacy laws and federal and state consumer protection laws, govern the collection, use, disclosure and storage of personal information as well as consumer rights with regard to such information. For example, California passed the California Consumer Privacy Act of 2018, which became effective on January 1, 2020, and other states have enacted similar privacy laws. Various foreign countries where we may process personal information also have, or are developing, privacy and data protection laws governing the collection, use, disclosure and storage of personal information.
In July 2016, U.S. and European Commission officials adopted a framework called the European Union-U.S. Privacy Shield (the “EU Privacy Shield”) to govern transfers of personal data from the European Economic Area (“EEA”) to the U.S. We adopted the European Union-U.S. Privacy Shield and have certified to its requirements since October 2016. We also adopted the Swiss-U.S. Privacy Shield (the “Swiss Privacy Shield”) in order to legitimize the transfer of personal data from Switzerland to the U.S. In May 2018, the General Data Protection Regulation (the “GDPR”) took effect in the EEA. The GDPR imposes more stringent data protection requirements, and provides for greater penalties for noncompliance, than previous EEA data protection legislation. In addition, although we have implemented certain measures as a result of Brexit to allow for the transfer of personal data between EEA member states and the United Kingdom, we may need to develop additional mechanisms to permit for the transfer of this data. Implementation of the GDPR and other changes in privacy and data protection laws or regulations could require changes to certain of our business practices, thereby increasing our costs. While we continue to engage in activities to comply with the GDPR requirements and other data protection laws, we may be unsuccessful in these efforts.
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On July 16, 2020, the Court of Justice of the European Union (“CJEU”) invalidated the EU Privacy Shield as a data transfer mechanism for transferring personal data from the EEA to the U.S., effective immediately. On September 20, 2020, the Swiss Federal Data Protection and Information Commissioner invalidated the Swiss Privacy Shield. Therefore, the EU Privacy Shield and the Swiss Privacy Shield no longer qualify as appropriate safeguards for the transfer of personal data from the EEA or Switzerland to the U.S. and transfers made under those frameworks could attract regulatory scrutiny and penalties for non-compliance. There was no “grace period” to allow organizations to implement an alternative data transfer mechanism to the EU Privacy Shield and the Swiss Privacy Shield. While the European Commission approved Standard Contractual Clauses (“SCCs”) and Binding Corporate Rules remain valid mechanisms to transfer personal data to third countries outside the EEA and Switzerland, the CJEU's ruling has also imposed enhanced due diligence obligations on organizations acting as data exporters and relying on SCCs to ensure that the laws of the country to which personal data is transferred offers a level of data protection that is essentially equivalent to the EEA. On June 4, 2021, the European Commission adopted new SCCs more aligned with the requirements of the GDPR and to be used when personal data is transferred outside of the European Union. On June 28th, 2022, the EU Commission granted “adequacy” to the UK, allowing the free flow of EU resident personal data from the EU to recipients located in the UK. However, due to the UK’s withdrawal from the EU, the new SCCs are not valid for transfers of UK resident personal data to countries outside of the UK. The UK Information Commissioner’s Office is currently drafting a UK version of SCCs to facilitate such transfers. We are in the process of assessing the new SCCs and determining how to apply them. To the extent we are not able to employ suitable data transfer mechanisms, including the implementation of the new SCCs, to facilitate international transfers of data, our ability to conduct our business may be materially adversely impacted.
The legislative and regulatory landscape for privacy and data protection continues to evolve, and there has been an increasing amount of focus on privacy and data protection issues that may affect our business. There is a degree of uncertainty associated with the legal and regulatory environment around privacy and data protection laws, which continue to develop in ways we cannot predict, including with respect to evolving technologies, such as cloud computing. Privacy and data protection laws may be interpreted and applied inconsistently from country to country and impose inconsistent or conflicting requirements. As a result, our practices may not comply in the future with all such privacy and data protection laws. Varying jurisdictional requirements could increase the costs and complexity of compliance or require us to change our business practices in a manner adverse to our business. A determination that we have violated any privacy or data protection laws could result in significant damage awards, fines and other penalties that could, individually or in the aggregate, materially harm our business and reputation. For example, administrative fines of up to the greater of €20 million or 4% of our global turnover may be imposed for breaches of the GDPR. We may also be liable should any individual who has suffered financial or non-financial damage arising from our infringement of the GDPR or other applicable data protection laws exercise his or her right to receive compensation against us.
In addition, our marketing activities and the marketing activities of any third parties on which we rely are subject to various foreign jurisdictions. Various factorsregulations, including privacy and data protection laws, consumer protection laws and competition laws. Such laws may impair our ability, or the ability of third parties on which we rely, to collect information. Such regulations may have favorable or unfavorable effectsa negative effect on businesses and may increase the potential civil liability and cost of operating our effective income tax rate. These factors include, but are not limited to, interpretations of existing tax laws, changes in tax laws and rates, the accounting for stock options and other stock-based compensation, changes in accounting standards, future levels of research and development spending, changes in the mix and level of pre-tax earnings by taxing jurisdiction, the outcome of examinations by the U.S. Internal Revenue Service and regulators of other jurisdictions, the accuracy of our estimates for unrecognized tax benefits, the realization of deferred tax assets, or by changes to our ownership or capital structure. The impact on our effective income tax rate resulting from the above-mentioned factors and others may be significant and could adversely affect our results of operations.business.
We have been significantly expandingexpanded our operations and the size of our company and will needplan to continue our expansion to support our NASH program.future development strategy for OCA for indications other than PBC, including liver fibrosis due to NASH. We may experience difficulties in managing our significant growth.
From December 31, 2014 to December 31, 2016,We have significantly expanded our operations, including the size of our employee base, has grown from 136 to 456 employees.as we pursue our future development and commercialization strategy. As we advance our preclinical and clinical development programs for OCA in NASH and other potential indications and our other product candidates, seek regulatory approval in the United States and elsewhere increase the number of ongoing product development programs and advancepursue our product candidates through preclinical studies and clinical trials,commercialization strategy, we willmay need to increase our product development, scientific, commercial and administrative headcountheadcount. Such an evolution may impact our strategic focus and our deployment and allocation of resources. Our management, personnel and systems may experience difficulty in adjusting to manage these programs. our growth and strategic focus.
We willmay also need to growanticipate needs for growth that do not materialize. For example, we expanded our commercial capabilities, which will require usorganization in anticipation of a potential U.S. commercial launch of OCA for liver fibrosis due to hire additional personnelNASH. However, in June 2020, we received a CRL from the FDA with respect to our NDA for OCA for liver fibrosis due to NASH. Although we are in discussions with the FDA with respect to the potential resubmission of our NDA seeking accelerated approval
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of OCA for the launchtreatment of liver fibrosis due to NASH, there is no assurance that we will be successful or that OCA will be approved for liver fibrosis due to NASH on an accelerated basis, or at all. In August 2020, we adopted the 2020 Workforce Plan to reduce our workforce in light of the receipt of the CRL from the FDA. The 2020 Workforce Plan sought to streamline our operations and ongoing marketingreduce operating expenses, while maintaining the critical resources needed to continue to support the NASH and salePBC clinical programs, pursue the approval of OcalivaOCA for the treatment of liver fibrosis due to NASH and support our successful PBC business. The 2020 Workforce Plan resulted in PBCa workforce reduction of approximately 25%, or approximately 170 employees. The 2020 Workforce Plan was implemented during the third quarter of 2020, immediately after its announcement, and anywas completed in the beginning of 2021. We can provide no assurance that we will correctly forecast the needs for growth given our reliance on approvals from regulatory authorities for our product candidate for which we obtain marketing approval. candidates.
In addition, in order to continue to meet our obligations as a public company and to support the anticipatedany longer-term growth, in the other functions at our company, we willmay need to maintain and possibly increase our general and administrative capabilities. We are also expanding our operations geographically andhave formed a number of wholly-owned subsidiaries in key markets outside of the United States. In addition to our U.S. offices, we also have an office in London, United Kingdom which serves as ourthe headquarters for our operations in Europe and international markets,(ex-U.S.) operations, and regional offices in a number of these countries. In the longer term,other countries, and we may further expand our geographical footprint.footprint in the future. Our management, personnel and systems currently in place may not be adequate to support this future growth. Furthermore, we may face a number of complexities, such as being subject to national collective bargaining agreements for employees, in some of the countries in which we operate.
Our need to effectively manage our operations, growth and various projects requires that we:
| successfully attract and recruit new employees or consultants with the expertise and experience we |
| develop, expand or adjust our commercial infrastructure; |
| ● | manage our clinical programs effectively, which |
| continue to improve our operational, financial and management controls, reporting systems and procedures. |
If we are unable to successfully manage thisour growth and the increased complexity of our operations, our business may be materially and adversely affected.
We may not be able to manage our business effectively if we are unable to attract and retain key personnel and consultants.
We may not be able to attract or retain qualified personnel and consultants across our organization due to the intense competition for qualified personnel and consultantssuch individuals among biotechnology, pharmaceutical and other businesses. If we are not able to attract and retain necessary personnel and consultants to accomplish our business objectives, we may experience constraints that will significantly impede the achievement of our development and commercial objectives, our ability to raise additional capital and our ability to implement our business strategy.
Our industry has experienced a high rate of turnover of management personnel in recent years. We are highly dependent on the development, regulatory, commercialization and business development expertise of Mark Pruzanski,the members of our co-founder and president and chief executive officer, and ourteam, as well as other key employees and consultants. If we lose one or more of our executive officers or other key employees or consultants, our ability to implement our business strategy successfully could be seriously harmed. Any of our executive officers or other key employees or consultants may terminate their employment at any time. Replacing executive officers, key employeestime and consultantsreplacing such individuals may be difficult and may take an extended period of timetime-consuming because of the limited number of individuals in our industry with the necessary breadth of skills and experience required to develop, gain regulatory approval of and commercialize products successfully.experience. Competition to hire and retain employees and consultants from this limited pool is intense, and we may be unable to hire, train, retain or motivate these additional key personnel and consultants.
such individuals.
We also have scientific and clinicalkey advisors and consultants such as our co-founder Professor Roberto Pellicciari, who assist us in formulatingoperating our research, development and clinical strategies.business. These advisors are not our employees and may have commitments to, or consulting or advisory contracts with, other entities that may limit their
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availability to us and such individuals typically they will not enter into non-compete agreements with us. If a conflict of interest arises between their work for us and their work for another entity, we may lose their services. In addition, our advisors may have arrangements withassist other companies to assist those companies in developing products or technologies that may compete with ours.us.
Failure to establish and maintain adequate finance infrastructure and accounting systems and controls could impair our ability to comply with the financial reporting and internal controls requirements for publicly traded companies.
As a public company, we operate in an increasingly demanding regulatory environment, which requires us to comply with the Sarbanes-Oxley Act of 2002, and the related rules and regulations of the Securities and Exchange Commission, expanded disclosure requirements, accelerated reporting requirements and more complex accounting rules. Company responsibilities required by the Sarbanes-Oxley Act include establishing and maintaining corporate oversight and adequate internal control over financial reporting and disclosure controls and procedures. Effective internal controls are necessary for us to produce reliable financial reports and are important to help prevent financial fraud.
Our compliance with Section 404 of the Sarbanes-Oxley Act has required and will continue to require that we incur substantial accounting expense and expend significant management efforts. Our testing, or the testing by our independent registered public accounting firm, may reveal deficiencies in our internal controls that we would be required to remediate in a timely manner so as to be able to comply with the requirements of Section 404 of the Sarbanes-Oxley Act each year. If we are not able to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner each year, we could be subject to sanctions or investigations by the Securities and Exchange Commission, the NASDAQ Stock Market or other regulatory authorities which would require additional financial and management resources and could adversely affect the market price of our common stock. Furthermore, if we cannot provide reliable financial reports or prevent fraud, our business and results of operations could be harmed and investors could lose confidence in our reported financial information.
Our employees may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements and insider trading, which could significantly harm our business.
We are exposed to the risk of employee fraud or other misconduct. Misconduct by employees could include intentional failures to comply with the regulations of the FDA, and non-U.S.the SEC or other domestic or foreign regulators, provide accurate information to the FDA, and non-U.S.the SEC or other domestic or foreign regulators, comply with health carehealthcare fraud and abuse laws and regulations in the United States and abroad, report financial information or data accurately or disclose unauthorized activities to us. In particular, sales, marketing and business arrangements in the health carehealthcare industry are subject to extensive laws and regulationsregulation in the United States and abroad intended to prevent fraud, misconduct, kickbacks, self-dealing and other abusive practices. TheseSuch laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Employee misconduct could also involve the improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to our reputation. Misconduct and misappropriation of confidential information by our employees or third parties may also include improper trading in our securities, which may harm our reputation and result in enforcement actions against us. We have adopted a global code of business conduct and implemented a corporate compliance program, but it is not always possible to identify and deter employee misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental inquires, investigations or other actions or lawsuits stemming from a failure to comply with theseapplicable laws or regulations. IfThe outcome of any such actions are instituted against us, and we are not successful in defending ourselvesinquiry, investigation, action or asserting our rights, those actionslawsuit could have a significant negative impact on our business, including as a result of the imposition of significant fines or other sanctions. In addition, the institution of any such inquiry, investigation, action or lawsuit could negatively impact the market price of our securities.
We face potential product liability exposure, and if successful claims are brought against us, we may incur substantial liability for our products andor product candidates and may have to limit or suspend their use.
The use of our product candidates in clinical trials and the sale of any products for which we have obtained or may obtain marketing approval, such as Ocaliva infor PBC, expose us to the risk of product liability claims. Product liability claims may be brought against us or our collaborators by participants enrolled in our clinical trials, patients, health carehealthcare providers or others using, administering or selling our products.others. If we cannot successfully defend ourselves against any such claims, we wouldmay incur substantial liabilities. Regardless of their merit or eventual outcome, product liability claims may result in:
| withdrawal of clinical trial participants; |
| termination of clinical trial sites or entire clinical trial programs; |
| costs of related litigation; |
| substantial monetary awards to patients or other claimants; |
| decreased demand for our |
| impairment of our business reputation; |
| diversion of management and scientific resources from our business operations; and |
| the inability to develop and commercialize our products and product candidates or the withdrawal of our products from the market. |
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We have obtained limited product liability insurance coverage in the United States for the use of OCA in our U.S. clinical trials and commercial sales and in selected other jurisdictions where we are conducting clinical trials.coverage. Our product liability insurance coverage in the United States is currently limited to an aggregate of $10 million. We have clinical trial and commercial product liability insurance coverage outside of the United States in amounts that vary by country. As such, our insurance coverage may not reimburse us or may not be sufficient to reimburse us for any expenses or losses we may suffer. Moreover, insurance coverage is becoming increasingly expensive, and, in the future, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to product liability. We intend to expand our insurance coverage for products to include the sale of commercial products if we obtain marketing approval for our product candidates in development, but we may be unable to obtain commercially reasonable product liability insurance for any products approved for marketing. Large judgments have been awarded in class action lawsuits based on drugs that hadthe unanticipated side effects.effects of drug products. A successful product liability claim or series of claims brought against us, particularly if judgments exceed our insurance coverage, could decrease our cash resources and adversely affect our business.
Our insurance policies are expensive and only protect us from some business risks, which will leave us exposed to significant uninsured liabilities.
We do not carry insurance for all categories of risk that our business may encounter. Some of the policies we currently maintain include general liability, employment practices liability, property, auto, workers’ compensation, products liability and directors’ and officers’ insurance. We do not know, however, if we will be able to maintain insurance with adequate levels of coverage. Any significant uninsured liability may require us to pay substantial amounts, which would adversely affect our financial position and results of operations. Furthermore, the increased volatility of our stock price may result in us being required to pay substantially higher premiums for our directors’ and officers’ insurance than those to which we are currently subject, and may even lead a large number of underwriters to be unwilling to cover us.
If we engage in an in-license transaction, acquisition, reorganization or business combination, we will incur a variety of risks that could adversely affect our business operations or our stockholders.
From time to time, we have considered, and we will continue to consider in the future, strategic business initiatives intended to further the expansion and development of our business. These initiatives may include in-licensing or acquiring products, technologies or business or entering into a business combination with another company. If we pursue such a strategy, we could, among other things:
Although we intend to evaluate and consider in-license transactions, acquisitions, reorganizations and business combinations in the future, we have no agreements or understandings with respect to any acquisition, reorganization or business combination at this time.
Our business and operations would suffer in the event of system failures or data breaches.
Despite the implementation of security measures and policies, our internal information technology systems, as well as those of our CROs and other third parties on which we rely, are vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. Information security risks have significantly increased in recent years in part due to the proliferation of new technologies and the increased sophistication and activities of organized crime, hackers, terrorists and other external parties, including foreign state actors. As cyber threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities.
Although to date we have not experienced any material losses relating to cyber-attacks or other information security breaches, there can be no assurance that we will not suffer such losses in the future. If such an event were to occur and cause interruptions in our operations, it could result in a material disruption of our drug development programs, damage to our reputation and/or monetary damages. For example, the loss of clinical trial data from completed or ongoing or planned clinical trials could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. To the extent that any disruption or security breach were to result in a loss of or damage to our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability and the further development of our product candidates could be delayed.
Our information security systems are subject to laws and regulations requiring that we take measures to protect the privacy and security of certain information we gather and use in our business. For example, the Health Insurance Portability and Accountability Act, or HIPAA, and its implementing regulations impose, among other requirements, certain regulatory and contractual requirements regarding the privacy and security of personal health information. In addition to HIPAA, numerous other federal and state laws, including, without limitation, state security breach notification laws, state health information privacy laws and federal and state consumer protection laws, govern the collection, use, disclosure and storage of personal information.
Various foreign countries where we may process personal information also have, or are developing, laws governing the collection, use, disclosure and storage of personal information. The legislative and regulatory landscape for privacy and data protection continues to evolve, and there has been an increasing amount of focus on privacy and data protection issues that may affect our business. In July 2016, U.S. and European Commission officials adopted a new framework called the EU-U.S. Privacy Shield to govern cross-border flows of personal data. We adopted the EU-U.S. Privacy Shield and certified to its requirements in October 2016. In May 2018, the General Data Protection Regulation (“GDPR”) will supersede current EU data protection legislation, impose more stringent EU data protection requirements, and provide for greater penalties for noncompliance. While we are actively employing the EU-U.S. Privacy Shield as a means to legitimize the transfer of personal information from the EU and Switzerland to the United States, and are engaging in activities to comply with the GDPR requirements, we may be unsuccessful in these efforts.
Risks Related to Our Intellectual Property
It is difficult and costly to protect our proprietary rights, and we may not be able to ensure their protection. If our patent position does not adequately protect our products such as Ocaliva and product candidates such as OCA for liver fibrosis due to NASH, others couldmay compete against us more directly, which wouldcould harm our business, possibly materially.
Our commercial success will depend in part on obtainingour ability to obtain and maintainingmaintain patent, protectiontrademark and trade secret protection ofcovering Ocaliva, OCA for liver fibrosis due to NASH, if approved, and our current and future products andother product candidates, and the methods used to manufacture them, as well as our ability to successfully defending these patentsdefend our intellectual property against third-party challenges. Our ability to stop third parties from making, using, selling, offering to sell or importing our products and product candidates is dependent upon the extent to which we have regulatory exclusivity or intellectual property-based exclusivity rights under valid and enforceable patents or trade secretsother intellectual property that cover our products. If we fail to obtain and maintain adequate intellectual property protection, we may not be able to prevent third parties from launching generic versions of our products, from using our proprietary technologies or from marketing products that are very similar or identical to ours. For example, we have received paragraph IV certification notice letters from several generic drug manufacturers indicating that each such company has submitted to the FDA an ANDA seeking approval to manufacture and sell a generic version of our 5 mg and 10 mg dosage strengths of Ocaliva (obeticholic acid) for PBC prior to the expiration of certain patents protecting Ocaliva. We have initiated patent infringement suits against each of these activities.
generic drug manufacturers in the United States District Court for the District of Delaware. While we intend to vigorously defend and enforce our intellectual property rights protecting Ocaliva, we can offer no assurance as to when the lawsuits will be decided, or whether the lawsuits will be successful. If a generic equivalent of Ocaliva is approved and enters the market before the expiration of our patents protecting Ocaliva, our business may be materially and adversely affected. See Note 17 to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for more information.
The patent positions of biotechnology and pharmaceutical companies can be highly uncertain and involve complex legal and factual questions for which important legal principles remain unresolved. No consistent policy regarding the breadth of claims allowed in pharmaceutical patents has emerged to date in the United States or in manyforeign jurisdictions, outsideand the legal standards relating to the patentability, validity and enforceability of the United States.pharmaceutical patents are evolving. Changes in either the patent laws or in interpretations of patent laws in the United StatesU.S. and other countriesforeign jurisdictions may diminish the value of our intellectual property. Accordingly, we cannot predict the breadth of claims that may be enforced in the patents that we currently own or that may be issuedissue from the applications we currently ownhave filed or may ownfile in the future or those that we may license from third parties. Additionally, our currently pending or future patent applications may not result in issued patents, and any term extensions or reissues that we seek may not be granted. Further, if any patents we obtain or license are deemed invalid andor unenforceable, it could impact our ability to commercialize or license our technology or we may not be able to prevent third parties from launching generic versions of our products, or from developing or marketing products that are similar or identical to ours.
There have been numerous changes to the patent laws that may have a significant impact on our ability to protect our technology and enforce our intellectual property rights. In September 2011, the America Invents Act was signed into law. The final substantive provisions of the America Invents Act became effective in March 2013. The America Invents Act included a number of significant changes to U.S. patent law that affect the way patent applications are filed, prosecuted and litigated, including, among other things, changing from a “first to invent” to a “first inventor to file” system and creating processes, such as Inter Partes Review (“IPR”) and other post-grant review processes, that permit third parties to challenge the validity of granted patents before the Patent Trial and Appeal Board of the U.S. Patent and Trademark Office (the “USPTO”). The IPR process, for example, permits any person to challenge the validity of a patent on the grounds that it was anticipated or made obvious by prior art. The America Invents Act and its implementation could be adversely affected.increase the
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uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
Others have filed, and in the future, are likely to file, patent applications covering products and technologies that are similar or competitive to ours, or may be important to our business. We cannot be certain that any patent application owned by a third party will not have priority over patent applications filed or in-licensed by us, or that we or our licensors will not be involved in infringement, interference, derivation, opposition, nullity, invalidity or invalidityother similar proceedings before U.S. or non-U.S. patent offices. Our patents may also be challenged under other proceedings, such as inter partes review and post-grant review proceedings introduced by provisions of the America Invents Act.
offices or courts.
The degree of future protection forto which our proprietary rights is uncertain because legal means afford only limited protection and may not adequatelypatents protect our rights or permit usproducts may be limited due to gain or keep our competitive advantage.a number of factors. For example:
| others may be able to develop |
| we might not have been the first to |
| we might not have been the first to file patent applications for these inventions; |
| the patents of others may have an adverse effect on our business. |
As of September 30, 2017, we wereWe are the owner of record of over 110numerous issued or granted U.S. and non-U.S. patents relating to OCAand patent applications with claims directed to pharmaceutical compounds, pharmaceutical compositions, formulations, methods of making these compounds and methods of using these compounds in various indications. We were also the owner at that date of record of over 100 pending U.S.
Our issued patents for OCA are expected to expire between 2022 and non-U.S. patent applications relating to OCA in these areas.
In addition, as of September 30, 2017, we were the owner of record of approximately 220 issued or granted U.S. and non-U.S. patents relating to our product candidates other than OCA, with claims directed to pharmaceutical compounds, pharmaceutical compositions, methods of making these compounds and methods of using these compounds in various indications. We were also the owner of record of approximately 70 pending U.S. and non-U.S. patent applications relating to such other product candidates in these areas.
Patents covering the composition of matter of OCA expire in 2022 at the soonest and 2033 at the latest2036 if the appropriate maintenance, renewal, annuity, or other government fees are paid. We expect thatWithout patent protection, including patent protection covering the other patents in the OCA portfolio, if the appropriate maintenance, renewal, annuity or other governmental fees are paid, would expire from 2022 to 2033. We expect the issued INT-767 composition of matter, patent in the United States, if the appropriate maintenance, renewal, annuity or other governmental fees are paid, to expire in 2029. We expect the other patents in the INT-767 portfolio, if the appropriate maintenance, renewal, annuity or other governmental fees are paid, to expire from 2027 to 2029. We expect the issued INT-777 compositionmethods of matter patent in the United States, if the appropriate maintenance, renewal, annuity or other governmental fees are paid, to expire in 2030. We expect the other patents in the INT-777 portfolio, if the appropriate maintenance, renewal, annuity or other governmental fees are paid, to expire from 2028 to 2030.
We have received assignments of rights to the INT-767 patent portfolio from all inventors, with the exception of one inventor. That inventor is contractually obligated to provide an assignment to us. Thus, we believe that we are the owner of the INT-767 patent portfolio by virtue of this contractual obligationusing and the patent assignments we have received. By virtue of the patent assignments we have received and other contractual obligations owed to us, we believe we are the owner of the INT-777 patent portfolio. Without patent protection on the composition of matterformulations of our products and product candidates, our ability to stop others from making, using, selling, offering to sell or sellingimporting our products and product candidates may be limited.
Due to the patent laws of a specific country orin which we are seeking patent protection, the decisions of a patent examiner in a specific country in which we are seeking patent protection or our own filing strategies, we ultimately may not obtain patent coverage for all of our products and product candidates or methods involving these candidates in the parentfor which we have filed a patent application. We plan toWhile we regularly pursue divisional patent applications or continuation patent applicationsprotection in the United States and other countries to obtain claim coverage for our inventions, which were disclosed but not claimed inwe cannot be certain that such patent rights will be granted or that the parentscope of any patent application.granted will prevent third parties from making, using, selling, offering for sale or importing the same or similar products.
If we do not obtain protection under the Hatch-Waxman Act andin the United States (and similar legislation outside of the United States byStates) extending the patent terms and obtainingof our patents and/or providing data or other exclusivity for our products and product candidates, our business may be materially harmed.
Depending upon the timing, duration and specifics of FDA marketing approval of our products, and product candidates, U.S. patents may be eligible for a limited extension of patent term under the Drug Price Competition and Patent Term Restoration Act of 1984 referred to as the Hatch-Waxman Act.(the “Hatch-Waxman Act”). The Hatch-Waxman Act permits an extension of patent term for one patent of up to five years as compensation for patent term lost during product development and the FDA regulatory review process.process, so long as the total period of patent term extension does not exceed 14 years from the date of approval. However, an extension may not be granted because of, for example, failure to apply within applicable deadlines, failure to apply prior to expiration of relevant patents or failure to satisfy applicable requirements. Moreover, the applicable time period or the scope of patent protection afforded could be less than what is requested. If we are unable to obtain patent term extension or restoration or the term of
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any such extension is less than what we request, the period during which we will have the right to exclusively market our product willproducts may be shortened andshorter than anticipated, our competitors may obtain approval of competing products following our patent expiration and our revenue could be reduced, possibly materially.
OurIn October 2020, the USPTO granted to the Company a reissue patent, the ‘286 Patent. By operation of law, our primary composition of matter patent for OCA expiresprotecting Ocaliva, the ‘390 Patent, was withdrawn and replaced by the ‘286 Patent, which contains composition of matter claims to OCA. The ‘286 Patent has been substituted in any litigation where the ‘390 Patent was asserted. The ‘286 Patent, like its predecessor the ‘390 Patent, was scheduled to expire in 2022. In light of the U.S. marketing approval of OCA inOcaliva for PBC in May 2016, and pursuant to the Hatch-Waxman Act, we havepreviously applied for an extension toof the patent term for this patentthe ‘390 Patent in the U.S. seeking to extend the term of the ‘390 Patent into 2027. After the ‘286 Patent was issued, the application for extension of patent term was transferred to the ‘286 Patent. In February 2021, a patent term extension certificate was issued, which extends the term of the ‘286 Patent into 2027. Similarly, in connection with the conditional approval of Ocaliva for PBC in the European Union, we applied for supplementary protection certificates (“SPC”) to extend the patent term for the European analogue of the ‘390 Patent (now the ‘286 Patent) in most of the European Union into 2027. To date, we have received grants of SPC in Austria, Belgium, Cyprus, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United States through 2027.Kingdom. We expect to takehave also taken similar actions in other jurisdictions and countries where similar regulations exist. In the event that we are unable to obtain anyproviding for patent term extensions, theextension exist. The issued composition of matter patents for OCA are expected to expire inbetween 2022 at the soonest and 2033 at the latest, assuming they withstand any challenge. We expect that the other patents for the OCA portfolio,2036 if the appropriate maintenance, renewal, annuity, or other governmentalgovernment fees are paid, would expire from 2022 to 2033.paid. The substitution in the U.S. of the ‘286 Patent for the ‘390 Patent has no effect on foreign patent rights.
We may incur substantial costs as a result of litigation or other proceedings relating to patent and other intellectual property rights.
rights, and such litigation may divert the attention of our management and scientific personnel and adversely affect our development and commercialization efforts.
If we choose to go to courtfile patent infringement lawsuits or engage in other adversarial proceedings to stop another party from making, using, selling, offering for sale or importing the inventions claimed in any of our patents, we obtain, that individual or company alleged to be infringing has the right to ask the court or adjudicating body to rule that such patents are invalid, not infringed or should not be enforced against that third party. These lawsuits and proceedings are expensive, and would consume time and resources and divert the attention of managerialmanagement and scientific personnel even if we wereare successful in stopping the infringement of such patents.defending our rights. In addition, there is a risk that thesuch court or adjudicating body will decide that such patents are not validinvalid, unenforceable or not infringed, and that we do not have the right to stop the other party from making, using, selling, offering for sale or importing the inventions. ThereFor example, we have received paragraph IV certification notice letters from several generic drug manufacturers indicating that each such company has submitted to the FDA an ANDA seeking approval to manufacture and sell a generic version of our 5 mg and 10 mg dosage strengths of Ocaliva (obeticholic acid) for PBC prior to the expiration of certain patents protecting Ocaliva. We have initiated patent infringement suits against each of these generic drug manufacturers in the United States District Court for the District of Delaware. Such lawsuits may be expensive and divert our management’s time and attention. In addition, to the extent such lawsuits are not successful, and a generic equivalent of Ocaliva is alsoapproved and enters the risk that, even ifmarket before the validityexpiration of suchour patents is upheld,protecting Ocaliva, our business may be materially and adversely affected. See Note 17 to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for more information.
Over the court or adjudicating body will refuse to stop the other party on the ground that such other party’s activities do not infringe our rights to such patents. In addition,past 20 years, the U.S. Supreme Court has modified some tests used byand the U.S. Patent and Trademark Office, orCongress have modified certain examination procedures utilized by the USPTO in granting patents, overwhich has raised the past 20 years, whichstandard of patentability for some types of inventions. Such modifications may decreasereduce the likelihood that we will be able to obtain patentspatent protection and increase the likelihood of challenge of anychallenges to our patents or the patents we obtain or license.
We may infringe the intellectual property rights of others, which may prevent or delay our product development efforts and stop us from commercializingand/or delay, halt or increase the costs of commercializing our product and product candidates.
commercialization efforts.
Our success will depend in part on our ability to operate without infringing the proprietary rights of third parties. We cannot guarantee that our products,the use, manufacture, sale, offer for sale or manufacture or useimportation of our product candidates,products will not infringe third-party patents. Furthermore, a third party may claim that we or our manufacturing or commercialization collaboratorspartners are using inventions covered by the third party’s patent rights and may go to court to stop us from engaging in our normal operations
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and activities, including making or selling our products and product candidates. TheseThe defense of these lawsuits areis often costly and could affect our results of operations and divert the attention of managerialour management and scientific personnel. There is also a risk that a court wouldcould decide that we or our manufacturing or commercialization collaboratorspartners are infringing the third party’s patents and would order us or our collaboratorspartners to stop the activities covered by the patents. In that event, we or our commercialization collaboratorspartners may not have a viable way around the patent and may needbe required to halt or delay commercialization or development of the relevant product.product or product candidate. In addition, there is a risk that a court willcould order us or our collaboratorspartners to pay the other party damages for having violated the other party’s patents. In the future,patents, and we may agreebe subject to indemnifyindemnification obligations with respect to any such payments made by our commercial collaborators against certain intellectual property infringement claims brought by third parties. The pharmaceutical and biotechnology industries have producedpartners. There is a proliferationvast array of patents and patent applications that claim various pharmaceutical inventions and because the scope of a patent’s claims is subject to interpretation by the courts, it is not always clear to industry participants including us, which patents cover various types of products, product candidates or methods of use. The coverageIn addition, interpretation of patents is subjecta patent’s claims can vary from court to interpretation by the courts, and the interpretation is not always uniform.
court.
If we are sued for patent infringement, we would need to demonstrate that the relevant patent is not enforceable or that our products, product candidates or methods either do not infringe the patent claims of the relevant patent or that the patent claims are invalid,invalid. Proving invalidity, non-infringement and/or unenforceability is difficult, and we may not be able to do this. Proving invalidity is difficult.successful. For example, in the United States, proving invalidity requires a showing of clear and convincing evidence to overcome the presumption of validity enjoyed by issued patents. Even if we are successful in thesesuch proceedings, we may incur substantial costs and divert our management’s time and attention, in pursuing these proceedings, which could have a material adverse effect on us.our business. If we are unable to avoid infringing the patent rights of others, we may be required to seek a license, which may not be available, defend an infringement action or challenge the validity of the patents in court. Patent litigation is costly and time consuming. We may not have sufficient resources to bring these actions to a successful conclusion. In addition, if we fail to obtain a license, develop or obtain non-infringing technology or defend an infringement action successfully, or have infringed patents declared invalid, we may incur substantial monetary damages, encounter significant delays in bringingthe commercialization of our products and product candidates to market and be precluded from manufacturing or selling our products and product candidates.
We cannot be certain that others have not filed patent applications for technology covered by our pending applications, or that we were the first to invent theor file with respect to a technology, because:
| some patent applications in the United States may be unpublished or otherwise maintained in secrecy until the patents are issued; |
| patent applications in the United States are typically not published until 18 months after the priority date; and |
| publications in the scientific literature often lag behind actual discoveries. |
Our competitors may have filed, and may in the future file, patent applications covering technology similar to ours. Any such patent application may have priority over our patent applications, which could further require us to obtain rights to issued patents covering such technologies. If another party has filed a U.S. patent application on inventions similar to ours, we may have to participate in an interference, derivation or derivationother similar proceeding declared by the USPTO to determine priority of invention in the United States. The costs of these proceedings could be substantial, and it is possible that such efforts would be unsuccessful, if, unbeknownst to us, the other party had independently arrived at the same or similar invention prior to our own invention, resulting in a loss of our U.S. patent position with respect to such inventions. Other countries have similar laws that permit secrecy of patent applications, and such patent applications may be entitled to priority over our applications in such jurisdictions.
Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater financial and other resources. In addition, any uncertainties resulting from the initiation and continuation of any such litigation could have a material adverse effect on the market price of our securities and our ability to raise the funds necessary to continue our operations.
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Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated foras a result of non-compliance with these requirements.
Periodic maintenance fees, renewal fees, annuity fees and various other governmental fees on our patents and/orand patent applications will be dueare required to be paid to the USPTO and various governmentalforeign patent agencies outside of the United Statesoffices in several stages over the lifetime of thesuch patents and/orand patent applications. We have systems in place to remind us to pay these fees, and we employ a third-party service provider and rely on this service provider to pay these fees due toIn addition, the USPTO and non-U.S. patent agencies. The USPTO and various non-U.S. governmentalforeign patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. We employhave implemented systems and engaged reputable law firms and other professionalsthird-party service providers to help usensure that we comply and in many cases, anwith such requirements on a timely basis, but inadvertent lapse can be cured by payment of a late fee or by other means in accordance with the applicable rules. However,lapses may occur and there are situations in which noncompliance can result in abandonment or lapse of the relevant patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. InAny such an event may impair our competitors might be able to entercompetitive position in the marketrelevant jurisdiction and this circumstance would have a material adverse effect on our business.financial condition or results of operations.
We may be subject to claims that our employees have wrongfully used or disclosed alleged trade secrets or other proprietary information of their former employers. IfIn addition, if we are not able to adequately prevent disclosure of our trade secrets and other proprietary information, the value of our technology, products and productsproduct candidates could be significantly diminished.
As is common in the biotechnology and pharmaceutical industries, we employ individuals who were previously employed at other biotechnology or pharmaceutical companies, including our competitors or potential competitors. We may be subject to claims that these employees, or we, have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigationwhich could result in substantial costs and be a distraction to management.
our management even if we are successful.
We may rely on trade secrets to protect our proprietary technologies, especially where we do not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to protect.protect, and may not prevent others from independently and lawfully developing similar or identical products that circumvent our intellectual property. We rely in part on confidentiality agreements with our employees, consultants, outside scientific collaborators, sponsored researchers and other advisors to protect our trade secrets and other proprietary information. These agreements may not effectively prevent disclosure of confidentialproprietary information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, others
Third parties, including competitors of ours, may also independently discover our trade secrets andor other proprietary information. For example, in September 2016, the Department of Health and Human Services adopted newIn addition, we may be required under U.S. or foreign transparency initiatives or other regulations mandating sponsors to publicly postdisclose or otherwise make available certain data from clinical trials of products subject to FDA regulation. Although the implementation of the regulations may be delayed, this and other transparency initiatives may result in making publicly available information that we may consider to be trade secrets or proprietary, information. Moreover, the EMA has already adopted a policy of general transparency both in relation to requests under EU freedom of information legislation for access toincluding pre-clinical and clinical research data once marketing authorizations are granted and through proactive disclosure of clinical data on its website. This policy coupled with imminent requirements for public disclosure of clinical research data under a new EU Clinical Trial Regulation, means that public disclosure will ordinarily be made of substantial research data that previously would have been considered commercially confidential.data. Enforcing a claim that a third party illegally obtained and is using any of our trade secrets or other proprietary information is expensive and time consuming, and the outcome is unpredictable. In addition, courts outside of the United States are sometimes less willingreluctant to protect trade secrets. Moreover, our competitors may independently develop equivalent knowledge, methods and know-how. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain protection of our trade secret protectionsecrets and other proprietary information could adversely affect our competitive business position.
We have not yet registered all of our trademarks and failure to secure thosesuch registrations could adversely affect our business.
We have applied for and obtained a number of trademarks and service marks to further protect the proprietary position of our products. As of September 30, 2017, we have over 580numerous trademark and service mark registrations and over 290 pending trademark and service mark applications in the United States and abroad.
Our trademark applications may not be allowed for registration orand our registered trademarks may not be maintained or enforced. During prosecution of applications for trademark registration, we may receive rejections or refusals. Although we are given an opportunity to respond, to those rejections, we may be unable to overcome such rejections. In addition, in the USPTO and in comparable agencies in many other jurisdictions provide third parties are givenwith an opportunity to oppose pending trademark applications and to seek to cancel registered trademarks. Opposition or cancellation proceedings have been filed and may in the future be filed against certain of our trademarks, and our trademarks may not survive such proceedings. If we do not
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secure registrations for our trademarks, we may encounter more difficulty in enforcing them against third parties than we otherwise would.
Trademark protection varies in accordance with local law, and continueslaws. Trademarks remain in force in some countries as long as the trademark is used and in other countries as long as the trademark is registered. Trademark registrations generally are for fixed but renewable terms. We cannot provide any assurances that any trademarks or service marks will be sufficient to prevent competitors from adopting similar names. The adoption of similar names by competitors could impede our ability to build brand identity and may lead to customer confusion, which could adversely affect our sales or profitability.
We have received approval from both the FDA and EMA for Ocaliva®, the proprietary name for OCA, as well as the associated logo. The Ocaliva trademarks have registered in jurisdictions, including the United States, member states of the Community Trademark, Australia, Great Britain, New Zealand, Norway, Switzerland, Taiwan and certain other countries.
Risks Related to Our Indebtedness
ServicingCertain of our debt will requireis secured and imposes covenants.
In August 2021, we retired significant amountsportions of cash, and weour existing convertible notes by issuing $500.0 million in new 2026 Convertible Secured Notes. These new notes are secured by a first priority security interest in substantially all assets of Intercept Pharmaceuticals, Inc., including intellectual property. If subsidiaries of Intercept Pharmaceuticals, Inc. meet certain threshold requirements, they may not have sufficient cash flow from our business to pay our debt.
Our ability to make scheduled paymentsalso become guarantors of the notes and subject to a requirement to pledge their security interests.
The new notes also include additional covenants and other requirements compared with our other convertible notes, including limits on incurrence of further indebtedness, limits on payment of dividends, limits on repayment of principal of other indebtedness (other than repayment of the 2023 Convertible Notes at maturity, or before maturity at less than par), limits on transfer of material intellectual property to pay interest on orsubsidiaries unless the subsidiaries become guarantors, and requirements to refinancedeliver collateral to the $460.0 million aggregate principal amountcollateral agent and enter into deposit account control agreements as regards certain of 3.25% convertible senior notes due 2023 we issued in July 2016, or convertible notes or any indebtedness we or our subsidiaries may incur in the future depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not generate cash flow from operations in the future sufficient to service our debt, including the convertible notes. bank accounts.
If we are unablefail to generate cash flow, we may be requiredcomply with these requirements, fail to adopt one or more alternatives, such as selling assets, restructuringrepay the debt, or obtaining additional equity capitalotherwise default under these new notes, and the indenture trustee and/or noteholders exercise remedies, they may foreclose on terms that may be unfavorable to us or highly dilutive. Our ability to refinancesubstantially all of our indebtedness will depend on the capital marketsassets, and our financial condition at the time we seek to refinanceany such indebtedness. We may not be able to engage in any of these activities or engage in these activities on desirable terms, whichdefault could also result in a default under our other outstanding indebtedness. Any of which would significantly impair our business and the value of our stock.
We will need significant additional capital to retire or refinance our debt.
In August and September 2021, we refinanced and repurchased approximately 75% of our 2023 Convertible Notes. We now have outstanding $113.7 million of 2023 Convertible Notes due July 1, 2023; $500.0 million 2026 Convertible Secured Notes due February 15, 2026; and $115.3 million 2026 Convertible Notes due May 15, 2026.
Based on our debt obligations.
We may incur substantially morecurrent cash position, we will need to raise significant additional capital to repay our outstanding notes maturing in 2026, either from operations, sale of assets, new debt, or take other actions which wouldnew equity. We are not currently profitable, and sales of significant assets could affect our business and future profitability. Given our level of indebtedness, new debt or new equity financing to refinance or pay off our 2026 maturities may not be available on attractive terms, or at all, and, even if available, the issuance of new equity or new convertible notes could dilute existing stockholders.
Our 2026 Convertible Secured Notes are secured by a first priority lien on substantially all assets, so we do not have substantial unsecured assets to pledge to prospective lenders. The 2026 Convertible Secured Notes impair our ability to pay the principal of and interest on our debt.
We and our subsidiariesincur debt maturing prior to their maturity. Lenders may be ableunwilling to incur substantial additional debt inlend on an unsecured basis beyond the future, some of which may be secured debt. We and our subsidiaries will not be restricted under the termsmaturity of the indenture governing2026 Convertible Secured Notes. If we do retire or refinance the convertible notes from incurring additional debt, securing existing or future debt, recapitalizing our debt or taking a number of other actions that are not2023 Convertible Notes and the 2026 Convertible Secured Notes, we may still be limited by the terms of the indenture governing the convertible notes that could have the effect of diminishingin our ability to serviceretire or refinance the 2026 Convertible Notes.
Inability to repay our debtdebts when due.due could trigger collection efforts, noteholder remedies, and litigation, and significantly impair the value of our stock.
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The conditional conversion featureissuance of the convertible notes, if triggered, may adversely affect our financial condition and operating results.
In the event the conditional conversion feature of the convertible notes is triggered, holders will be entitled to convert their convertible notes at any time during specified periods at their option. If one or more holders elect to convert their convertible notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock (other than paying cash in lieu of delivering any fractional share), we would be required to settle a portion or all of ourupon conversion obligation through the payment of cash, which could adversely affect our liquidity. In addition, even if holders do not elect to convert their convertible notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the convertible notes as a current rather than long-term liability, which would result in a material reductiondilute the ownership interests of our net working capital.stockholders and could depress the trading price of our common stock.
We may settle conversions of our outstanding convertible notes in cash, shares of our common stock or a combination of cash and shares of our common stock. The issuance of shares of our common stock upon conversion of the convertible notes would dilute the ownership interests of our stockholders, which could depress the trading price of our common stock. In addition, the market’s expectation that conversions may occur could depress the trading price of our common stock even in the absence of actual conversions. Moreover, the expectation of conversions could encourage the short selling of our common stock, which could place further downward pressure on the trading price of our common stock.
The accounting method for convertible debt securities that may be settled in cash, such as the convertible notes, is the subject of recent changes thatConvertible Notes, could have a material effect on our reported financial results.
Under Accounting Standards Codification Subtopic 470-20, Debt“Debt with Conversion and Other Options, which we refer to as Options” (“ASC 470-20,470-20”), an entity must separately account for the liability and equity components of the convertible debt instruments (such as the convertible notes)Convertible Notes) that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer’s economic interest cost. The effect of ASC 470-20 on the accounting for the convertible notesConvertible Notes is that the equity component is required to be included in the additional paid-in capital section of stockholders’ equity on our consolidated balance sheet,sheets, and the value of the equity component would beis treated as original issue discount for purposes of accounting for the debt component of the convertible notes.Convertible Notes. As a result, we will beare required to record a greater amount of non-cash interest expense in current periods presented as a result of the amortization of the discounted carrying value of the convertible notesConvertible Notes to their face amount over the term of the convertible notes. We will report lower net income in our financial results becauseConvertible Notes. Because ASC 470-20 will requirerequires interest to include both the current period’s amortization of the debt discount and the instrument’s coupon interest, we report lower net income in our financial results, which could adversely affect our reported or future financial results, the tradingmarket price of our common stock and the tradingmarket price of the convertible notes.
Convertible Notes.
In addition, under certain circumstances, convertible debt instruments (such as the convertible notes)Convertible Notes) that may be settled entirely or partly in cash are currently accounted for utilizing the treasury stock method, the effect of which is that the shares issuable upon conversion of the convertible notesConvertible Notes will not be included in the calculation of diluted earnings per share except to the extent that the conversion value of the notes exceeds their principal amount. Under the treasury stock method, for diluted earnings per share purposes, the transaction is accounted for as if the number of shares of common stock that would be necessary to settle such excess, if we elected to settle such excess in shares, are issued. We cannot be sure that the accounting standards in the future will continue to permit the use of the treasury stock method. If we are unable to use the treasury stock method in accounting for the shares issuable upon conversion of the convertible notes,Convertible Notes, then our diluted earnings per share would be adversely affected.
Provisions in the indenture governing the convertible notes may deter or prevent a business combination that may be favorable to you.
If a fundamental change occurs prior to the maturity date of the convertible notes, holders of the convertible notes will have the right, at their option, to require us to repurchase all or a portion of their convertible notes. In addition, if a make-whole fundamental change occurs prior to the maturity date of the convertible notes, we will in some cases be required to increase the conversion rate for a holder that elects to convert its convertible notes in connection with such make-whole fundamental change. Furthermore, the indenture governing the convertible notes prohibits us from engaging in certain mergers or acquisitions unless, among other things, the surviving entity assumes our obligations under the convertible notes and the indenture. These and other provisions in the indenture could deter or prevent a third party from acquiring us even when the acquisition may be favorable to you.
Risks Related to Ownership of Our Common Stock
An active trading marketOwnership in our common stock is highly concentrated and your ability to influence corporate matters may not be maintained.limited as a result.
The trading market inOur executive officers, directors and stockholders who own more than 5% of our outstanding common stock has been extremely volatile. The quotationtogether beneficially own a significant percentage of our common stock based on The NASDAQ Global Select Market does not assure that a meaningful, consistentreports filed with the SEC. If these stockholders were to choose to act together, they would be able to significantly influence matters submitted to our stockholders for approval, including the election of directors and liquid trading market will exist. We cannot predict whether an active market for our common stock will be maintained in the future. An absenceapproval of an active trading market could adversely affect our stockholders’ ability to sell our common stock at current market prices in short time periods,any merger, consolidation, sale of all or possibly at all. Additionally, market visibility for our common stock may be limited and such lack of visibility may have a depressive effect on the market price for our common stock. As of September 30, 2017, approximately 30.1%substantially all of our outstanding shares of common stock was held by our officers, directors, beneficial owners of 5% or more of our securities (other than FMR LLC, Carmignac Gestion, Capital World Investors, Ameriprise Financial, Inc. and their respective affiliates) and their respective affiliates, which adversely affects the liquidity of the trading market for our common stock, in as much as federal securities laws restrict sales of our shares by these stockholders. If our affiliates continue to hold their shares of common stock, there will be limited trading volume in our common stock, which may make it more difficult for investors to sell their shares or increase the volatility of our stock price.
We were previously, and are currently, subject to securities class action litigation and may be subject to similarassets or other litigation in the future, which may divert management’s attention.
We have previously been subject to securities class action lawsuits. In February 2014, two purported securities class actions were filed against us and certain of our officers, which were eventually consolidated. In May 2016, the defendants reached an agreement with the lead plaintiff to seek Court approval of a proposed resolution and the settlement was ultimately granted final approval by the Court in September 2016. While the final judgment and order of the Court included a dismissal of the action with prejudice against all defendants and the defendants did not admit any liabilitybusiness combination or reorganization, as part of the settlement, the total payment aggregated to $55.0 million, of which $10.0 million was paid by our insurers.
A lawsuit has been filed alleging, among other things, that we and certain of our officers violated federal securities laws by making allegedly material false and/or misleading statements regarding our business, operational and compliance policies. The plaintiff seeks unspecified monetary damages on behalf of the putative class and an award of costs and expenses, including attorney’s fees. While we believe we have meritorious defenses and intent to rigorously defend ourselves, we cannot predict the outcome of this lawsuit.
There may be additional suits or proceedings brought in the future. Monitoring and defending against legal actions, whether or not meritorious, is time-consuming forwell as our management and detracts from our ability to fully focus our internal resourcesaffairs. This concentration of voting power could delay or prevent an acquisition of us on our business activities,terms that other securityholders may desire. The interests of this group of stockholders may not always coincide with your interests or the interests of other securityholders and we cannot predict how long itthey may take to resolve these matters. In addition, we may incur substantial legal feesact in a manner that advances their best interests and costs in connection with litigation. Although we may receive insurance coveragenot necessarily those of other securityholders, including seeking a premium value for certain adversarial proceedings, coverage could be denied or prove to be insufficient. It is possible that we could, intheir common stock, and might affect the future, incur judgment or enter into settlement of claims for monetary damages. A decision adverse to our interests could result in the payment of substantial damages and could have a material adverse effect on our business, results of operations and financial condition.
Our stockmarket price has been and may in the future be volatile, which could cause holders of our common stock and the Convertible Notes to incur substantial losses.Notes.
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Furthermore, the stock markets in general and the market for biotechnology companies in particular have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political and market conditions such as recessions, interest rate changes or international currency fluctuations may negatively impact the market price of shares of our common stock, regardless of our actual operating performance. In the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We have been in the past, and may be in the future, the target of this type of litigation, which could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business. As a result of this volatility, our stockholders could incur substantial losses.
We have a significant stockholder, which will limit your ability to influence corporate matters, may give rise to conflicts of interest and could result in future substantial sales of shares of our common stock into the market.
Genextra S.p.A., together with its affiliates, whom we refer to collectively as Genextra, (“Genextra”) is one of our largest stockholder. As of September 30, 2017, Genextra owned 6,454,953 shares of our common stock. The shares of common stock owned by Genextra represented approximately 25.7%stockholders and owns a significant minority percentage of our outstanding common stock as of September 30, 2017.stock. Accordingly, Genextra exerts and will continue to exert significant influence over us and any action requiring the approval of the holders of our common stock, including the election of directors and amendments to our organizational documents, such as increases in our authorized shares of common stock and approval of significant corporate transactions. This concentration of voting power makes it less likely that any other holderholders of common stock or directors of our business will be able to affect the way we are managed and could delay or prevent an acquisition of us on terms that other stockholderssecurityholders may desire.
Furthermore, the interests of Genextra may not always coincide with your interests or the interests of other stockholders,securityholders, and Genextra may act in a manner that advances its best interests and not necessarily those of other stockholders,securityholders, including seeking a premium value for its common stock, and might affect the prevailing market price forof our common stock.stock and the Convertible Notes. Our board of directors, which consists of nineeleven directors, including one associated with Genextra, has the power to set the number of directors on our board from time to time.
Genextra also may sell shareshares of our common stock into the market from time to time. Iftime, and we in the future engage in a registered offering of our common stock, we could also determine, as we have done in the past, to register for sale a portion of Genextra’s shares as part of that same offering to provide for the orderly sale of such shares. We cannot predict the effect, if any, that future sales by Genextra may have on the market price of our common stock or the Convertible Notes.
An active trading market in our common stock may not be maintained.
The trading market in our common stock has been extremely volatile. The quotation of our common stock on the Nasdaq Global Select Market does not assure that a meaningful, consistent and liquid trading market will exist. We cannot predict whether an active market for our common stock will be maintained in the future. An absence of an active trading market could adversely affect your ability to sell our common stock at current market prices in short time periods, or possibly at all. Additionally, market visibility for our common stock may be limited and such lack of visibility may have a depressive effect on the market price for our common stock.
Our disclosure controlsWe have previously been, and proceduresare currently, subject to securities class action litigation and may not preventbe subject to similar or detect all errors or actsother litigation in the future. Such matters can be expensive, time-consuming and have a material adverse effect on our business, results of fraud.
operations and financial condition.
We arehave previously been subject to securities class action lawsuits. In February 2014, two purported securities class actions were filed against us and certain of our officers, which were eventually consolidated. In May 2016, the periodic reporting requirementsdefendants reached an agreement with the lead plaintiff to seek court approval of a proposed resolution and the settlement was ultimately granted final approval by the court in September 2016. While the final judgment and order of the Exchange Act. Our disclosure controlscourt included a dismissal of the action with prejudice against all defendants and proceduresthe defendants did not admit any liability as part of the settlement, the total payment aggregated to $55.0 million, of which $10.0 million was paid by our insurers.
In September 2017, a lawsuit and, in January 2018, a follow-on lawsuit, were filed alleging that we and certain of our officers made material misrepresentations and/or omissions of material fact regarding Ocaliva dosing, use and pharmacovigilance-related matters, as well as our operations, financial performance and prospects. The plaintiffs seek unspecified monetary damages on behalf of the putative class, an award of costs and expenses, including attorney’s fees, and rescissory damages.
While we believe that we have a number of valid defenses to the claims described above and intend to vigorously defend ourselves, the matters are designedin the early stages of litigation and no assessment can be made as to reasonably assurethe likely outcome of the matters or whether they will be material to us.
Additionally, in November 2020, a lawsuit and, in December 2020 and February 2021, follow-on lawsuits, were filed alleging that we and certain of our officers made material misrepresentations and/or omissions of material fact during the period from September 28, 2019 to October 7, 2020 relating to our NDA for OCA for the treatment of liver fibrosis due to NASH and the use of Ocaliva in patients with PBC, as well as our operations, financial performance and prospects. The
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plaintiff seeks unspecified monetary damages on behalf of the putative class, and an award of costs and expenses, including attorney’s fees.
We may be subject to additional suits or proceedings brought in the future and, as has been the case with many companies in our industry, we may from time to time receive inquiries and subpoenas and other types of information requiredrequests from government authorities and others. While the ultimate outcome of any such investigations, inquiries, information requests and legal proceedings is difficult to predict, adverse resolutions or settlements of those matters may result in, among other things, modification of our business practices, product recalls, significant costs, payments, damages or fines or other administrative, civil or criminal remedies, liabilities or penalties, which may have a material adverse effect on our business, results of operations and financial condition. In addition, monitoring and defending against legal actions, whether or not meritorious, and responding to investigations, inquiries and information requests is expensive, time-consuming for our management and detracts from our ability to fully focus our internal resources on our business activities, and we cannot predict how long it may take to resolve such matters. Although we may receive insurance coverage for certain adversarial proceedings, coverage could be denied or prove to be disclosed by us in reportsinsufficient. It is possible that we file or submit under the Exchange Act is accumulated and communicated to management, recorded, processed, summarized and reported within the time periods specifiedcould, in the rulesfuture, incur a judgment or enter into settlement of claims for monetary damages. A decision adverse to our interests could result in the payment of substantial damages and formscould have a material adverse effect on our business, results of operations and financial condition.
Our stock price has been and may in the future be volatile, which could cause holders of our common stock to incur substantial losses.
The market price of our common stock has been, and is likely to continue to be, highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control. Since our initial public offering in October 2012, the price of our common stock on the Nasdaq Global Select Market has ranged from $11.60 per share to $497.00 per share. In addition to the other factors discussed in this “Risk Factors” section and elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2020, the factors that may result in wide fluctuations in the price of our common stock include any:
| ● | delay, failure or receipt of regulatory approval for our product candidates, including OCA for liver fibrosis due to NASH; |
| ● | delay, failure or receipt of additional marketing authorizations for Ocaliva or our product candidates, including OCA for liver fibrosis due to NASH, in our target markets; |
| ● | failure to successfully commercialize our approved products in the United States, the European Union and our other target markets, or our inability to maintain regulatory approval for Ocaliva or our other approved products in such markets; |
| ● | clinical trial failure, including any such failure resulting from issues, delays or difficulties in identifying patients, enrolling patients, treating patients, retaining patients, meeting specific endpoints in the jurisdictions in which we intend to seek approval or completing and timely reporting the results of our clinical trials, such as our NASH and PBC trials; |
| ● | the effects of COVID-19 and related public health safety measures and business closures and disruptions; |
| ● | inability to obtain additional funding; |
| ● | delay in filing an investigational new drug application, NDA, MAA or comparable submission for any of our product candidates, and any adverse development or perceived adverse development with respect to the regulatory review of any such submission; |
| ● | potential side effects associated with Ocaliva for PBC, OCA for liver fibrosis due to NASH or our other product candidates; |
| ● | inability to obtain adequate product supply of Ocaliva, OCA for liver fibrosis due to NASH or any of our other product candidates or the inability to do so at acceptable prices; |
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| ● | results of clinical trials of our competitors’ products and product candidates; |
| ● | regulatory or advisory committee actions or recommendations with respect to our products or product candidates, including Ocaliva or OCA for liver fibrosis due to NASH, or our competitors’ products or product candidates; |
| ● | changes in laws or regulations applicable to our products or product candidates; |
| ● | failure to meet or exceed financial projections or guidance we may provide to the public; |
| ● | failure to meet or exceed the estimates and projections of the investment community; |
| ● | actual or anticipated fluctuations in our financial condition and operating results; |
| ● | actual or anticipated changes in our growth rate relative to our competitors; |
| ● | actual or anticipated fluctuations in our competitors’ operating results or changes in their growth rate; |
| ● | competition from existing products or new products that may emerge; |
| ● | announcements by us, our collaborators or our competitors of significant acquisitions, strategic collaborations, joint ventures, collaborations or capital commitments; |
| ● | issuance of new or updated research or reports by securities analysts; |
| ● | fluctuations in the valuation of companies perceived by investors to be comparable to us; |
| ● | share price and volume fluctuations attributable to inconsistent trading volume levels of our shares; |
| ● | additions or departures of key management or scientific personnel; |
| ● | disputes or other developments related to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our technologies; |
| ● | announcement or expectation of additional financing efforts; |
| ● | disputes, governmental inquiries or investigations, legal proceedings or litigation, including any securities, intellectual property, employment, product liability or other litigation; |
| ● | sales of our common stock by us, our insiders or our other stockholders; |
| ● | failure to adopt appropriate information security systems, including any systems that may be required to prevent or defend against system failures or security or security or data breaches due to cyber-attacks, or cyber intrusions, including ransomware, phishing attacks and other malicious intrusions; |
| ● | failure to comply with data protection laws; |
| ● | market conditions for biopharmaceutical stocks in general; and |
| ● | general economic, industry, market and political conditions. |
Any of these factors could also affect the trading price of the SEC.Convertible Notes.
Furthermore, stock markets in general and the market for biotechnology companies in particular have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. A number of factors, including global health catastrophes (e.g., COVID-19), general economic, political and market conditions, recessions, interest rate changes or international currency fluctuations may negatively impact the
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market price of our securities, regardless of our actual operating performance. In the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We believehave been in the past, and are currently subject to this type of litigation, which could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business. As a result of this volatility, you could incur substantial losses.
If our stockholders sell substantial amounts of our common stock, the market price of our common stock or the Convertible Notes may decline even if our business is doing well.
A significant number of shares of our common stock are held by a small number of stockholders, including Genextra. Sales of a significant number of shares of our common stock, or the expectation that any disclosure controlssuch sales may occur, could significantly reduce the market price of our common stock or the Convertible Notes. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and proceduresprice that we deem appropriate. We have also registered the offer and sale of the shares of common stock that we may issue under our equity compensation plans, including upon the exercise of stock options. These shares may be freely sold in the public market upon issuance.
Additionally, sales of our common stock by our executive officers or internal controls and procedures, no matter how well conceived and operated, can provide only reasonable,directors, even when done during an open trading window under our policies with respect to insider sales or done under a trading plan adopted in accordance with the guidelines set forth by Rule 10b5-1, may adversely impact the market price of our common stock or the Convertible Notes. Although we do not absolute, assuranceexpect that the objectivesrelatively small volume of such sales would itself significantly impact the control system are met.market price of our common stock or the Convertible Notes, the market could react negatively to the announcement of such sales, which could in turn affect the market price of our common stock and the Convertible Notes.
These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control system, misstatements or insufficient disclosure due to error or fraud may occur and not be detected.
You may experience future dilution as a result of future equity offerings or strategic transactions.
InWe may in the future we may issueraise funds through the issuance and sale of additional shares of our common stock or other securities convertible into or exchangeable for our common stock. For example, in August 2021, we issued $500.0 million aggregate principal amount of the 2026 Convertible Secured Notes, in May 2019, we issued and sold an aggregate of 2,879,760 shares of common stock and $230.0 million aggregate principal amount of the 2026 Convertible Notes, in orderApril 2018, we issued and sold an aggregate of 4,257,813 shares of common stock and in July 2016, we issued and sold $460.0 million aggregate principal amount of the 2023 Convertible Notes. Conversions of the Convertible Notes will dilute the ownership interests of existing shareholders to raise additional capital orthe extent that we elect to deliver shares of our common stock (or a combination of cash and shares of our common stock) in connection with strategic transactions, including potential in-licenses or acquisitionstherewith. In addition, the existence of products, technologies or businesses. We cannot assure you that we will be able to sell shares or other securities in any other offering at a price per share that is equal to or greater thanthe Convertible Notes may encourage short selling by market participants because the conversion of the Convertible Notes could depress the price per share you paid forof our shares. If we issue securities in connection with a strategic transaction, we cannot assure you that the value of the assets we receive will be commensurate with the value of the securities we may issue, Investors purchasing or otherwise acquiring shares or other securities from us in the future could have rights, preferences or privileges senior to those of existing stockholders and you may experience dilution. Youcommon stock. We may also incur additional dilution upon the exerciseissue shares of any outstandingcommon stock, stock options, or vesting ofrestricted stock, restricted stock units or awards.
Ifother stock-based awards under our existing or future equity incentive plans or other employee or director compensation plans. The issuance of additional shares of common stock (including pursuant to conversions of the Convertible Notes) or other securities convertible into or industry analysts cease publishing researchexchangeable for our common stock, or reports about us, our business or our market, or if they publish inaccurate or unfavorable reports about our stock,the perception that such issuances may occur, may materially and adversely affect the price of our common stock and trading volume could decline.the Convertible Notes.
The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about our company. We do not have any control over these analysts, and there can be no assurance that analysts will continue to cover us or provide favorable coverage. If one or more of the analysts who cover us downgrade our common stock or publish inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of the analysts covering us fail to regularly publish reports on us, demand for our common stock could decline, which could cause our stock price and trading volume to decline.
Anti-takeover provisions in our restated certificate of incorporation and our restated bylaws, as well as provisions of Delaware law and certain provisions of the Convertible Notes, might discourage, delay or prevent a change in control of our company or changes in our management and, therefore, depress the tradingmarket price of our common stock.
stock or the Convertible Notes.
Provisions in our restated certificate of incorporation and restated bylaws, as well as provisions of Delaware law, contain provisions that may discourage, delay or prevent a merger, acquisition or other change in control that stockholders mayour securityholders consider favorable, including transactions in which yousecurityholders might otherwise receive a premium for your shares of our common stock.their securities. These provisions may also prevent or frustrate attempts by our stockholders to replace or remove our management. Our corporate governance documents include provisions:
| authorizing the issuance of “blank check” convertible preferred stock, the terms of which may be established and shares of which may be issued without stockholder approval; |
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| prohibiting stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of our stockholders, to the extent that no stockholder, together with its affiliates, holds more than 50% of our voting stock; |
| eliminating the ability of stockholders to call a special meeting of stockholders; |
| permitting our board of directors to accelerate the vesting of outstanding equity awards upon certain transactions that result in a change of control; and |
| establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted upon at stockholder meetings. |
In addition, as a Delaware corporation, we are subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation Law or DGCL,(the “DGCL”), which prevents some stockholders holding more than 15% of our outstanding common stock from engaging in certain business combinations without approval of the holders of substantially all of our outstanding common stock. Any provision of our restated certificate of incorporation or restated bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholderssecurityholders to receive a premium for their shares of our common stock,securities, and could also affect the price that some investors are willing to pay for our common stock.stock or the Convertible Notes.
Certain provisions of the Convertible Notes could also make it more difficult or more expensive for a third party to acquire us. For example, if an acquisition event constitutes a “fundamental change” under the terms of the Convertible Notes, holders of the Convertible Notes will have the right to require us to purchase their Convertible Notes for cash. Similarly, if an acquisition event constitutes a “make-whole fundamental change” under the terms of the Convertible Notes, we may be required to increase the conversion rate for holders who convert their Convertible Notes in connection with such make-whole fundamental change.
The existence of the foregoing provisions and anti-takeover measures may also frustrate or prevent any attempts by our stockholders to replace or remove our current management or members of our board of directors and could limit the price that investors might be willing to pay in the future for shares of our common stock.stock or the Convertible Notes. They could also deter potential acquirers of our company, thereby reducing the likelihood that youour securityholders could receive a premium for your common stocktheir securities in an acquisition.
Claims for indemnification by our directors and officers may reduce our available funds to satisfy successful stockholder claims against us and may reduce the amount of money available to us.
As permitted by Section 102(b)(7) of the DGCL, our restated certificate of incorporation limits the liability of our directors to the fullest extent permitted by law. In addition, as permitted by Section 145 of the DGCL, our restated certificate of incorporation and restated bylaws provide that we shall indemnify, to the fullest extent authorized by the DGCL, each person who is involved in any litigation or other proceeding because such person is or was a director or officer of our company, or is or was serving as an officer or director of another entity at our request, against all expense, loss or liability reasonably incurred or suffered in connection therewith. Our restated certificate of incorporation provides that the right to indemnification includes the right to be paid expenses incurred in defending any proceeding in advance of its final disposition, provided, however, that such advance payment will only be made upon deliverysubject to us of an undertaking, by or on behalf of the director or officer, to repay all amounts so advanced if it is ultimately determined that such director is not entitled to indemnification. If we do not pay a proper claim for indemnification in full within 60 days after we receive a written claim for such indemnification, except in the case of a claim for an advancement of expenses, in which case such period is 20 days, our restated certificate of incorporation and our restated bylaws authorize the claimant to bring an action against us and prescribe what constitutes a defense to such action.
Section 145 of the DGCL permits a corporation to indemnify any director or officer of the corporation against expenses (including attorney’s fees), judgments, fines and amounts paid in settlement actually and reasonably incurred in connection with any action, suit or proceeding brought by reason of the fact that such person is or was a director or officer of the corporation, if such person acted in good faith and in a manner that he reasonably believed to be in, or not opposed to, the best interests of the corporation, and, with respect to any criminal action or proceeding, if he or she had no reason to believe his or her conduct was unlawful. In a derivative action (i.e., one brought by or on behalf of the corporation), indemnification may be provided only for expenses actually and reasonably incurred by any director or officer in connection with the defense or settlement of such an action or suit if such person acted in good faith and in a manner that he or she reasonably believed to be in, or not opposed to, the best interests of the corporation, except that no indemnification shall be provided if such person shall have been adjudged to be liable to the corporation, unless and only to the extent that the court in which the action or suit was brought shall determine that the defendant is fairly and reasonably entitled to indemnity for such expenses despite such adjudication of liability.
certain conditions. The rights conferred in the restated certificate of incorporation and the restated bylaws are not exclusive, and we are authorized to enter into indemnification agreements with our directors, officers, employees and agents and to obtain insurance to indemnify such persons. We have entered into indemnification agreements with each of our officers and directors.
The above limitations on liability and our indemnification obligations limit the personal liability of our directors and officers for monetary damages for breach of their fiduciary duty as directors by shifting the burden of such losses and expenses to us. Although we have increased the coverage under ourcarry directors’ and officers’ liability insurance, certain liabilities or expenses covered by our indemnification obligations may not be covered by such insurance or the coverage limitation amounts may be exceeded. As a result, we may need to use a significant amount of our funds to satisfy our indemnification obligations, which could severely harm our business and financial condition and limit the funds available to stockholderssecurityholders who may choose to bring a claim against our company.
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We do not intend to pay dividends in the foreseeable future.
We do not anticipate paying cash dividends in the future. As a result, only appreciation of the price of shares of our common stock will provide a return to stockholders, which may not occur. Investors seeking cash dividends should not invest in our common stock. You may not realize any return on your investment in our common stock and may lose some or all of your investment.
Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.
As of December 31, 2016, we hadWe have significant net operating loss carryforwards (“NOLs”) for U.S. Federal, state and foreign income tax purposes. The enactment of the Tax Cuts and Jobs Act enacted in 2017 (the “TCJA”) modified the ability of companies to utilize U.S. Federal NOLs arising in tax years beginning on or after January 1, 2018, by providing that such NOLs may be carried-forward indefinitely and used to offset up to 80 percent of taxable income in any given future year. Existing NOLs that arose in tax years beginning prior to January 1, 2018, were not affected by the TCJA and are generally eligible to be carried-forward for up to 20 years and used to fully offset taxable income in future years. If not utilized, our pre-2018 NOLs will expire for U.S. Federal income tax purposes of $562.3 million, which expire between 2024 and 2036.2037. In addition, the Biden administration is proposing changes to the Internal Revenue Code. It is not yet clear what effect such tax legislation would have on our NOLs, financial condition, and results of operations. We also have certain state and foreign NOLs in varying amounts depending on the different state and foreign tax laws.
OurIn addition, our ability to utilize our NOLs may be limited under Section 382 of the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, or similar rules.applicable state and foreign tax law. The Section 382 limitations apply if an “ownership change” occurs. Generally, an ownership change occurs when certain shareholders increase their aggregate ownership by more than 50 percentage points over their lowest ownership percentage in a testing period (typically three years). We have evaluated whether one or more ownership changes under Section 382 have occurred since our inception and have determined that there have been at least two such changes. Although we believe that these ownership changes have not resulted in material limitations on our ability to use these NOLs, our ability to utilize these NOLs may be limited due to future ownership changes or for other reasons. Additionally, tax laws limit the time during which NOLs and certain other tax attributes may be utilized against future taxes. As a result, we may not be able to take full advantage of our NOL carryforwards for U.S. federal,Federal, state, and foreign income tax purposes.
General Risk Factors
We may use our limited financial and human resources to pursue a particular research program or product candidate that is ultimately unsuccessful or less successful than other programs or product candidates that we may have forgone or delayed.
Because we have limited resources, we may forego or delay the development of certain programs or product candidates that later prove to have greater commercial potential than the programs or product candidates that we do pursue. Our resource allocation decisions may cause us to fail to capitalize on viable commercial products or profitable market opportunities. Our spending on current and future research and development programs for product candidates may not yield any commercially viable products. If we fail to accurately evaluate the commercial potential or target market for a particular product candidate, we may relinquish valuable rights to that product candidate through strategic collaboration, licensing or other arrangements or we may allocate our limited internal resources to that product candidate when it would have been more advantageous to enter into such an arrangement. Any such failure could have a material adverse effect on our business, financial condition or results of operations.
If we engage in a licensing transaction, acquisition, reorganization or business combination, we will face a variety of risks that could adversely affect our business operations and our securityholders.
From time to time, we have considered, and we will continue to consider in the future, strategic business initiatives intended to further the expansion and development of our business. These initiatives may include in-licensing or acquiring
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products, technologies or businesses, entering into a business combination with another company or otherwise partnering with another company. If we pursue such a strategy, we could, among other things:
| ● | issue equity securities that would dilute our current stockholders’ ownership; |
| ● | incur substantial debt that may place strains on our operations; |
| ● | be required to dedicate substantial operational, financial and management resources to integrate new products, technologies or businesses; |
| ● | assume substantial actual or contingent liabilities; |
| ● | impair our ability to make payments of interest and principal on our outstanding debt, including the Convertible Notes; |
| ● | reprioritize our development programs or cease development and commercialization activities with respect to certain of our product candidates or approved products; or |
| ● | merge or otherwise enter into a business combination with another company, which may result in our stockholders receiving cash and/or securities of the other company on terms that certain of our stockholders may not deem desirable. |
Our insurance policies are expensive and only protect us from some business risks, which leave us exposed to significant uninsured liabilities.
We do not carry insurance for all categories of risk that our business may encounter. Some of the policies we currently maintain include general liability, employment practices liability, property, auto, workers’ compensation, cyber liability, products liability and directors’ and officers’ insurance. We do not know, however, if our current levels of coverage are adequate or if we will be able to obtain insurance with adequate levels of coverage in the future, if at all. Any significant uninsured liability, including significant uninsured liabilities resulting from COVID-19 or related public health safety measures or business closures and disruptions, may require us to pay substantial amounts, which could materially and adversely affect our financial position and results of operations. Furthermore, any increase in the volatility of our stock price, among other factors, may result in us being required to pay substantially higher premiums for our directors’ and officers’ insurance, and may make it difficult for us to obtain adequate coverage on reasonable terms, if at all.
We must comply with environmental, health and safety laws and regulations.
Our activities involve the controlled storage, use and disposal of hazardous materials. We are subject to federal, state, city and local laws and regulations, in and outside the United States, governing the use, manufacture, storage, handling and disposal of these hazardous materials. Although we believe that the safety procedures we use for handling and disposing of these materials comply with the standards prescribed by applicable laws and regulations, we cannot eliminate the risk of accidental contamination or injury from these materials. In the event of an accident, regulatory authorities may curtail the use of these materials and interrupt our business operations. We do not currently maintain hazardous materials insurance coverage.
Failure to establish and maintain adequate financial infrastructure and accounting systems and controls could impair our ability to comply with the financial reporting and internal controls requirements for publicly traded companies.
As a public company, we operate in a demanding regulatory environment, which requires us to comply with the Sarbanes-Oxley Act of 2002 and related rules and regulations, expanded disclosure requirements, accelerated reporting requirements and complex accounting rules. Responsibilities imposed by the Sarbanes-Oxley Act include establishing and maintaining corporate oversight and adequate internal control over financial reporting and disclosure controls and
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procedures. Effective internal controls are necessary for us to produce reliable financial reports and are important to help prevent financial fraud.
In particular, our compliance with Section 404 of the Sarbanes-Oxley Act has required and will continue to require that we incur substantial accounting-related expenses and expend significant management efforts. Our testing, or the testing by our independent registered public accounting firm, may reveal deficiencies in our internal controls that we would be required to remediate in a timely manner. If we are not able to comply with the requirements of the Sarbanes-Oxley Act, we could be subject to sanctions or investigations by the SEC, the Nasdaq Global Select Market or other regulatory authorities, which would require additional financial and management resources and could adversely affect the market price of our securities. Furthermore, if we cannot provide reliable financial reports or prevent fraud, including as a result of remote working by our employees in connection with COVID-19 and related public health safety measures, our business and results of operations would likely be materially and adversely affected.
Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud.
We are subject to the periodic reporting requirements of the Exchange Act. Our disclosure controls and procedures are designed to reasonably assure that information required to be disclosed by us in reports we file or submit under the Exchange Act is accumulated and communicated to management, recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. We believe that any disclosure controls and procedures or internal controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control system, misstatements or insufficient disclosure due to error or fraud may occur and not be detected.
Changes in our effective income tax rate could adversely affect our results of operations.
We are subject to income taxes in the United States and various foreign jurisdictions. Various factors may have favorable or unfavorable effects on our effective income tax rate. These factors include, but are not limited to, interpretations of existing tax laws, changes in tax laws and rates, such as the TCJA, the accounting for stock options and other stock-based compensation, changes in accounting standards, future levels of research and development spending, changes in the mix and level of pre-tax earnings in different jurisdictions, the outcome of audits or other examinations by the U.S. Internal Revenue Service and tax regulators in other jurisdictions, the accuracy of our estimates for unrecognized tax benefits, the realization of deferred tax assets and changes to our ownership or capital structure. The Biden administration is proposing changes to the Internal Revenue Code that could include material increases to corporate tax rates. It is not yet clear what effect such tax legislation would have on our financial condition and results of operations.
The impact on our effective income tax rate resulting from these factors may be significant and could adversely affect our results of operations.
If securities or industry analysts cease publishing research or reports about us, our business or our market, or if they publish inaccurate or unfavorable reports about us or our securities, the price of our securities and trading volume in our securities could decline.
The market for our common stock and the Convertible Notes depends in part on the research and reports that securities or industry analysts publish about our company. We do not have any control over these analysts, and there can be no assurance that analysts will continue to cover us or provide favorable coverage. If one or more of the analysts who cover us downgrade our common stock or publish inaccurate or unfavorable research about our business, our stock price and the price of the Convertible Notes may decline. If one or more of the analysts covering us fail to regularly publish reports on us, demand for our common stock and the Convertible Notes may decline, which could cause our stock price and the price of the Convertible Notes and trading volume to decline.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Recent SalesSale of Unregistered Securities
On August 17, 2021, the Company sold $500.0 million of 2026 Convertible Secured Notes in exchange for old convertible notes and in a new subscription for cash, as described above in “Long-Term Debt” in the notes to our financial statements. These new notes were issued in a private placement to institutional investors in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act.
Set forth below is
As of August 20, 2021, the Company agreed with its financial advisor in the exchange and issuance, J. Wood Capital Advisors LLC, to settle its financial advisory fee for services rendered through issuance of 769,823 shares of common stock, equivalent to $10.0 million. These shares were issued in a private placement in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act.
Of the new 2026 Convertible Secured Notes, $117.6 million were issued at par for cash. Substantially all proceeds were used either for the repurchase of 4,521,502 shares of common stock in connection with the notes issuance for $75.8 million, or the repurchase in September 2021 of additional 2023 Convertible Notes for $38.1 million.
The 2026 Convertible Secured Notes are convertible into shares of common stock, with the terms of conversion described under above “Long-Term Debt”, which have not been registered under the Securities Act. The 2026 Convertible Secured Notes contain various covenants, including limitations upon the payment of dividends.
Issuer Purchases of Equity Securities
The following table provides certain information regarding securities sold by uswith respect to purchases of our common stock during the ninethree months ended September 30, 2017 that were not registered under the Securities Act of 1933, as amended, or the Securities Act. Also included is the consideration, if any, received by us for the securities and information relating to the section of the Securities Act, or rule of the Securities and Exchange Commission, under which exemption from registration was claimed.2021.
| | | | | | | | | |
| | | | | | | | | Maximum Number (or |
| | | | | | | Total Number of Shares | | Approximate Dollar Value) of |
|
| Total Number of | | Average | | Purchased as Part of Publicly | | Shares that May Yet Be | |
| | Shares | | Price Paid | | Announced Plans or | | Purchased Under the Plans or | |
Period |
| Purchased (1) |
| per Share |
| Programs |
| Programs | |
| | | | | | | | | |
July 1, 2021 through July 31, 2021 | | — | | $ | — | | — | | — |
August 1, 2021 through August 31, 2021 | | 4,521,502 | | $ | 16.75 | | — | | — |
September 1, 2021 through September 30, 2021 | | — | | $ | — | | — | | — |
Total | | 4,521,502 | | $ | 16.75 | | — | | — |
| (1) | In August 2021, the Company repurchased in privately negotiated transactions 4,521,502 shares of its common stock from purchasers of the 2026 Convertible Secured Notes at an average price of $16.75 per share for an aggregate purchase price of approximately $75.8 million. |
Between January 1 and September 30, 2017, we did not issue or sell any shares on an unregistered basis.
Purchase of Equity Securities
We did not purchase any of our registered equity securities during the period covered by this Quarterly Report on Form 10-Q.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
None.
None.
The exhibits filed or furnished as part of this Quarterly Report on Form 10-Q are set forth onin the Exhibit Index below, which Exhibit Index is incorporated herein by reference.
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Exhibit Index
Exhibit | Description of Exhibit | |
| | |
4.1 | | |
| | |
4.2 | | |
| | |
10.1 | | |
| | |
31.1 | Certification of Principal Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a). | |
| | |
31.2 | Certification of Principal Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a). | |
| | |
32.1(1) | | |
| | |
101 | The following materials from the Registrant’s Quarterly Report on Form 10-Q for the period ended September 30, 2021, formatted in Inline XBRL (Inline eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets at September 30, 2021 (unaudited) and December 31, 2020 (audited), (ii) Condensed Consolidated Statements of Operations for the three and nine-month periods ended September 30, 2021 and 2020 (unaudited), (iii) Condensed Consolidated Statements of Comprehensive Loss for the three and nine-month periods ended September 30, 2021 and 2020 (unaudited), (iv) Condensed Consolidated Statements of Changes in Stockholders’ (Deficit) Equity for the three and nine-month periods ended September 30, 2021 and 2020 (unaudited), (v) Condensed Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 2021 and 2020 (unaudited) and (vi) Notes to Condensed Consolidated Financial Statements (unaudited). | |
104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
| (1) | The certifications attached hereto as Exhibit 32.1 are furnished to the SEC pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, nor shall they be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
INTERCEPT PHARMACEUTICALS, INC.
| | |
| INTERCEPT PHARMACEUTICALS, INC. | |
| | |
Date: November | By: | /s/ |
| | Jerome Durso |
| | President and Chief Executive Officer |
| | (Principal Executive Officer) |
| | |
Date: November | By: | /s/ |
| | Andrew Saik |
| | Chief Financial Officer |
| | (Principal Financial Officer) |
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| ||