During 2007, we issued a restricted stock award to our President and Chief Executive Officer, the vesting of which is contingent upon the price of our common stock achieving a certain pre-established stock price target. Compensation cost is based upon the grant date fair value of the shares awarded and charged against income over the derived service period. Compensation cost is charged against income regardless of whether the market condition is ever achieved and is reversed only if the derived service period is not met by the senior executive. We used a Monte Carlo simulation model to calculate both the grant date fair value and the derived service period of the award. Based on the simulation, the grant date fair value of the award is $8.98 per share and compensation cost is being charged against income ratably over a two-year derived service period.
For the three months ended September 30, 2008 and 2007, approximately $0.3 million and $0.1 million, respectively, of compensation cost was charged against income related to restricted stock awards that contain performance or market conditions. For the nine months ended September 30, 2008 and 2007, approximately $1.2 million and $0.3 million, respectively, of stock option compensation cost has been charged against income related to restricted stock awards that contain performance or market conditions. At September 30, 2008, approximately 676,000 potential shares of restricted stock with performance or market conditions remain unvested. Restricted stock awards with performance conditions encompass performance targets set for senior management personnel through 2011 and could result in approximately $4.5 million of additional compensation expense if the performance targets are met or expected to be attained. At September 30, 2008, there was approximately $0.3 million of unrecognized compensation cost related to restricted stock awards that contain market conditions which is expected to be recognized ratably over the next five months.
New Accounting Pronouncements
In February 2007, the FASB issued Staff Position, or FSP, No. 157-2. FSP No. 157-2 delayed the effective date of SFAS No. 157 to fiscal years beginning after November 15, 2008 and interim periods within those fiscal years for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis and at least annually. The delay is intended to allow the FASB and its constituents additional time to consider the effect of various implementation issues that have arisen, or that may arise, from the application of SFAS No. 157. Since we do not carry any financial instruments that are measured at fair value on a non-recurring basis, the conclusion of the SFAS No. 157 deferral period will not have an effect on our financial statements.
Accounting Pronouncements Adopted
In October 2008, the FASB issued FASB FSP No. 157-3, determining the fair value of a financial asset when the market for that asset is not active. FSP No. 157-3 clarifies the application of SFAS No. 157, fair value measurements, in a market that is not active and provides an example of key considerations in determining the fair value of a financial asset when the market for that asset is not active. FSP No. 157-3 was effective upon issuance, or October 10, 2008, including prior periods for which financial statements have not been issued. We adopted FSP No. 157-3 on October 10, 2008. The adoption of FSP No. 157-3 did not have a material effect on our consolidated financial statements.
In May 2008, the FASB issued SFAS No. 162,Hierarchy of Generally Accepted Accounting Principles, or SFAS No. 162. This statement is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements of non-governmental entities that are presented in conformity with GAAP. This statement is effective on November 15, 2008. The effective date is tied to the United States Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board amendment to AU Section 411,The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles, which occurred in September 2008. The adoption of SFAS No. 162 did not have an impact on our consolidated financial statements.
In December 2007, the SEC issued SAB No. 110 which expresses the views of the SEC staff regarding the use of a “simplified” method, as discussed in SAB No. 107 and which provides guidance in developing an estimate of the expected term of “plain vanilla” share options in accordance with SFAS No. 123(R). In particular, the staff of the SEC indicated in SAB No. 107 that it will accept a company’s election to use the simplified method, regardless of whether the company has sufficient information to make more refined estimates of expected term. At the time SAB No. 107 was issued, the staff of the SEC believed that more detailed external information about employee exercise behavior (e.g., employee exercise patterns by industry and/or other categories of companies) would, over time, become readily available to companies. Therefore, the staff of the SEC stated in SAB No. 107 that it would not expect a company to use the simplified method for share option grants after December 31, 2007. The staff of the SEC understands that such detailed information about employee exercise behavior may not be widely available by December 31, 2007. Accordingly, the staff of the SEC will continue to accept, under certain circumstances, the use of the simplified method after December 31, 2007. We employed the simplified method for all stock options granted prior to December 31, 2007. We utilize historical experience as the basis for the expected term for all stock options granted subsequent to December 31, 2007.
In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements, or SFAS No. 157, which defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements; rather, it applies under other accounting pronouncements that require or permit fair value measurements. The provisions of SFAS No. 157 are to be applied prospectively as of the beginning of the fiscal year in which it is initially applied, with any transition adjustment recognized as a cumulative-effect adjustment to the opening balance of retained earnings. The provisions of SFAS No. 157 are effective for fiscal years beginning after November 15, 2007. We adopted the provisions of SFAS No. 157 on January 1, 2008. Our adoption of SFAS No. 157 did not have a material effect on our consolidated financial statements. See Note 2 to our consolidated financial statements for further discussion of our adoption of SFAS No. 157.
In September 2007, the EITF reached a final consensus on Issue No. 07-03,Accounting for Non-refundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities. The EITF affirmed as a consensus the tentative conclusion that non-refundable advance payments for future research and development activities should be deferred and capitalized. Such amounts should be recognized as an expense as the goods are delivered or the related services are performed. The EITF reached a final consensus that is effective for financial statements issued for fiscal years beginning after December 15, 2007, and interim periods within those fiscal years. Consistent with the consensus, we have deferred approximately $1.3 million of these costs as of September 30, 2008 and have amortized approximately $0.4 million of these costs into expense for the three and nine months ended September 30, 2008 based on services performed. The net deferred balance of $0.9 million as of September 30, 2008 is included in Prepaid Expenses and Other Current Assets on our consolidated balance sheet.
In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities, or SFAS No. 159, which provides companies with an option to report selected financial assets and liabilities at fair value. The objective of SFAS No. 159 is to reduce both complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. SFAS No. 159 also establishes presentation and disclosure requirements designedto facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 does not eliminate any disclosure requirements included in other accounting standards. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. We adopted the provisions of SFAS No. 159 on January 1, 2008. Our adoption of SFAS No. 159 did not have an effect on our consolidated financial statements since we did not elect the fair value option for any of our existing assets or liabilities.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices and equity prices. To date our exposure to market risk has been limited. We do not currently hedge any market risk, although we may do so in the future. We do not hold or issue any derivative financial instruments for trading or other speculative purposes.
Our material interest-bearing assets consist of cash and cash equivalents and short-term investments, including investments in United States Treasury and other money market funds, commercial paper, time deposits and other debt instruments. Our investment income is sensitive to changes in the general level of interest rates, primarily United States interest rates, and other market conditions.
ITEM 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended or the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer, or CEO and Chief Financial Officer, or CFO as appropriate, to allow timely decisions regarding required disclosure.
We do not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control systems are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in a cost-effective control system, no evaluation of internal control over financial reporting can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within our company have been detected.
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. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
Our management, with the participation of our CEO and CFO, evaluated the effectiveness of our disclosure controls and procedures. Based on this evaluation, as of the end of the period covered by this Form 10-Q, our CEO and CFO have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended are effective.
Change in Internal Control
During the third quarter ended September 30, 2008, we changed our service provider used to administer our stock-based compensation programs and converted all of our stock plan data to the new service provider’s administration system. We believe that the conversion will support improvements in internal controls over our stock plan administration process.
Except as noted above, there has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Settlements
On December 1, 2006, the FDA approved abbreviated new drug applications previously filed by Sandoz Pharmaceuticals Corp., or Sandoz, and by Upsher-Smith Laboratories, Inc., or Upsher-Smith, for their dosage forms of generic oral products containing oxandrolone. On December 4, 2006, we filed a lawsuit in the U.S. District Court for the District of New Jersey or the District Court, against Sandoz and Upsher-Smith claiming that their generic oxandrolone products infringe our patents related to various methods of using Oxandrin. Following a series of motions and appeals, we entered into a settlement agreement with Sandoz on December 20, 2007, and Upsher-Smith on July 30, 2008. The agreements settled all disputes relating to the litigation. We made a one-time payment to Upsher-Smith in partial consideration for the execution of its settlement agreement, and no party admitted any liability with respect to the litigation. As a result of the settlement, the parties jointly submitted a Stipulation of Dismissal with Prejudice with the District Court on August 5, 2008. While the settlement agreements allow for certain actions to enforce their respective provisions, no further proceedings relating to this matter are anticipated.
On June 26, 2006, a complaint was filed against us by a former executive asserting that he was wrongfully terminated. The parties have executed a comprehensive settlement agreement in exchange for a complete release of all claims by the plaintiff and the matter has been dismissed with prejudice.
Intellectual Property-Related Litigation
We are aware of patent applications filed by, or patents issued to, other entities with respect to technology potentially useful to us and, in some cases, related to products and processes being developed by us. We cannot presently assess the effect, if any, that these patents may have on our operations. The extent to which efforts by other researchers have resulted or will result in patents and the extent to which the issuance of patents to others would have a materially adverse effect on us or would force us to obtain licenses from others is currently unknown. See “Item 1A. Risk Factors — Risks Relating to Intellectual Property” for further discussion.
On December 1, 2006, the FDA denied two Citizens Petitions filed by us, which had been pending since February 2004 and September 2005, requesting that the Commissioner of Food and Drugs not approve any abbreviated new drug applications, or ANDAs, for generic oral products containing oxandrolone until (i) agency adopted bioequivalence standards and a requirement for any generic product to have completed a trial determining whether it may safely be used by patients who take the prescription blood thinner warfarin are satisfied and (ii) prior to the expiration of our exclusive labeling for geriatric dosing of Oxandrin on June 20, 2008. On December 5, 2006, we filed a petition for reconsideration with the FDA regarding their rejection of our Citizen Petitions on the basis that the FDA failed to adequately consider the significant safety and legal issues raised by permitting approval of generic oxandrolone drug products without the inclusion of labels that contain full geriatric dosing and safety information. Having not received a decision or other communication regarding this petition for reconsideration, we withdrew our petition for reconsideration on July 24, 2008.
On September 4, 2007, Joseph R. Berger filed a complaint against us in the Fayette County Circuit Court in Kentucky alleging breach of contract in connection with the assignment of certain inventions related to the method of using oxandrolone to treat HIV/AIDS patients. The complaint alleged several causes of action, all of which were premised on the existence of an oral agreement between us and Berger, which Berger alleges we breached. Berger sought, among other things, damages and rescission of the assignment of the inventions. Effective March 7, 2008, Berger filed an amended complaint which dropped certain causes of action, while continuing to seek damages and rescission of the invention assignments. On March 7, 2008, the Court granted our motion to limit discovery to liability issues through December 7, 2008, in contemplation of our bringing a motion for summary judgment at the conclusion of that period. We believe there are strong defenses to Berger’s claims and intend to vigorously defend against this lawsuit.
Other Litigation
On December 20, 2002,In re Bio-Technology General Corp. Securities Litigation, a shareholder class action was filed against us and three of our former officers in the United States District Court for the District of New Jersey, or the District Court, alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and seeking unspecified compensatory damages. Following a series of motions and appeals the suit was dismissed with prejudice and upheld on appeal
From time to time we become subject to legal proceedings and claims in the ordinary course of business. Such claims, even if without merit, could result in the significant expenditure of our financial and managerial resources.
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ITEM 1A. RISK FACTORS
Our Quarterly Report on Form 10-Q contains statements which constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements that set forth anticipated results based on management’s plans and assumptions. From time to time, we also provide forward-looking statements in other materials we release to the public as well as oral forward-looking statements. Such statements discuss our strategy, expected future financial position, results of operations, cash flows, financing plans, development of products, strategic alliances, intellectual property, competitive position, plans and objectives of management. We often use words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “will” and similar expressions to identify forward-looking statements. In particular, the statements regarding our strategic direction and its potential effects on our business and the development of our lead drug candidate pegloticase, are forward-looking statements. Additionally, forward-looking statements include those relating to future actions, prospective products or product approvals, future performance, financing needs, liquidity or results of current and anticipated products, sales efforts, expenses, interest rates, foreign exchange rates and the outcome of contingencies, such as legal proceedings, and financial results.
We cannot guarantee that any forward-looking statement will be realized. Achievement of future results is subject to risks, uncertainties and potentially inaccurate assumptions. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could differ materially from past results and those anticipated, estimated or projected. You should bear this in mind as you consider forward-looking statements.
We undertake no obligation to publicly update forward-looking statements. We provide the following cautionary discussion of risks, uncertainties and possibly inaccurate assumptions relevant to our businesses.
These are important factors that, individually or in the aggregate, we think could cause our actual results to differ materially from expected and historical results. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider the following to be a complete discussion of all potential risks or uncertainties.
You should carefully consider the following risk factors, in addition to other information included in this quarterly report on Form 10-Q, in evaluating us and our business. If any of the following risks occur, our business, financial condition and operating results could be materially adversely affected. The following risk factors restate and supersede the risk factors previously disclosed in Item 1A. of our Quarterly Report on Form 10-Q for the three months ended June 30, 2008.
The following risk factors have been updated to reflect developments subsequent to the filing of our Annual Report on Form 10-K for the year ended December 31, 2007 and we have denoted with an asterisk (*) in the following discussion those risk factors that are new or materially revised.
Risks Relating to Our Business
* Pegloticase, and any other product candidate that we may develop in the future, must satisfy rigorous regulated standards of safety and efficacy before it can be approved for sale. To satisfy these standards we must engage in, analyze and report the results of complicated and lengthy clinical trials, with no certainty that the relevant regulatory authorities will agree with our assessment of the data derived from such studies.
Clinical testing is expensive, takes time and effort to design and implement, can take many years to complete and is uncertain as to the outcome. Success in one set of clinical trials does not ensure that later clinical trials will be successful and interim analyses of results of a clinical trial do not necessarily predict final results. A failure of one or more of our clinical trials can occur at any stage of testing or analysis of the data, including during the final analysis of the data resulting from our clinical trials. Moreover, we must report the results of clinical trials to the Food and Drug Administration, or FDA, and other regulatory bodies prior to the commercialization of pegloticase, or any other product we may develop, in the United States and other jurisdictions. We cannot predict how the FDA or other regulatory authorities will view or consider the data we report, or how any of the data set will be translated into label language if pegloticase is approved. The FDA typically conducts its own analyses from the original data sets and may come to different conclusions than those we reached with respect to the efficacy or safety of pegloticase. Accordingly, there can be no guarantee that the FDA will view the complex data of our Biologic License Application, or BLA, which we submitted in October 2008 and for which we requested priority review, in the same manner as we do, or that the FDA will not require additional testing. Moreover, we may conduct additional clinical trials in support of expanded product labeling or additional indications, and additional trials may be required prior to the approval of pegloticase for sale in the European Union and other foreign jurisdictions.
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* Our company focuses primarily on the development of a single product, pegloticase. If we are unable to complete the development and commercialization of pegloticase, or if we experience significant delays or unanticipated costs in doing so, our ability to generate product revenue and our likelihood of success will be materially harmed.
Much of our near-term results depend on the commercial launch of pegloticase and its further clinical development for expanded uses. Although we have announced positive Phase 3 clinical trial and interim Open Label Extension study, or OLE, results and are currently continuing to conduct our OLE study involving patients who completed the Phase 3 protocols, there can be no guarantee that even though we have filed our BLA that the FDA will accept our BLA as filed, grant our BLA priority review or approve our BLA, or if it will issue a conditional approval. Failure of the FDA to accept or approve our BLA as filed, or the cost and delay associated with a conditional approval, will harm our ability to generate product revenue and our business, possibly materially.
In addition, our ability to commercialize pegloticase will depend on several factors, including:
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| • | successfully completing the analysis of our Phase 3 clinical trial results and certain OLE study data, |
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| • | receiving priority review and approval of our BLA, |
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| • | successfully manufacturing drug supplies in sufficient quantities, |
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| • | receiving all necessary marketing approvals from the FDA and similar foreign regulatory authorities in order to market pegloticase, |
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| • | receiving all necessary approvals from the FDA and similar foreign regulatory authorities for the use of pegloticase product sourced from our secondary source supplier, |
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| • | maintaining, and as appropriate, entering into additional commercial manufacturing arrangements with third-party manufacturers, |
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| • | launching commercial sales of the product, whether alone or in collaboration with others, |
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| • | acceptance of the product in the medical community and their third-party payers and consumers, and |
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| • | successfully completing future clinical trials. |
There is no guarantee that we will successfully accomplish any or all of the above goals, and our inability to do so may result in significant delays, unanticipated costs or the failure of the clinical development and commercialization of pegloticase or future product candidates, which would have a material adverse effect on our business.
We rely on third parties to conduct our clinical development activities for pegloticase and those third parties may not perform satisfactorily.
We do not independently conduct clinical development activities for pegloticase, including any additional clinical trials we may conduct in the future in support of expanded product labeling and additional indications. We rely on third parties, such as contract research organizations, clinical data management organizations, medical institutions, bio-analytical laboratories and clinical investigators, to perform this function. Our reliance on these third parties for clinical development activities reduces our control over these activities. We are responsible for ensuring that each of our clinical trials is conducted in accordance with the general investigational plan and protocols for the trial. Moreover, the FDA requires us and third parties acting on our behalf to comply with standards, commonly referred to as Good Clinical Practices, for conducting, recording, and reporting the results of clinical trials to assure that data and reported results are credible and accurate and that the rights, integrity and confidentiality of trial participants are protected. Our reliance on third parties that we do not control does not relieve us of these responsibilities and requirements. Furthermore, these third parties may also have relationships with other entities, some of which may be our competitors. If these third parties do not successfully carry out their contractual duties, meet expected deadlines or conduct our clinical development activities in accordance with regulatory requirements or our stated protocols, we may not be able to obtain, or may be delayed in obtaining, regulatory approvals for pegloticase and may not be able to, or may be delayed in our efforts to, successfully commercialize pegloticase.
We also rely on other third parties to store and distribute drug supplies for our clinical development activities. Any performance failure on the part of our existing or future distributors could delay regulatory approval or commercialization of pegloticase, producing additional losses and depriving us of potential product revenue.
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We are required to meet stringent quality control and quality assurance standards in the manufacturing of our products. In addition, we depend on third parties to manufacture pegloticase and intend to rely on third parties to manufacture and supply any future products. If these third-party manufacturers and suppliers, and particularly our sole source supplier for pegloticase, fail to meet applicable regulatory requirements or to supply us for any reason, our revenues and product development efforts may be materially adversely affected.
We depend on third parties for the supply of pegloticase. Failure of any third-party to meet applicable regulatory requirements and stringent quality control and quality assurance standards may adversely affect our results of operations or result in unforeseen delays or other problems beyond our control.
The manufacture of pegloticase involves a number of technical steps and requires our third-party suppliers and manufacturers to meet stringent quality control and quality assurance specifications imposed by us or by governmental regulatory bodies. Moreover, prior to the approval of our BLA, our third-party manufacturers are subject to preapproval inspection by the FDA and any unsatisfactory results of such preapproval inspections may delay the issuance of the regulatory approvals that are necessary in order to market pegloticase. In the event of a natural disaster, equipment failure, strike, war or other difficulty, our suppliers may be unable to manufacture our products in a manner necessary to fulfill demand. Our inability to fulfill market demand or the inability of our third-party manufacturers to meet our demands will have a direct and adverse impact on our sales and may also permit our licensees and distributors to terminate their agreements.
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| Other risks involved with engaging third-party suppliers include: |
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| • | reliance on the third-party for regulatory compliance and quality control and assurance, |
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| • | the possible breach of the manufacturing agreement by the third-party or the inability of the third-party to meet our production schedules because of factors beyond our control, such as shortages in qualified personnel, and |
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| • | the possibility of termination or non-renewal of the agreement by the third-party, based on its own business priorities, at a time that is costly or inconvenient for us. |
We rely on a single source supplier, BTG-Israel, for the manufacture of the active pharmaceutical ingredient, or API, of pegloticase, and a single source drug manufacturer, Enzon Pharmaceuticals, Inc. Although we have contracted with an additional supplier of pegloticase API, Diosynth RTP, Inc., or Diosynth we do not expect Diosynth to commence its commercial supply to us until mid-2010 at the earliest.
In addition, the continued ability of BTG-Israel to consistently perform manufacturing activities for us may be affected by economic, military and political conditions in Israel and in the Middle East in general. The nature and scope of the technology transfer required to manufacture the product outside of BTG-Israel makes it unlikely that we will be able to initiate sources of supply of pegloticase API other than BTG-Israel prior to 2010. Escalating hostilities involving Israel could adversely affect BTG-Israel’s ability to supply adequate quantities of pegloticase API under our agreement. While we have contracted with Diosynth in order to secure a secondary source of supply of pegloticase API, the time to conduct a technology transfer to enable Diosynth to scale up and validate its manufacturing processes, or the failure to successfully complete a technology transfer to Diosynth or to validate the manufacturing process in their facility, for pegloticase will be lengthy. Supply of pegloticase API from this secondary source is not expected to commence until mid-2010 at the earliest. An interruption in the supply of pegloticase API from BTG-Israel or raw materials from other third-party suppliers may materially adversely affect our ability to market pegloticase, which would harm our financial results.
* We must engage in lengthy and extensive development of manufacturing and quality processes and assessment procedures in order to obtain regulatory approval of pegloticase and any other product candidate.
The development and validation of manufacturing processes and quality control and assurance procedures which demonstrate the reliability and consistency of the drug substance and final drug product used in our clinical trials, and for which we would seek marketing approval, is subject to the review and approval of regulatory authorities as part of our BLA submission. We may experience numerous unforeseen events during, or as a result of, the clinical trial process that could delay or prevent our ability to receive regulatory approval or commercialize pegloticase or future product candidates, including:
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| • | difficulty or delays in developing or validating our manufacturing and quality processes and procedures, and |
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| • | regulators could disagree with our assessment of the reliability of our manufacturing and quality processes to reproduce consistent clinical and commercial materials. |
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If we are required to engage in additional manufacturing or quality process development beyond those that we contemplate, if we are unable to successfully complete our clinical trials or other testing, if the results of these trials or tests are not positive or are only modestly positive, if we are unable to successfully complete the development and validation of our manufacturing and quality processes, or if a regulatory authority disagrees with our interpretation of our manufacturing and quality processes, we may:
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| • | be delayed in obtaining marketing approval for our product candidates, |
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| • | not be able to obtain marketing approval, |
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| • | obtain approval for indications that are not as broad as intended, or |
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| • | not obtain marketing approval before other companies are able to bring competitive products to market. |
We may be unsuccessful in establishing collaborative arrangements for the development of pegloticase, or any future product candidate, which could adversely affect the commercialization of our products.
If we are unsuccessful in reaching an agreement with a suitable collaborator or collaborators for the continued development or commercialization, or to establish reliable supply, of pegloticase or any future product candidates, we may fail to meet our business objectives for the applicable product or program. We face significant competition in seeking appropriate collaborators. Moreover, these alliance arrangements are complex to negotiate and time-consuming to document, and our inability to do so could adversely affect the commercialization of pegloticase or any other product.
Our strategic business plan includes a licensing initiative to collaborate with a partner for the further development and commercialization of pegloticase outside North America. If we are not successful in our efforts to partner pegloticase the full potential of pegloticase may not be realized.
Although we may determine to enter certain markets outside of North America ourselves, we are seeking to establish a development and commercialization partnership for pegloticase outside North America as part of our strategic business plan. To date, however, we have not identified a suitable partner that meets the criteria we are seeking, and we may continue to have difficulty doing so for a number of reasons. In particular, certain companies may not want to partner with us to commercialize pegloticase because it is a biologic and they focus on small molecule products, or in some instances gout therapy is outside their preferred therapeutic area focus. Certain companies may await greater probability of the approval of pegloticase by regulatory authorities. Other companies only wish to partner for global rights, including North America, a transaction structure that we do not prefer.
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| The risks that we are likely to face in connection with any future strategic alliances include the following: |
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| • | strategic alliance agreements are typically for fixed terms and are subject to termination under various circumstances, including, in many cases without cause, |
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| • | we may rely on collaborators to manufacture the products covered by our alliances, |
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| • | the areas of research, development and commercialization that we may pursue, either alone or in collaboration with third parties, may be limited as a result of non-competition provisions of our strategic alliance agreements, and |
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| • | failure to establish a steady supply of essential raw materials from vendors. |
We may not be successful in our efforts to establish strategic alliances or other alternative arrangements. The terms of any strategic alliances or other arrangements that we establish may not be favorable to us. Moreover, such strategic alliances or other arrangements may not be successful.
Additionally, the licensing and partnering of biopharmaceutical and pharmaceutical products is a competitive area with numerous companies pursuing strategies similar to those that we are pursuing to license and partner products. These companies may have a competitive advantage over us due to their size, cash resources and greater clinical development and commercialization capabilities. If we are unsuccessful in partnering pegloticase outside North America and are unable to fully exploit the commercial opportunity for the product ourselves in these markets, the full potential of pegloticase may not be realized.
If we do not successfully recruit and train qualified sales, managed care and marketing personnel and build a marketing and sales infrastructure, our ability to independently launch and market pegloticase will be impaired. We will be required to incur significant costs and devote significant efforts to establish a direct sales force.
If it receives regulatory approval, we intend to independently launch and market pegloticase in North America. We currently have no distribution capabilities and have limited sales and marketing capabilities. We may not be able to attract, hire and train qualified sales and marketing personnel to build a significant or successful sales force. If we are not successful in our efforts to develop an internal sales force, our ability to independently launch and market pegloticase will be impaired.
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We will have to invest significant amounts of money and management resources to develop internal sales and marketing capabilities. Because we plan to minimize sales and marketing expenditures and activities, including the hiring and training of sales personnel, prior to obtaining the regulatory approval for pegloticase, we may have insufficient time to build our sales and marketing capabilities in advance of the launch of pegloticase. If we are not successful in building adequate sales and marketing capabilities in advance of the launch of pegloticase, our ability to successfully commercialize the product may be impaired. If we develop these capabilities in advance of the launch of pegloticase and approval of pegloticase is delayed substantially or not granted at all, we will have incurred significant unrecoverable expenses.
Our strategic business plan includes an initiative to in-license or partner other novel compounds to build our development portfolio. We may not be successful in our efforts to expand our product portfolio in this manner.
As part of our strategic business plan we continually seek active in-licensing or partnering program to access and develop novel compounds in later clinical development. This is a highly competitive area with virtually every pharmaceutical, biotechnology and specialty pharmaceutical company publicly stating that they are seeking in-license product opportunities. Certain of these companies are also pursuing strategies to license or acquire products similar to those that we are pursuing. These companies may have a competitive advantage over us due to their size, cash resources and greater clinical development and commercialization capabilities. Other factors that may prevent us from partnering, licensing or otherwise acquiring suitable product candidates include the following:
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| • | we may be unable to identify suitable products or product candidates within our areas of expertise, |
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| • | we may be unable to license or acquire the relevant technology on terms that would allow us to make an appropriate return on our investment in the product, or |
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| • | companies that perceive us to be their competitors may be unwilling to assign or license their product rights to us. |
If we are unable to develop suitable potential product candidates by obtaining rights to novel compounds from third parties, we may not be able to fully achieve our strategic business plan and our business could suffer.
* We expect we will need to raise substantial additional capital to accomplish our future business objectives, including the full development and commercialization of pegloticase and execution of our strategic business plan, and such financing may only be available on terms unacceptable to us, or not at all. If we are unable to obtain financing on favorable terms, our business, results of operations and financial condition may be materially adversely affected.
We have sustained and continue to experience recurring operating losses and negative cash flows from operations and expect that we will need to raise substantial additional capital to accomplish our future business objectives in the near future. As of September 30, 2008, we had $98.5 million in cash, cash equivalents and short and long-term investments (including restricted investments), as compared to $144.2 million as of December 31, 2007. The development and commercialization of pharmaceutical products and the acquisition of new product candidates each require substantial funds. In recent periods, we have satisfied our cash requirements primarily through product sales, the divestiture of assets that are not core to our strategic business plan and the monetization of underperforming investments, however, our product sales of Oxandrin® have decreased significantly for the nine months ended September 30, 2008 as compared to the same period in 2007, and we do not have further non-core assets to divest. Historically, we have also obtained capital through collaborations with third parties, contract fees, government funding and equity and debt financings. These financing alternatives might not be available in the future to satisfy our cash requirements.
We may not be able to obtain additional funds or, if such funds are available, such funding may not be on terms that are acceptable to us. If we raise additional funds by issuing equity securities, either under our shelf registration statement or otherwise, dilution to our then existing stockholders will result. If we raise additional funds through the issuance of debt securities or borrowings, we may incur substantial interest expense and could become subject to financial and other covenants that could restrict our ability to take specified actions, such as incurring additional debt or making capital expenditures. If adequate funds are not available on favorable terms, or at all, we may be required to significantly curtail our commercialization efforts or future development programs or obtain funds through sales of assets or make arrangements with collaborative partners or others on less favorable terms than might otherwise be available.
We incurred an operating loss from continuing operations for the year ended December 31, 2007 and the nine months ended September 30, 2008 and anticipate that we may incur operating losses from continuing operations for the foreseeable future, particularly as a result of decreasing Oxandrin sales, which in the past accounted for a significant portion of our revenues. If we are unable to obtain regulatory approval for or commercialize pegloticase or any other product candidates we may pursue, we may never achieve operating profitability.
Since 2004, we have incurred substantial operating losses from continuing operations. Our operating losses from continuing operations were $18.2 million and $63.8 million for the three and nine months ended September 30, 2008, respectively, $69.2 million for the year ended December 31, 2007 and $17.0 million for the year ended December 31, 2006. Our operating losses from continuing operations are the result of the interaction of two factors: increasing operating costs and decreasing revenues. We have and expect to continue to incur significant costs in connection with our research and development activities, including clinical trials, and from selling, general and administrative expenses associated with our operations. We have and expect to continue to experience decreasingrevenues from sales of Oxandrin and, since its launch in December 2006, our generic Oxandrin brand equivalent product, oxandrolone, on which our continuing operations have been substantially dependent. Sales of Oxandrin and, since December 2006, oxandrolone accounted for 100% of our continuing net product sales. If we do not commercially launch pegloticase, we expect that our revenues will continue to decline significantly, and our results of operations will be materially adversely affected, as the FDA has approved multiple generic versions of oxandrolone since December 2006.
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In addition to market erosion due to generic competition, our sales of Oxandrin and oxandrolone in the United States are impacted by fluctuations in the buying patterns of the three major drug wholesalers to whom we principally sell these products. In the past, wholesalers have reduced their inventories of Oxandrin and we expect that they will continue to reduce inventories as a result of generic competition, further decreasing our revenues from these products.
Sales of Oxandrin and oxandrolone have also decreased as a result of the elimination or limited reimbursement practices of some states under their AIDS Drug Assistance Programs via their state Medicaid programs for prescription drugs for HIV and AIDS, including Oxandrin and oxandrolone. There can be no assurances that other state formularies will not follow suit. In addition, the implementation of the Medicare Part D program has created disruption in the market as patients switch to a variety of new prescription coverage programs in all states across the United States, further decreasing demand for Oxandrin and oxandrolone.
We have considered the demand deterioration of Oxandrin and oxandrolone as part of our estimates into our product return; however, our demand forecasts are based upon management’s best estimates. Future product returns in excess of our historical reserves could reduce our revenues even further and adversely affect our results of operations.
Our ability to generate operating profitability in the future is dependent on the successful commercialization of pegloticase and any other product candidate that we may develop, license, partner or acquire. If we do not receive regulatory approval for and are unable to successfully commercialize pegloticase or any other product candidate, or if we experience significant delays or unanticipated costs in doing so, or if sales revenue from any product candidate that receives marketing approval is insufficient, we may never achieve operating profitability. Even if we do become profitable, we may not be able to sustain or increase our profitability on a quarterly or annual basis.
If third parties on which we rely for distribution of our generic versionof oxandrolone do not perform as contractually required or as we expect, ourresults of operations may be harmed.
We do not have the ability to independently distribute our generic version of oxandrolone tablets and depend on our distribution partner, Watson Pharmaceuticals, or Watson, to distribute this product for us. If Watson fails to carry out its contractual obligations, does not devote sufficient resources to the distribution of oxandrolone, or does not carry out its responsibilities in the manner we expect, our oxandrolone product may not compete successfully against other generics, and our results of operations could be harmed.
We operate in a highly competitive market. Our competitors may developor market alternative technologies or safer or more effective products before we are ableto do so.
The pharmaceutical and biotechnology industries are intensely competitive. The technological areas in which we work continue to evolve at a rapid pace. Our future success will depend upon our ability to compete in the research, development and commercialization of products and technologies in our areas of focus. Competition from pharmaceutical, chemical and biotechnology companies, universities and research institutions is intense and we expect it to increase. Many of these competitors are substantially larger than we are and have substantially greater capital resources, research and development capabilities and experience and manufacturing, marketing, financial and managerial resources than we do. Acquisitions of competing companies by large pharmaceutical companies or other companies could enhance the financial, marketing and other resources available to these competitors.
Rapid technological development may result in current or future product candidates becoming obsolete before we can begin marketing these products or are able to recover a significant portion of the research, development and commercialization expenses incurred in the development of these products. For example, since our launch of Oxandrin, a significant portion of Oxandrin sales has been for treatment of patients suffering from HIV-related weight loss. These patients’ needs for Oxandrin have decreased as a result of the development of safer or more effective treatments, such as protease inhibitors. In fact, since January 2001, growth in the AIDS-related weight loss market has slowed substantially and actually began to decline as a result of improved therapies to treat HIV-related weight loss.
If and when commercialized, pegloticase will be launched in the treatment-failure gout population, an orphan indication for which there is currently no product commercially available. Products used to treat the symptoms of gout, such as gout flares and synovitis, could be used concomitantly in patients also using pegloticase, as long as symptoms and signs of the disease persist. Other uric acid lowering therapies, such as febuxostat, probenecid, and allopurinol, have not been tested for use in combination with pegloticase.
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Our competitors may develop safer, more effective or more affordable products or achieve earlier product development completion, patent protection, regulatory approval or product commercialization than we do. These companies also compete with us to attract qualified personnel and to attract third parties for acquisitions, joint ventures or other collaborations. Our competitors’ achievement of any of these goals could have a material adverse effect on our business.
The manufacture and packaging of pharmaceutical products are subject tothe requirements of the FDA and similar foreign regulatory bodies. If we or ourthird-party suppliers fail to satisfy these requirements, our businessoperations may be materially harmed.
The manufacturing process for pharmaceutical products is highly regulated. Manufacturing activities must be conducted in accordance with the FDA’s current Good Manufacturing Practices and comparable requirements of foreign regulatory bodies.
Failure by our third-party suppliers and manufacturers to comply with applicable regulations, requirements, or guidelines, or to meet FDA preapproval requirements, could result in sanctions being imposed on us, or our third-party manufacturers or suppliers, including fines, injunctions, civil penalties, failure of regulatory authorities to grant marketing approval of pegloticase or future product candidates, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of products, operating restrictions and criminal prosecutions, any of which could significantly and adversely affect our business. Other than by contract, we do not have control over the compliance by our third-party manufacturers or suppliers with these regulations and standards.
Changes in manufacturing processes or procedures, including changes in the location where an API or a finished product is manufactured (such as the process we are engaged in with Diosynth) or changes in a third-party supplier may require prior FDA or other governmental review or approval or revalidation of the manufacturing process. This is particularly an issue with biologic products such as pegloticase. This review or revalidation may be costly and time-consuming.
Because there are a limited number of manufacturers that operate under applicable regulatory requirements, it may be difficult for us to change a third-party supplier if we are otherwise required to do so.
* Initial sales levels for pegloticase, or any new product candidate, are difficult to predict, and the actual market demand for a new drug such as pegloticase may be different than we anticipate. In the event sales or demand for pegloticase are significantly lower than our internal forecasts our future revenues could be materially harmed.
Utilizing a product profile based on the results of our Phase 3 and interim OLE study data and our proposed labeling for pegloticase, we have conducted internal and commissioned external market research in order to formulate our internal forecasts on the size of the market for pegloticase. Ultimately, the size of the market and demand for pegloticase will be based on the final approved label language, which may or may not be the same as the proposed label language we have submitted to the FDA, and the marketplace uptake prescription demand for pegloticase which may vary from our internal forecasts. If the final label approved is materially different from that we proposed, the actual market size for pegloticase could be at a significant variance from our internal forecasts, our revenues may be lower or grow more slowly than expected and our business could be materially harmed. Moreover, if the actual rate at which physicians prescribe pegloticase is slower or lower than we have forecasted, our revenues could also be lower or grow more slowly and our business could be materially harmed.
Our sales depend on payment and reimbursement from third-party payers anda reduction in the payment or reimbursement rate could result in decreased useor sales of our products.
Most patients rely on Medicare and Medicaid, private health insurers and other third-party payers to pay for their medical needs, including any drugs we or our collaborators may market. If third-party payers do not provide adequate coverage or reimbursement for any products that we may develop, our revenues and prospects for profitability will suffer. The United States Congress enacted a limited prescription drug benefit for Medicare recipients in the Medicare Prescription Drug and Modernization Act of 2003 which was expanded by the Medicare Part D prescription plan that went into effect January 1, 2006. As a result, in some cases our prices are negotiated with drug procurement organizations for Medicare beneficiaries and are likely to be lower than if we did not participate in this program. Non-Medicare third-party drug procurement organizations may also base the price they are willing to pay on the rate paid by drug procurement organizations for Medicare beneficiaries.
A primary trend in the United States healthcare industry is toward cost containment. In addition, in some foreign countries, particularly the countries of the European Union, the pricing of prescription pharmaceuticals is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take six to twelve months or longer after the receipt of regulatory marketing approval for a product. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost effectiveness of our product candidates or products to other available therapies. The conduct of such a clinical trial could be expensive and result in delays in commercialization of our products.
Third-party payers, states, and federally subsidized programs are challenging the prices charged for medical products and services, and many third-party payers, states, and federally subsidized programs consistently limit reimbursement for healthcare products, including Oxandrin and our authorized generic version of oxandrolone. In particular, third-party payers may limit theindications for which they will reimburse patients who use any products we may develop. Cost control initiatives could decrease the price we might establish for products that we may develop, which would result in lower product revenues to us.
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If we fail to attract and retain senior management and key scientificpersonnel, we may be unable to successfully develop or commercialize ourproduct candidates.
Our ability to successfully develop and commercialize our products will depend on our ability to attract, retain and motivate highly qualified personnel and to establish and maintain continuity and stability within our management team. There is a great deal of competition from other companies and research and academic institutions for the limited number of pharmaceutical development professionals with expertise in the areas of our activities. We generally do not enter into employment agreements with any of our product development personnel. In addition, we do not maintain, and have no current intention of obtaining, “key man” life insurance on any of our employees. If we cannot continue to attract and retain, on acceptable terms, the qualified personnel necessary for the continued development of our business and products, we may not be able to sustain our operations and execute our business plan.
We may incur substantial costs related to product liability.
The testing and marketing of our products entail an inherent risk of product liability and associated adverse publicity. Pharmaceutical product liability exposure could be extremely large and poses a material risk.
We currently have product liability insurance coverage in place, which is subject to coverage limits and deductibles. We might not be able to maintain existing insurance or obtain additional insurance on acceptable terms, or at all. It is possible that a single product liability claim could exceed our insurance coverage limits, and multiple claims are possible. Any successful product liability claim made against us could substantially reduce or eliminate any stockholders’ equity we may have and could materially harm our financial results. Product liability claims, regardless of their merit, could be costly, divert management’s attention, and adversely affect our reputation and the demand for our products.
Risks Relating to Intellectual Property
If we fail to comply with our obligations in our intellectual propertylicenses with third parties, we could lose license rights that are important toour business.
We are party to various license agreements and we intend to enter into additional license agreements in the future. For example, we licensed exclusive worldwide rights to the technology related to pegloticase and the trademark for Puricase from Duke University and Mountain View Pharmaceuticals. Our existing licenses impose various diligence, milestone payment, royalty, insurance and other obligations on us and we expect that future licenses that we may enter into would impose additional requirements on us. If we fail to comply with these obligations, the licensor may have the right to terminate the license, in which event we might not be able to market any product that is covered by the licensed patents.
If we are unable to obtain and maintain protection for the intellectualproperty relating to our technology and products, the value of our technologyand products will be adversely affected.
Our success will depend in large part on our ability to obtain and maintain protection in the United States and other countries for the intellectual property covering or incorporated into our technology and products. The patent situation in the field of biotechnology and pharmaceuticals is highly uncertain and involves complex legal and scientific questions. We may not be able to obtain additional issued patents relating to our technology or products. Even if issued, patents may be challenged, narrowed, invalidated or circumvented, which could limit our ability to stop competitors from marketing similar products or limit the length or term of patent protection we may have for our products. Generic forms of our product Oxandrin were introduced to the market in late 2006. As a result, our results of operations have been harmed. The patents and patent applications related to pegloticase, if issued, would expire between 2019 and 2028. Changes in either patent laws or in interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property or narrow the scope of our patent protection.
Our patents also may not afford us protection against numerous competitors with similar technology. Because patent applications in the United States and many foreign jurisdictions are typically not published until eighteen months after filing, or in some cases not at all, and because publications of discoveries in the scientific literature often lag behind actual discoveries, neither we nor our licensors can be certain that we or they were the first to make the inventions claimed in issued patents or pending patent applications, or that we or they were the first to file for protection of the inventions set forth in these patent applications.
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If we are unable to protect the confidentiality of our proprietaryinformation and know-how, the value of our technology and products could beadversely affected.
In addition to patented technology, we rely upon unpatented proprietary technology, processes and know-how. We seek to protect this information in part by confidentiality agreements with our employees, consultants and third parties. These agreements may be breached and we may not have adequate remedies for any such breach and any remedies we may seek may prove costly. In addition, our trade secrets may otherwise become known or be independently developed by competitors. If our confidential information or trade secrets become publicly known, they may lose their value to us.
If we infringe or are alleged to infringe intellectual property rights ofthird parties, our business may be adversely affected.
Our development and commercialization activities, as well as any product candidates or products resulting from these activities, may infringe or be claimed to infringe patents or patent applications under which we do not hold licenses or other rights. We are aware of patent applications filed by, or patents issued to, other entities with respect to technology potentially useful to us and, in some cases, related to products and processes being developed by us. Third parties may own or control these patents and patent applications in the United States and abroad. These third parties could bring claims against us, our licensors or our collaborators that would cause us to incur substantial expenses and, if successful, could cause us to pay substantial damages. Further, if a patent infringement suit were brought against us, our licensors or our collaborators, we or they could be forced to stop or delay research, development, manufacturing or sales of the product or product candidate that is the subject of the suit.
As a result of patent infringement claims, or in order to avoid potential claims, we, our licensors or our collaborators may choose or be required to seek a license from the third-party and be required to pay license fees, royalties, or both. These licenses may not be available on acceptable terms, or at all. Even if we, our licensors or our collaborators were able to obtain a license, the rights may be nonexclusive, which could result in our competitors gaining access to the same intellectual property. Ultimately, we could be prevented from commercializing a product, or be forced to cease some aspect of our business operations if, as a result of actual or threatened patent infringement claims, we or our collaborators are unable to enter into licenses on acceptable terms. This could harm our business significantly.
There has been substantial litigation and other proceedings regarding patent and other intellectual property rights in the pharmaceutical and biopharmaceutical industries. In addition to infringement claims against us, we may become a party to other patent litigation and other proceedings, including interference proceedings declared by the United States Patent and Trademark Office and opposition proceedings in the European Patent Office or in another patent office, regarding intellectual property rights with respect to our products and technology. The cost to us of any patent litigation or other proceeding, even if resolved in our favor, could be substantial. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their substantially greater financial resources.
Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could adversely affect our ability to compete in the marketplace. Patent litigation and other proceedings may also absorb significant management time.
In the future we may be involved in costly legal proceedings to enforce orprotect our intellectual property rights or to defend against claims that weinfringe the intellectual property rights of others.
Litigation is inherently uncertain and an adverse outcome could subject us to significant liability for damages or invalidate our proprietary rights and adversely impact our ability to develop and market pegloticase. Legal proceedings that we initiate to protect our intellectual property rights could also result in counterclaims or countersuits against us. Any litigation, regardless of its outcome, could be time-consuming and expensive to resolve and could divert our management’s time and attention. Any intellectual property litigation also could force us to take specific actions, including:
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| • | cease selling products or undertaking processes that are claimed to be infringing a third-party’s intellectual property, |
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| • | obtain licenses to make, use, sell, offer for sale or import the relevant technologies from the intellectual property’s owner, which licenses may not be available on reasonable terms, or at all, |
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| • | redesign those products or processes that are claimed to be infringing a third-party’s intellectual property, or |
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| • | pursue legal remedies with third parties to enforce our indemnification rights, which may not adequately protect our interests. |
We have been involved in several lawsuits and disputes regarding intellectual property in the past. We could be involved in similar disputes or litigation with other third parties in the future. An adverse decision in any intellectual property litigation could have a material adverse effect on our business, results of operations and financial condition.
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Regulatory Risks
We, our contract manufacturers, suppliers and contract researchorganizations, are subject to stringent governmental regulation, and our ortheir failure to comply with applicable regulations could adversely affect ourability to conduct our business.
Virtually all aspects of our business are subject to extensive regulation by numerous federal and state governmental authorities in the United States, including the FDA, as well as by foreign countries where we manufacture or distribute our products. Of particular significance are the requirements covering research and development, testing, manufacturing, quality control, labeling, promotion and distribution of pharmaceutical products for human use. All of our current and future product candidates, manufacturing processes and facilities require governmental licensing, registration or approval prior to commercial use, and maintenance of those approvals during commercialization. Prescription pharmaceutical products cannot be marketed in the United States until they have been approved by the FDA, and then can only be marketed for the indications and claims approved by the FDA. As a result of these requirements, the length of time, the level of expenditures and the laboratory and clinical information required for approval of a new drug application or a BLA are substantial. The approval process applicable to pegloticase and products of the type we may develop usually takes many years from the commencement of human clinical trials and typically requires substantial expenditures. We may encounter significant delays or excessive costs in our efforts to secure necessary approvals or licenses. Before obtaining regulatory approval for the commercial sale of our products, we are required to conduct pre-clinical and clinical trials to demonstrate that the product is safe, effective and of quality, for the treatment of the target indication. The timing of completion of clinical development activities depends on a number of factors, many of which are outside our control. In addition, we may encounter delays or rejections based upon changes in the policies of regulatory authorities. The FDA and foreign regulatory authorities have substantial discretion to terminate clinical trials, require additional testing, delay, condition or withhold registration and marketing approval, and mandate product withdrawals.
Regulation by governmental authorities in the United States and other countries is a significant factor affecting our ability to commercialize our products, the timing of such commercialization, and our ongoing research and development activities. The timing of regulatory approvals, if any, is not within our control. Failure to obtain and maintain requisite governmental approvals, or failure to obtain approvals of the scope requested, could delay or preclude us from marketing our products, limit the commercial use of the products and allow competitors time to introduce competing products ahead of product introductions by us. Even after regulatory approval is obtained, use of the products could reveal side effects that, if serious, could result in suspension or modification of the conditions of existing approvals and delays in obtaining approvals in other jurisdictions.
Failure to comply with applicable regulatory requirements can, among other things, result in significant fines or other sanctions, termination of clinical trials, suspension, modification or withdrawal of regulatory approvals, product recalls, seizure of products, imposition of operating restrictions, civil penalties and criminal prosecutions. We or our employees might not be, or might fail to be, in compliance with all potentially applicable federal and state regulations, which could adversely affect our business.
In addition, all pharmaceutical product promotion and advertising activities are subject to stringent regulatory requirements and continuing regulatory review. Violations of these regulations could result in substantial monetary penalties, and civil penalties which can include costly mandatory compliance programs and exclusion from federal healthcare programs.
Recently enacted legislation may make it more difficult and costly for usto obtain regulatory approval of our product candidates and to produce, marketand distribute products after approval.
In 2007, the Food and Drug Administration Amendments Act of 2007, or FDAAA was enacted. The FDAAA grants a variety of new powers to the FDA, many of which are aimed at improving the safety of drug products before and after approval. Under the FDAAA, companies that violate the new law are subject to substantial civil monetary penalties. Although we expect the FDAAA to have a substantial effect on the pharmaceutical industry, the extent of that effect is not yet known. As the FDA issues regulations, guidance and interpretations relating to the new legislation, the impact on the industry, as well as our business, will become clearer. The new requirements and other changes that the FDAAA imposes may make it more difficult, and likely more costly, to obtain approval of new pharmaceutical products and to produce, market and distribute products after approval.
In addition, from time to time legislation is drafted and introduced in Congress that could provide for a reduced regulatory threshold for the approval of generic competition, especially with respect to biologic products. We cannot predict what effect changes in regulations, enforcement positions, statutes or legal interpretations, when and if promulgated, adopted or enacted, may have on our business in the future. Changes could, among other things, provide for a reduced regulatory threshold for the approval of generic competition, especially with regard to generic or “follow-on” biologics products, require changes to manufacturing methods or facilities, expanded or different labeling, new approvals, the recall, replacement or discontinuance of certain products, additional record keeping and expanded scientific substantiation requirements. These changes, or new legislation, could adversely affect our business.
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Risks Relating to an Investment in Our Common Stock
* Our stock price is volatile, which could adversely affect your investment.
Our stock price is volatile. Since January 1, 2008, our common stock has traded as high as $28.42 per share and as low as $2.80 per share. The market price of our common stock may be influenced by many factors, including:
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| • | the timing of obtaining regulatory approval of pegloticase, |
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| • | the disclosure of information relating to the efficacy or safety of pegloticase, |
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| • | announcements of technological innovations or new commercial products by us or our competitors, |
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| • | the costs of commercialization activities, including product marketing, manufacturing, sales and distribution, |
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| • | changes in our earnings estimates and recommendations by securities analysts, |
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| • | period-to-period fluctuations in our financial results, |
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| • | our ability to obtain adequate capital resources to execute our business strategy, and |
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| • | general economic, industry and market conditions. |
The volatility of our common stock imposes a greater risk of capital losses on our stockholders than a less volatile stock would. In addition, volatility makes it difficult to ascribe a stable valuation to a stockholder’s holdings of our common stock. The stock market in general and the market for pharmaceutical and biotechnology companies in particular have also experienced significant price and volume fluctuations that are often unrelated to the operating performance of particular companies. In the past, following periods of volatility in the market price of the securities of pharmaceutical and biotechnology companies, securities class action litigation has often been instituted against these companies. Such litigation would result in substantial costs and a diversion of management’s attention and resources, which could adversely affect our business.
We expect our quarterly results to fluctuate, which may cause volatilityin our stock price.
Our revenues and expenses have in the past and may in the future continue to display significant variations. These variations may result from a variety of factors, including:
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| • | the amount and timing of product sales, |
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| • | changing demand for our products, |
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| • | our inability to provide adequate supply for our products, |
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| • | changes in wholesaler buying patterns, |
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| • | returns of expired product, |
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| • | changes in government or private payer reimbursement policies for our products, |
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| • | increased competition from new or existing products, including generic products, |
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| • | the timing of the introduction of new products, |
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| • | the timing and realization of milestone and other payments from licensees, |
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| • | the timing and amount of expenses relating to research and development, product development and manufacturing activities, |
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| • | the timing and amount of expenses relating to sales and marketing, |
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| • | the timing and amount of expenses relating to general and administrative activities, |
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| • | the extent and timing of costs of obtaining, enforcing and defending intellectual property rights, and |
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| • | any charges related to acquisitions. |
Because many of our expenses are fixed, particularly in the short-term, any decrease in revenues will adversely affect our earnings until revenues can be increased or expenses reduced. We also expect that our revenues and earnings will be adversely affected now that generic versions of Oxandrin have been introduced. Because of fluctuations in revenues and expenses, it is possible that our operating results for a particular quarter or quarters will not meet the expectations of public market analysts and investors, which could cause the market price of our common stock to decline.
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* Effecting a change of control of our company could be difficult, which maydiscourage offers for shares of our common stock.
Our certificate of incorporation and the Delaware General Corporation Law contain provisions that may delay or prevent an attempt by a third-party to acquire control of us. These provisions include the requirements of Section 203 of the Delaware General Corporation Law. In general, Section 203 prohibits designated types of business combinations, including mergers, for a period of three years between us and any third-party that owns 15% or more of our common stock. This provision does not apply if:
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| • | our Board of Directors approves the transaction before the third-party acquires 15% of our stock, |
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| • | the third-party acquires at least 85% of our stock at the time its ownership goes past the 15% level, or |
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| • | our Board of Directors and two-thirds of the shares of our common stock not held by the third-party vote in favor of the transaction. |
Our certificate of incorporation also authorizes us to issue up to four million shares of preferred stock in one or more different series with terms fixed by our Board of Directors. Stockholder approval is not necessary to issue preferred stock in this manner. Issuance of these shares of preferred stock could have the effect of making it more difficult for a person or group to acquire control of us. No shares of our preferred stock are currently outstanding. While our Board of Directors has no current intention or plan to issue any preferred stock, issuance of these shares could also be used as an anti-takeover device.
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ITEM 6. EXHIBITS
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a) | Exhibits |
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| The exhibits listed in the Exhibit Index are included in this report. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| SAVIENT PHARMACEUTICALS, INC.
(Registrant) |
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| By: | /s/ Christopher G. Clement |
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|
| | Christopher G. Clement
President and Chief Executive Officer
(Principal Executive Officer) |
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| By: | /s/ Brian J. Hayden |
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|
| | Brian J. Hayden
Chief Financial Officer
(Principal Financial Officer) |
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Dated: November 7, 2008 | | |
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EXHIBIT INDEX
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Exhibit No. | | Description |
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|
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10.1†† | | Commercial Supply Agreement, dated October 16, 2008, by and between Enzon Pharmaceuticals, Inc. and Savient Pharmaceuticals, Inc. |
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31.1 | | Certification of principal executive officer pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended |
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31.2 | | Certification of the principal financial officer pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended |
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32.1 | | Statement pursuant to 18 U.S.C. §1350 |
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32.2 | | Statement pursuant to 18 U.S.C. §1350 |
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| †† Confidential treatment requested as to certain portions, which portions are omitted and filed separately with the Commission. |
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