Item
1A. Risk Factors
You
should carefully consider the following risk factors in addition to the other information contained in this Quarterly Report.
Our business, financial condition, results of operations and stock price could be materially adversely affected by any of these
risks.
Risks
Related to Our Business
We
have incurred losses in every year of our operations, and we may never become profitable.
We
have incurred losses in every year of our operations, including net losses of $(11,985,000) and $(19,087,000) for the years ended
December 31, 2017 and 2016, respectively, and net losses of $(2,514,000) and $(3,505,000) for the three and nine months ended
September 30, 2018 and $(5,692,000) and $(9,214,000) for the three and nine months ended September 30, 2017, respectively. As
of September 30, 2018, our accumulated deficit was $(92,341,000). We expect to decrease our operating losses during 2018 and 2019,
however, our projections may not be correct and our plans could change, and we could incur increasing operating losses in the
foreseeable future for our commercialization activities, research and development and our pharmacy operations. Although we have
been generating some revenue from our pharmacy operations, our ability to generate significant revenues and achieve profitability
will depend on many factors, including those discussed in this “Risk Factors” section. Our business plan and strategies
involve costly activities that are susceptible to failure, and, therefore, we may not be able to generate sufficient revenue to
support and sustain our business or reach the level of sales and revenues necessary to achieve and sustain profitability.
We
may not receive sufficient revenue to fund our operations and recover our development costs.
Our
business plan involves the preparation and sale of our proprietary formulations through our compounding pharmacies and outsourcing
facilities. We have limited experience operating pharmacies and commercializing compounded formulations, and we may be unable
to successfully manage this business or generate sufficient revenue to recover our development costs and operational expenses.
We may have only limited success in marketing and selling our proprietary formulations. Although we have established and plan
to grow our internal sales teams to market and sell our proprietary formulations and other non-proprietary products, we have limited
experience with such activities and may not be able to generate sufficient physician and patient interest in our formulations
to generate significant revenue from sales of these products. In addition, we are substantially dependent on our ImprimisRx compounding
pharmacies and outsourcing facilities, along with any pharmacy partners with which we may contract to compound and sell our formulations
using our quality standards and specifications, in a timely manner and sufficient volumes to accommodate the number of prescriptions
they receive. Our pharmacies may be unable to compound our formulations successfully and we may be unable to acquire, build or
enter into arrangements with pharmacies or outsourcing facilities of sufficient size, reputation and quality to implement our
business plan, which would cause our business to suffer.
We
sell certain of our proprietary formulations primarily through three pharmaceutical compounding facilities we own, but we may
not be successful in our efforts to integrate these businesses into our operations.
Our
business strategy includes establishing a small compounding pharmacy group, whether through acquisitions, establishing new pharmacies
or entering into licensing arrangements with third-party pharmacies and outsourcing facilities, to market and sell our proprietary
formulations and other non-proprietary products in all 50 states and in certain geographies outside of the U.S.
We
currently have compounding facilities in New Jersey and California We may plan to expand our pharmacy operations and personnel
and developing our facilities into a unified group compounding pharmacy facilities. We have been developing “ImprimisRx”
as a uniform brand for certain compounding facilities and ophthalmology focused pharmaceutical compounding business. We have limited
experience acquiring, building or operating compounding pharmacies or other prescription dispensing facilities or commercializing
our formulations through ownership of or licensing arrangements with pharmacies.. In addition, as we have in the past, we have
purchased and operated certain pharmaceutical compounding businesses and pharmacies, and subsequently divested or sold those associated
assets, we may pursue similar strategies in the future. Those things considered, we may experience difficulties implementing and/or
executing on our compounding pharmacy strategy, including difficulties that arise as a result of our lack of experience, and we
may be unsuccessful and our plans may change materially. For instance:
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we
have experienced delays and increased costs in our outsourcing facility construction efforts;
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we
may not be successful in completing future construction plans on a timely basis or within budget;
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we
may not be successful in our efforts to integrate, manage or otherwise realize the benefits we expect from acquisitions of
our ImprimisRx compounding pharmacies or any additional pharmacy businesses or outsourcing facilities we to acquire, sell
or build in the future;
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we
may not be able to satisfy applicable federal and state licensing and other requirements for any of our pharmacy businesses
in a timely manner or at all;
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changes
to federal and state pharmacy regulations may restrict compounding operations or make them more costly;
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we
may be unable to achieve a sufficient physician and patient customer base to sustain our pharmacy operations;
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market
acceptance of compounding pharmacies generally may be curtailed or delayed; and
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we
may not be able to enter into licensing or other arrangements with third-party pharmacies or outsourcing facilities when desired,
on acceptable terms or at all.
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Moreover,
all our efforts to expand pharmacy operations will involve significant costs and other resources, which we may not be able to
afford and may disrupt our other operations and distract management and employees from the other aspects of our business. As a
result, our business could materially suffer if we are unable to further develop a group of unified compounding facilities and,
even if we are successful, we may be unable to generate sufficient revenue to recover our costs.
We
are dependent on market acceptance of compounding pharmacies and compounded formulations, and physicians may be unwilling to prescribe,
and patients may be unwilling to use, our proprietary customizable compounded formulations.
We
currently distribute our proprietary formulations through compounding pharmacies and an outsourcing facility. Formulations prepared
and dispensed by compounding pharmacies contain FDA-approved ingredients, but are not themselves approved by the FDA. Thus, our
compounded formulations have not undergone the FDA approval process and only limited data, if any, may be available about the
safety and efficacy of our formulations for any particular indication. Certain compounding pharmacies have been subject to widespread
negative media coverage in recent years, and the actions of these pharmacies have resulted in increased scrutiny of compounding
pharmacy activities from the FDA and state governmental agencies. For example, the FDA has issued formal requests to compounding
pharmacies and outsourcing facilities to conduct a recall of all non-expired, purportedly sterile drug products and to cease sterile
compounding operations due to lack of sterility assurance. As a result, some health care providers may be reluctant to purchase
and use compounded drugs. Our growth and future sales depend not only on our ability to demonstrate in the face of increased scrutiny
the quality and safety of our pharmacies and outsourcing facilities and our compliance with more stringent regulatory standards
at the federal and state levels, but also on the continued acceptance of compounded drugs and formulations, particularly outsourced
compounded drugs and formulations, in the marketplace.
An
incident similar to the fungal meningitis outbreak in 2012, which was caused by a compounding pharmacy employing a non-sterile-to-sterile
business model, could cause our customers to reduce their use of compounded formulations significantly or even stop using compounded
drugs altogether. States have in the past, and could in the future, enact regulation prohibiting or restricting the use of compounding
pharmacies and outsourcing facilities in response to such incidents. Such prohibitions or restrictions by states or reduced customer
demand as a result of an incident with compounded drugs and formulations could have a material adverse effect on our business,
results of operations and financial condition.
In
August 2017, FDA issued a MedWatch notification regarding our curcumin emulsion and two adverse events that had been associated
with the use of these emulsions by prescribing physicians. We issued a press release on August 7, 2017, clarifying certain facts
regarding the notice which outlined our belief that the adverse events associated with the two patients occurred due to an allergic
reaction caused by the products being inappropriately administered and obtained by the prescribing physician, and our use of curcumin
and excipients in our curcumin emulsion formulation met regulatory standards required for dispensing of the curcumin emulsion.
In September 2017, the FDA released a letter confirming that the alleged misuse of certain ingredients in our curcumin emulsions
were due to mislabeling by the underlying supplier, and not of our own misdoing. Separately, in December 2017, we were issued
a warning letter from the FDA alleging that, in their interpretation of our public communications, we had made false or misleading
claims and omitted risk and side effect information regarding certain of our ophthalmology focused compounded medications. We
immediately performed a full review of our public communications referenced in the warning letter and responded to the FDA in
January 2018. Notwithstanding our continued belief that our public communications were not in fact false and misleading, we have
been in communication with the FDA and taking steps to address the items outlined in the letter and will continue to work with
the FDA to assure that all allegations in the warning letter have been addressed. We believe we have addressed all of the material
items of concern in the FDA’s warning letter and those related to the MedWatch notification (and any other requirements
observed by FDA and noted to us), and do not believe there will be any further action taken by FDA in this regard. Nonetheless,
these two items increased further scrutiny and negative publicity on us as a company. At times, we have become aware of negative
views of regulators related to certain formulations, and as a result discontinued compounding certain drug formulations in an
attempt help mitigate potential regulatory risk. As a result of the MedWatch notice and other regulatory notifications, some physicians
may be hesitant to prescribe and some patients may be hesitant to purchase and use non-FDA approved compounded formulations, particularly
when an FDA-approved potential alternative is available. For other reasons physicians may be unwilling to prescribe or patients
may be unwilling to use our proprietary compounded formulations, including the following: legal proscriptions on our ability to
discuss the efficacy or safety of our formulations with potential users to the extent applicable data is available; our pharmacy
operations are primarily operating on a cash-pay basis and reimbursement may or may not be available from third-party payors,
including the government Medicare and Medicaid programs; and certain formulations are not required to be prepared and are not
presently being prepared in a manufacturing facility governed by cGMP requirements. Any failure by physicians, patients and/or
third-party payors to accept and embrace compounded formulations could substantially limit our market and cause our operations
to suffer.
Our
business is significantly impacted by state and federal statutes and regulations.
Our
proprietary formulations are comprised of active pharmaceutical ingredients that are components of drugs that have received marketing
approval from the FDA, although our proprietary compounded formulations have not themselves received FDA approval. FDA approval
is not required in order to market and sell our compounded formulations. In the future we may choose to pursue FDA approval to
market and sell certain potential drug candidates. The marketing and sale of compounded formulations is subject to and must comply
with extensive state and federal statutes and regulations governing compounding pharmacies. These statutes and regulations include,
among other things, restrictions on compounding for office use or in advance of receiving a patient-specific prescription or,
for outsourcing facilities, requirements regarding preparation, such as regular FDA inspections and cGMP requirements, prohibitions
on compounding drugs that are essentially copies of FDA-approved drugs, limitations on the volume of compounded formulations that
may be sold across state lines, and prohibitions on wholesaling or reselling. These and other restrictions on the activities of
compounding pharmacies and outsourcing facilities may significantly limit the market available for compounded formulations, as
compared to the market available for FDA-approved drugs.
Our
pharmacy business is impacted by federal and state laws and regulations governing the following: the purchase, distribution, management,
compounding, dispensing, reimbursement, marketing and labeling of prescription drugs and related services; FDA and/or state regulation
affecting the pharmacy and pharmaceutical industries, including state pharmacy licensure and registration or permit standards;
rules and regulations issued pursuant to HIPAA and other state and federal laws related to the use, disclosure and transmission
of health information; and state and federal controlled substance laws. Our failure to comply with any of these laws and regulations
could severely limit or curtail our pharmacy operations, which would materially harm our business and prospects. Further, our
business could be adversely affected by changes in these or any newly enacted laws and regulations, and federal and state agency
interpretations of the statutes and regulations. Statutory or regulatory changes could require us to make changes to our business
model and operations and/or could require us to incur significantly increased costs to comply with such regulations.
If
our pharmacies fails to comply with state statutes and regulations, the pharmacy could be required to cease operations or become
subject to restrictions that could adversely affect our business.
State
pharmacy laws require pharmacy locations in those states be licensed as an in-state pharmacy to dispense pharmaceuticals. In addition,
state controlled substance laws require registration and compliance with state pharmacy licensure, registration or permit standards
promulgated by the state’s pharmacy licensing authority. Pharmacy and controlled substance laws often address the qualification
of an applicant’s personnel, the adequacy of its prescription fulfillment and inventory control practices and the adequacy
of its facilities. If our one of our pharmacies, or with which we may partner is found not to comply with state pharmacy and controlled
substance laws and regulations, the pharmacy could be required to cease operations or become subject to burdensome restrictions
and limitations on its business. For example, in March 2018, the California Board of Pharmacy filed an accusation against our
subsidiary, Park Compounding, Inc. related to a compounded formulation we believe was legally dispensed and was, without our knowledge,
inappropriately administered to a patient unknown to us, by the prescribing healthcare professionals. While we dispute all claims
against us and intend to vigorously defend against the accusations, if Park Compounding is found to be in non-compliance pursuant
to this accusation, it may be required to permanently or temporarily cease or limit its operations including its sterile compounding
operations. If Park Compounding is required to permanently or temporarily cease or limit its sterile compounding operations, we
would be unable to realize the expected benefits of this pharmacy’s operations, including its sales of our proprietary formulations.
Although we distribute our proprietary formulations through other compounding pharmacies, and not solely through Park Compounding,
the loss of Park Compounding’s ability to compound sterile formulations would have an immediate adverse impact on our ability
to implement our business plan in a timely manner.
If
we or our partner facilities fail to comply with the Controlled Substances Act, FDCA, or similar state statutes and regulations,
the pharmacy facilities could be required to cease operations or become subject to restrictions that could adversely affect our
business.
State
pharmacy laws require pharmacy locations in those states to be licensed as an in-state pharmacy to dispense pharmaceuticals. In
addition, state controlled substance laws require registration and compliance with state pharmacy licensure, registration or permit
standards promulgated by the state’s pharmacy licensing authority. Pharmacy and controlled substance laws often address
the qualification of an applicant’s personnel, the adequacy of its prescription fulfillment and inventory control practices
and the adequacy of its facilities. These laws also subject pharmacies to oversight by state boards of pharmacy and other regulators
that could impose burdensome requirements or restrictions on operations if a pharmacy is found not in compliance with these laws.
We believe that our compounding pharmacies are in material compliance with applicable regulatory requirements. Further, if any
of our compounding pharmacies (including Park) fail to comply with regulatory requirements, they could be forced to permanently
or temporarily cease or limit their compounding operations, which would severely limit our ability to market and sell our proprietary
formulations and would materially harm our operations and prospects. Any noncompliance could also result in complaints or adverse
actions by other state boards of pharmacy. FDA inspection of a facility to determine compliance with the FDCA, if not successful,
may result in the loss of FDCA exemptions provided under Sections 503A and 503B, warning letters, injunctions, prosecution, fines
and loss of required government licenses, certifications and approvals, any of which could involve significant costs and could
cause us to be unable to realize the expected benefits of these pharmacies’ operations.
Further,
under federal law, Section 503A of the FDCA seeks to limit the amount of compounded products that a pharmacy can dispense interstate.
The interpretation and enforcement of this provision is dependent on the FDA entering into a standard Memorandum of Understanding
(“MOU”) with each state setting forth limits on shipments of interstate compounding. Previously, the draft MOU presented
by the FDA in February 2015 intended to limit interstate shipments of compounded drug units to 30% of all compounded and non-compounded
units dispensed or distributed by the pharmacy per month, the excess of which the FDA considered an “inordinate amount.”
The FDA stated in the guidance issued in February 2015 that it would not enforce interstate restrictions until after it published
a final MOU and made it available to states for signature for some designated period of time. If the final MOU was drafted and
released by the FDA and was not signed by a particular state, then interstate shipments of compounded preparations from a pharmacy
located in that state would be limited to quantities not greater than 5% of total prescription orders dispensed or distributed
by the pharmacy; however, we are not aware that the FDA currently enforces or has in the past enforced the 5% rule and, under
current draft guidance, the FDA had historically stated that it would not enforce the 5% rule until a final MOU was made available
to states for signature. The FDA originally proposed a 180-day period for states to agree to the final MOU after the final version
was presented, which to date has not occurred, before it would begin to enforce the 5% rule. In January of 2018, the FDA released
a “2018 Compounding Policy Priorities Plan” (the “2018 Compounding Plan”) which provided an overview of
the key priorities the FDA plans to focus on in 2018 in connection with compounding regulations. One of the priorities outlined
in the 2018 Compounding Plan addressed the current status of the MOU and the FDA’s plan to release a revised MOU (the “Revised
MOU”). Pursuant to the statements in the Compounding Plan, the Revised MOU would consider amounts shipped interstate by
a compounder to be inordinate amounts if the “number of prescriptions of compounded drugs distributed interstate during
any calendar month is greater than 50 percent.” Importantly, instead of that number serving as a “hard limit, for
state action,” the 50% target would trigger certain additional reporting requirements. The Revised MOU will also provide
states more time to report to the FDA, and flexibility on identifying when amounts are inordinate, considering the size and scope
of compounding operations. Until a the Revised MOU is issued and presented to states to consider, the extent of interstate dispensing
restrictions imposed by Section 503A is unknown. However, if the final Revised MOU contains a 50% limit on interstate distribution,
dependent on the additional reporting requirements to be outlined in the Revised MOU, our pharmacy operations could be materially
limited.
There
are many competitive risks related to marketing and selling our proprietary formulations and operating our compounding pharmacy
business.
The
pharmaceutical and pharmacy industries are highly competitive. We compete against branded drug companies, generic drug companies,
outsourcing facilities and other compounding pharmacies. We are significantly smaller than some of our competitors. Currently
we lack some of the financial and other resources needed to develop, produce, distribute and market our proprietary formulations
at a level to capture a significant market share in these sectors. The drug products available through branded and generic drug
companies with which our formulations compete have been approved for marketing and sale by the FDA and are required to be manufactured
in facilities compliant with cGMP standards. Although we prepare our compounded formulations in accordance with the standards
provided by the United States Pharmacopeia (“USP”) <795> and USP <797> and applicable state and federal
law, our proprietary compounded formulations are not required to be, and have not been, approved for marketing and sale by the
FDA. As a result, some physicians may be unwilling to prescribe, and some patients may be unwilling to use, our formulations.
Additionally, under federal and state laws applicable to our current compounding pharmacy operations, we are not permitted to
prepare significant amounts of a specific formulation in advance of a prescription, compound quantities for office use or utilize
a wholesaler for distribution of our formulations; instead, our compounded formulations must be prepared and dispensed in connection
with a physician prescription for an individually identified patient. Pharmaceutical companies, on the other hand, are able to
sell their FDA-approved products to large pharmaceutical wholesalers, which can in turn sell to and supply hospitals and retail
pharmacies. Even if we are successful in registering certain of our facilities as outsourcing facilities, our business may not
be scalable on the scope available to our competitors that produce FDA-approved drugs, which may limit our potential for profitable
operations. These facets of our operations may subject our business to limitations our competitors with FDA-approved drugs may
not face.
Our
future success depends in large part on our ability to maintain a competitive position with respect to biotechnology and related
pharmaceutical technologies
.
Biotechnology
and related pharmaceutical technologies have undergone and continue to be subject to rapid and significant change. Our future
success will depend in large part on our ability to maintain a competitive position with respect to these technologies. Products
developed by our competitors, including FDA-approved drugs and compounded formulations created by other pharmacies, could render
our products and technologies obsolete or unable to compete. Any products that we develop may become obsolete before we recover
expenses incurred in their development, which may require us to raise additional funds that may or may not be available. The competitive
environment requires an ongoing, extensive search for medical and technological innovations and the ability to develop and market
these innovations effectively, and we may not be competitive with respect to these factors. Other competitive factors include
the safety and efficacy of a product, the size of the market for a product, the timing of market entry relative to competitive
products, the availability of alternative compounded formulations or approved drugs, the price of a product relative to alternative
products, the availability of third-party reimbursement, the success of sales and marketing efforts, brand recognition and the
availability of scientific and technical information about a product. Although we believe we are positioned to compete favorably
with respect to many of these factors, if our proprietary formulations are unable to compete with the products of our competitors,
we may never gain market share or achieve sustained profitability.
If
a compounded drug formulation provided through our compounding services leads to patient injury or death or results in a product
recall, we may be exposed to significant liabilities and reputational harm.
The
success of our business, including our proprietary formulations and pharmacy operations, is highly dependent upon medical and
patient perceptions of us and the actual safety and quality of our products. We could be adversely affected if we, any other compounding
pharmacies or our formulations and technologies are subject to negative publicity. We could also be adversely affected if any
of our formulations or other products we sell, any similar products sold by other companies, or any products sold by other compounding
pharmacies prove to be, or are asserted to be, harmful to patients. For instance, if any of the components of approved drugs or
other ingredients used to produce our compounded formulations have quality or other problems that adversely affect the finished
compounded preparations, our sales could be adversely affected. Because of our dependence upon medical and patient perceptions,
adverse publicity associated with illness or other adverse effects resulting from the use or misuse of our products, any similar
products sold by other companies, or any other compounded formulations could have a material adverse impact on our business.
To
assure compliance with USP guidelines, we have a policy whereby 100% of all sterile compound batches produced by our ImprimisRx
compounding pharmacies are tested prior to their delivery to patients and physicians both in-house and externally by an independent,
FDA-registered laboratory that has represented to us that it operates in compliance with current good laboratory practices. However,
we could still become subject to product recalls and termination or suspension of our state pharmacy licenses if we fail to fully
implement this policy, if the laboratory testing does not identify all contaminated products, or if our products otherwise cause
or appear to have caused injury or harm to patients. In addition, laboratory testing may produce false positives, which could
harm our business and impact our pharmacy operations and licensure even if the impacted formulations are ultimately found to be
sterile and no patients are harmed by them. If adverse events or deaths or a product recall, either voluntarily or as required
by the FDA or a state board of pharmacy, were associated with one of our proprietary formulations or any compounds prepared by
our ImprimisRx compounding pharmacies or any pharmacy partner, our reputation could suffer, physicians may be unwilling to prescribe
our proprietary formulations or order any prescriptions from such pharmacies, we could become subject to product and professional
liability lawsuits, and our state pharmacy licenses could be terminated or restricted. If any of these events were to occur, we
may be subject to significant litigation or other costs and loss of revenue, and we may be unable to continue our pharmacy operations
and further develop and commercialize our proprietary formulations.
We
carry product and professional liability insurance which may be inadequate.
Although
we have secured product and professional liability insurance for our pharmacy operations and the marketing and sale of our formulations,
our current or future insurance coverage may prove insufficient to cover any liability claims brought against us. Because of the
increasing costs of insurance coverage, we may not be able to maintain insurance coverage at a reasonable cost or at a level adequate
to satisfy liabilities that may arise.
Our
ability to generate revenues will be diminished if we fail to obtain acceptable prices or an adequate level of reimbursement from
third-party payors.
Currently,
our ImprimisRx compounding pharmacies operate on mostly a cash-pay basis and do not submit large amounts of claims for reimbursement
through Medicare, Medicaid or other third-party payors. As part of our Imprimis Cares initiative, we work with third-party insurers,
pharmacy benefit managers and buying groups to offer patient-specific customizable compounded formulations at accessible prices.
We plan to continue to devote time and other resources to seek reimbursement and patient pay opportunities for these and other
compounded formulations. We have hired pharmacy billers to process certain existing reimbursement opportunities for certain formulations.
However, we may be unsuccessful in achieving these goals, as many third-party payors have imposed significant restrictions on
reimbursement for compounded formulations in recent years. Moreover, third-party payors, including Medicare, are attempting to
contain health care costs by limiting coverage and the level of reimbursement for new drugs and by refusing, in some cases, to
provide coverage for uses of approved products for disease indications for which the FDA has not granted labeling approval. Further,
the Health Reform Law may have a considerable impact on the existing U.S. system for the delivery and financing of health care
and could conceivable have a material effect on our business. As a result, reimbursement from Medicare, Medicaid and other third-party
payors may never be available for any of our products or, if available, may not be sufficient to allow us to sell the products
on a competitive basis and at desirable price points. If government and other third-party payors do not provide adequate coverage
and reimbursement levels for our formulations, the market acceptance for our formulations may be limited.
Additionally,
we are making efforts to normalize the pricing for our currently available proprietary compounded formulations. Any efforts to
attain optimized pricing for our Dropless Therapy or any of our other proprietary formulations could fail, which could make our
products less attractive or unavailable to some patients or could reduce our margins.
We
may not be able to correctly estimate our future operating expenses, which could lead to cash shortfalls.
The
estimates of our future operating and capital expenditures are based upon our current business plan, our current operations and
our current expectations regarding the commercialization of our proprietary formulations. Our projections have varied significantly
in the past as a result of changes to our business model and strategy, our termination of efforts to pursue FDA approval of a
drug candidate in November 2013, our acquisitions of compounding facilities and various product development opportunities in 2014
and 2015, and the expenses in developing our pharmacy facilities into outsourcing facilities and registering them as such with
the FDA. We may not accurately estimate the potential revenues and expenses of our operations. If we are unable to correctly estimate
the amount of cash necessary to fund our business, we could spend our available financial resources much faster than we expect.
If we do not have sufficient funds to continue to operate and develop our business, we could be required to seek additional financing
earlier than we expect, which may not be available when needed or at all, or be forced to delay, scale back or eliminate some
or all of our proposed operations.
If
we do not successfully identify and acquire rights to potential formulations and successfully integrate them into our operations,
our growth opportunities may be limited.
We
plan to pursue the development of new proprietary compounded formulations in the ophthalmology and/or other therapeutic areas,
which may include continued activities to develop and commercialize current assets or, if and as opportunities arise, potential
acquisitions of new intellectual property rights and assets. We also intend to seek opportunities to introduce new lower-cost
compounded formulation alternatives to higher-priced FDA-approved drugs. However, we expect acquisitions of compounding pharmacies
to provide us with only limited research and development support and access to additional novel compounded formulations. We have
historically relied, and we expect to continue to rely, primarily upon third parties to provide us with additional development
opportunities. We may seek to enter into acquisition agreements or licensing arrangements to obtain rights to develop new formulations
in the future, but only if we are able to identify attractive formulations and negotiate acquisition or license agreements on
terms acceptable to us, which we may not be able to do. Moreover, we have limited resources to acquire additional potential product
development assets and integrate them into our business. Acquisition opportunities may involve competition among several potential
purchasers, which could include large multi-national pharmaceutical companies and other competitors that have access to greater
financial resources than we do. If we are unable to obtain rights to development opportunities from third parties and we are unable
to rely upon our compounding pharmacies and current and future relationships with pharmacists, physicians and other inventors
to provide us with additional development opportunities, our growth and prospects could be limited.
Our
product development strategy is to focus on a select few therapeutic areas in which we believe there is broad market potential,
large unmet needs and/or unique value to physicians and patients and to develop and offer formulations within these therapeutic
areas that could afford us with gross margins. However, our expectations and assumptions about market potential and patient needs
may prove to be wrong and we may invest capital and other resources on formulations that do not generate sufficient revenues for
us to recoup our investment.
We
may be unable to successfully develop and commercialize our proprietary formulations or any other assets we may acquire.
We
have acquired assets related to compoundable formulations and we have entered into one license agreement for rights to commercialize
a compounding formulation. We are currently pursuing development and commercialization opportunities with respect to certain of
these formulations, and we are in the process of assessing certain of our other assets in order to determine whether to pursue
their development or commercialization. In addition, we expect to consider the acquisition of additional intellectual property
rights or other assets in the future. Once we determine to pursue a potential drug candidate, we develop a commercialization strategy
for it, which may include marketing and selling the formulation in compounded form through compounding pharmacies or outsourcing
facilities, or pursuing FDA approval of the drug candidate. We may incorrectly assess the risks and benefits of the commercialization
options or we may not pursue a commercialization strategy that proves to be successful. If we are unable to successfully commercialize
one or more of our proprietary formulations, our operating results would be adversely affected. Even if we are able to successfully
sell one or more proprietary formulations, we may never recoup our investment in acquiring or developing the formulations. Our
failure to identify and expend our resources on formulations and technologies with commercial potential and execute an effective
commercialization strategy for each of our formulations would negatively impact the long-term profitability of our business.
We
have incurred significant indebtedness, which will require substantial cash to service and which subjects us to certain financial
requirements and business restrictions.
On
July 19, 2017, we incurred $16,000,000 of indebtedness under a loan agreement with SWK Funding, LLC and its partners (SWK) and
concurrent with the funding, we utilized a portion of the SWK Loan funds as full payment to an affiliate of Life Sciences Alternative
Funding, LLC (LSAF) to terminate all amounts due to LSAF in connection with the existing term loan and security agreements, as
amended, originally entered into between the Company and LSAF on May 11, 2015 (the “LSAF Loan”), which loan had a
principal balance of $12,120,000 at the time of final payment.
Our
ability to make scheduled payments on our indebtedness depends on our future performance and ability to raise additional capital,
which is subject to economic, financial, competitive and other factors, some of which are beyond our control. If we are unable
to generate sufficient cash to service our debt, we may be required to adopt one or more alternatives, such as selling assets,
restructuring our debt or obtaining additional capital through equity sales or incurrence of additional debt on terms that may
be onerous or highly dilutive to our stockholders. Our ability to engage in any of these activities would depend on the capital
markets and our financial condition at such time, and we may not be able to do so when needed, on desirable terms or at all, which
could result in a default on our debt obligations. Additionally, our SWK debt instrument contain various restrictive covenants,
including, among others, our obligation to deliver to SWK certain financial and other information, our obligation to comply with
certain notice and insurance requirements, and our inability, without SWK’s prior consent, to dispose of certain of our
assets, incur certain additional indebtedness, enter into certain merger, acquisition or change of control transactions, pay certain
dividends or distributions on or repurchase any of our capital stock or incur any lien or other encumbrance on our assets, subject
to certain permitted exceptions. Any failure by us to comply with any of these covenants, subject to certain cure periods, or
to make all payments under the debt instruments when due, would cause us to be in default under the applicable debt instrument.
In the event of any such default, SWK may be able to foreclose on our assets that secure the debt or declare all borrowed funds,
together with accrued and unpaid interest, immediately due and payable, thereby potentially causing all of our available cash
to be used to pay our indebtedness or forcing us into bankruptcy or liquidation if we do not then have sufficient cash available.
Any such event or occurrence could severely and negatively impact our operations and prospects.
We
may need additional capital in order to continue operating our business, and such additional funds may not be available when needed,
on acceptable terms, or at all.
We
only recently started generating cash from operations, but we do not currently earn sufficient revenues to support our operations.
We may need significant additional capital to execute our business plan and fund our proposed business operations. Additionally,
our plans may change or the estimates of our operating expenses and working capital requirements could be inaccurate, we may pursue
acquisitions of pharmacies or other strategic transactions that involve large expenditures, or we may experience growth more quickly
or on a larger scale than we expect, any of which may result in the depletion of capital resources more rapidly than anticipated
and could require us to seek additional financing earlier than we expect to support our operations.
We
have raised over $59,000,000 in funds through equity and debt financings since January 2015. We may seek to obtain additional
capital through equity or debt financings, funding from corporate partnerships or licensing arrangements, sales of assets or other
financing transactions. If we issue additional equity or convertible debt securities to raise funds, our existing stockholders
may experience substantial dilution, and the newly issued equity or debt securities may have more favorable terms or rights, preferences
and privileges senior to those of our existing stockholders. If we raise additional funds through collaboration and licensing
arrangements or sales of assets, we may have to relinquish potentially valuable rights to our drug candidates or proprietary technologies,
or grant licenses on terms that are not favorable to us. If we raise funds by incurring additional debt, we may be required to
pay significant interest expenses and our leverage relative to our earnings or to our equity capitalization may increase. Obtaining
commercial loans, assuming those loans would be available, would increase our liabilities and future cash commitments and may
impose restrictions on our activities, such as the financial and operating covenants included in our loan agreement with SWK.
Further, we may incur substantial costs in pursuing future capital and/or financing transactions, including investment banking
fees, legal fees, accounting fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash
expenses in connection with certain securities we may issue, such as options, convertible notes and warrants, which would adversely
impact our financial results.
We
have in the past and may in the future participate in strategic transactions that could impact our liquidity, increase our expenses
and distract our management.
From
time to time we consider engaging in strategic transactions, such as out-licensing or in-licensing of compounds or technologies,
acquisitions of companies, and asset purchases. We may also consider a variety of different business arrangements in the future,
including strategic partnerships, joint ventures, spin-offs, restructurings, divestitures, business combinations and investments.
In addition, another entity may pursue us or certain of our assets or aspects of our operations as an acquisition target. Any
such transactions may require us to incur expenses specific to the transaction and not incident to our operations, may increase
our near- and long-term expenditures, may pose significant integration challenges, may require us to hire or otherwise engage
personnel with additional expertise, or may result in our selling or licensing of our assets or technologies under terms that
may not prove profitable, any of which could harm our operations and financial results. Such transactions may also entail numerous
other operational and financial risks, including, among others, exposure to unknown liabilities, disruption of our business and
diversion of our management’s time and attention in order to develop acquired products, drug candidates, technologies or
businesses.
As
part of our efforts to complete any significant transaction, we would need to expend significant resources to conduct business,
legal and financial due diligence, with the goal of identifying and evaluating material risks involved in the transaction. We
may be unsuccessful in ascertaining or evaluating all the risks and, as a result, we may not realize the expected benefits of
the transaction, whether due to unidentified risks, integration difficulties, regulatory setbacks or other events. We may incur
material liabilities for the past activities of any businesses we partner with or acquire. If any of these events occur, we could
be subject to significant costs and damage to our reputation, business, results of operations and financial condition.
If
we are unable to establish, train and maintain an effective sales and marketing infrastructure, we will not be able to commercialize
our drug candidates successfully.
We
have started to build an internal sales and marketing infrastructure to implement our business plan by developing internal sales
teams and education campaigns to market our proprietary formulations. We will need to expend significant resources to further
establish and grow this internal infrastructure and properly train sales personnel with respect to regulatory compliance matters.
We may also choose to engage or enter into other arrangements with third parties to provide sales and marketing services for us
in place of or to supplement our internal commercialization infrastructure. We may not be able to secure sales personnel or relationships
with third-party sales organizations that are adequate in number or expertise to successfully market and sell our proprietary
formulations and pharmacy services. Further, any third-party organizations we may seek to partner with or engage may not be able
to provide sales and marketing services in accordance with our expectations and standards, may be more expensive than we can afford
or may not be available on otherwise acceptable terms or at all. If we are unable to establish and maintain compliant and adequate
sales and marketing capabilities, through our own internal infrastructure or third-party services or other arrangements, we may
be unable to sell our formulations or services or generate meaningful revenue.
Our
business and operations would suffer in the event of cybersecurity or other system failures.
Despite
the implementation of security measures, our internal computer systems and those of any third parties with which we partner are
vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical
failures. While we have not experienced any cybersecurity or system failure, accident or breach to date, if an event were to occur,
it could result in a material disruption of our operations, substantial costs to rectify or correct the failure, if possible,
and potentially violation of HIPAA and other privacy laws applicable to our operations. If any disruption or security breach resulted
in a loss of or damage to our data or applications or inappropriate disclosure of confidential or protected information, we could
incur liability, further development of our proprietary formulations could be delayed, and our pharmacy operations could be disrupted,
subject to restriction or forced to terminate their operations, any of which could severely harm our business and prospects.
We
depend upon consultants, outside contractors and other third-party service providers for key aspects of our business.
We
are substantially dependent on consultants and other outside contractors and service providers for key aspects of our business.
For instance, we rely upon pharmacist, physician and research consultants and advisors to provide us with significant assistance
in the evaluation of product development opportunities, and we have engaged or supported, and expect to continue to engage or
support, consultants, advisors, clinical research organizations (CROs) and others to design, conduct, analyze and interpret the
results of any clinical or non-clinical trials or other studies in connection with the research and development of our products.
If any of our consultants or other service providers terminates its engagement with us, or if we are unable to engage highly qualified
replacements as needed on commercially reasonable terms, we may be unable to successfully execute our business plan. We must effectively
manage these third-party service providers to ensure that they successfully carry out their contractual obligations and meet expected
deadlines. However, these third parties often engage in other business activities and may not devote sufficient time and attention
to our activities and we may have only limited contractual rights in connection with the conduct of the activities we have engaged
the service providers to perform. If we are unable to effectively manage our outsourced activities or if the quality, timeliness
or accuracy of the services provided by third-party service providers is compromised for any reason, our development activities
may be extended, delayed or terminated, and we may not be able to commercialize our formulations or advance our business.
Risks
Related to Product Development, Regulatory Approval, Manufacturing and Commercialization
If
we seek FDA approval to market and sell any of our proprietary formulations, such as with drug candidates being developed by Surface
and Eton, we may be unable to demonstrate the necessary safety and efficacy to obtain such FDA approval.
Historically,
our business strategy was focused on developing and commercializing product opportunities as compounded formulations. In 2017
and in the future we, alone or with project partners, may seek FDA regulatory approval to market and sell one or more of our assets
as a FDA-approved drug. Obtaining FDA approval to market and sell pharmaceutical products is costly, time consuming, uncertain
and subject to unanticipated delays. The FDA or other regulatory agencies may not approve a drug candidate on a timely basis or
at all. Before we obtain FDA approval for the sale of any potential drug candidates, we will be required to demonstrate through
preclinical studies and clinical trials that it is safe and effective for each intended use, which we may not be able to do. A
failure to demonstrate safety and efficacy of a drug candidate to the FDA’s satisfaction would result in our failure to
obtain FDA approval. Moreover, even if the FDA were to grant regulatory approval of a drug candidate, the approval may be limited
to specific therapeutic areas or limited as to its distribution, which could reduce revenue potential, and we will be subject
to extensive and costly post-approval requirements and oversight with respect to commercialization of the drug candidate.
Delays
in the completion of, or the termination of, any clinical or non-clinical trials for any drug candidates for which we may seek
FDA approval could adversely affect our business.
Clinical
trials are very expensive, time consuming, unpredictable and difficult to design and implement. The results of clinical trials
may be unfavorable, they may continue for several years, and they may take significantly longer to complete and involve significantly
more costs than expected. Delays in the commencement or completion of clinical testing could significantly affect product development
costs and plans with respect to any drug candidate for which we seek FDA approval. The commencement and completion of clinical
trials can be delayed and experience difficulties for a number of reasons, including delays and difficulties caused by circumstances
over which we may have no control. For instance, approvals of the scope, design or trial site may not be obtained from the FDA
and other required bodies in a timely manner or at all, agreements with acceptable terms may not be reached in a timely manner
or at all with CROs to conduct the trials, a sufficient number of subjects may not be recruited and enrolled in the trials, and
third-party manufacturers of the materials for use in the trials may encounter delays and problems in the manufacturing process,
including failure to produce materials in sufficient quantities or of an acceptable quality to complete the trials. If we were
to experience delays in the commencement or completion of, or if we were to terminate, any clinical or non-clinical trials we
pursue in the future, the commercial prospects for the applicable drug candidates may be limited or eliminated, which may prevent
us from recouping our investment in research and development efforts for the drug candidate and would have a material adverse
effect on our business, results of operations, financial condition and prospects.
We
depend on the success of our drug candidates, and those we have royalty rights to, which have not yet demonstrated efficacy for
their target or any other indications. If we are unable to generate revenues from our drug candidates, our ability to create stockholder
value will be limited.
Our
drug candidates are in the early stages of clinical development. We do not generate revenues from any FDA approved drug products.
We expect to submit an Investigational New Drug Application (“IND”) or foreign equivalent to the FDA or international
regulatory authorities seeking approval to initiate our clinical trials in humans in the United States or other countries yet
to be determined. We plan on submitting our clinical trial protocols and receive approvals from the FDA and international regulatory
authorities before we can commence any clinical trials. We may not be successful in obtaining acceptance from the FDA or comparable
foreign regulatory authorities to start our clinical trials. If we do not obtain such acceptance, the time in which we expect
to commence clinical programs for any drug candidate will be extended and such extension will increase our expenses and increase
our need for additional capital. Moreover, there is no guarantee that our clinical trials will be successful or that we will continue
clinical development in support of an approval from the FDA or comparable foreign regulatory authorities for any indication. We
note that most drug candidates never reach the clinical development stage and even those that do commence clinical development
have only a small chance of successfully completing clinical development and gaining regulatory approval. Therefore, our business
currently depends entirely on the successful development, regulatory approval and commercialization of our drug candidates, which
may never occur.
If
we are not able to obtain any required regulatory approvals for our drug candidates, we will not be able to commercialize our
drug candidate and our ability to generate revenue will be limited.
We
must successfully complete clinical trials for our drug candidates before we can apply for marketing approval. Even if we complete
our clinical trials, it does not assure marketing approval. Our clinical trials may be unsuccessful, which would materially harm
our business. Even if our initial clinical trials are successful, we are required to conduct additional clinical trials to establish
our drug candidates’ safety and efficacy, before an NDA or Biologics License Application (“BLA”), or their foreign
equivalents can be filed with the FDA or comparable foreign regulatory authorities for marketing approval of our drug candidates.
Clinical
testing is expensive, is difficult to design and implement, can take many years to complete and is uncertain as to outcome. Success
in early phases of pre-clinical and clinical trials does not ensure that later clinical trials will be successful, and interim
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. 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 our drug candidates. The research, testing,
manufacturing, labeling, packaging, storage, approval, sale, marketing, advertising and promotion, pricing, export, import and
distribution of drug products are subject to extensive regulation by the FDA and other regulatory authorities in the United States
and other countries, which regulations differ from country to country. We are not permitted to market our drug candidates as prescription
pharmaceutical products in the United States until we receive approval of an NDA from the FDA, or in any foreign countries until
we receive the requisite approval from such countries. In the United States, the FDA generally requires the completion of clinical
trials of each drug to establish its safety and efficacy and extensive pharmaceutical development to ensure its quality before
an NDA is approved. Regulatory authorities in other jurisdictions impose similar requirements. Of the large number of drugs in
development, only a small percentage result in the submission of an NDA to the FDA and even fewer are eventually approved for
commercialization. We have not submitted an NDA to the FDA or comparable applications to other regulatory authorities. If our
development efforts for our drug candidates, including regulatory approval, are not successful for their planned indications,
or if adequate demand for our drug candidates is not generated, our business will be materially adversely affected.
Our
success depends on the receipt of regulatory approval and the issuance of such regulatory approvals is uncertain and subject to
a number of risks, including the following:
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the
results of toxicology studies may not support the filing of an IND for our drug candidates;
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the
FDA or comparable foreign regulatory authorities or Institutional Review Boards, or “IRB”, may disagree with the
design or implementation of our clinical trials;
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we
may not be able to provide acceptable evidence of our drug candidates’ safety and efficacy;
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the
results of our clinical trials may not be satisfactory or may not meet the level of statistical or clinical significance required
by the FDA, European Medicines Agency (the “EMA”), or other regulatory agencies for marketing approval;
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the
dosing of our drug candidates in a particular clinical trial may not be at an optimal level;
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patients
in our clinical trials may suffer adverse effects for reasons that may or may not be related to our drug candidates;
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the
data collected from clinical trials may not be sufficient to support the submission of an NDA, BLA or other submission or
to obtain regulatory approval in the United States or elsewhere;
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the
FDA or comparable foreign regulatory authorities may fail to approve the manufacturing processes or facilities of third-party
manufacturers with which we contract for clinical and commercial supplies; and
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the
approval policies or regulations of the FDA or comparable foreign regulatory authorities may significantly change in a manner
rendering our clinical data insufficient for approval.
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Failure
to obtain regulatory approval for our drug candidates for the foregoing, or any other reasons, will prevent us from commercializing
our drug candidates, and our ability to generate revenue will be materially impaired. We cannot guarantee that regulators will
agree with our assessment of the results of the clinical trials we intend to conduct in the future or that such trials will be
successful. The FDA, EMA and other regulators have substantial discretion in the approval process and may refuse to accept any
application or may decide that our data is insufficient for approval and require additional clinical trials, or pre-clinical or
other studies. In addition, varying interpretations of the data obtained from pre-clinical and clinical testing could delay, limit
or prevent regulatory approval of our drug candidates.
Excluding
any activities through our ownership interest in Eton, we have not submitted an NDA or received regulatory approval to market
our drug candidates in any jurisdiction. We have only limited experience in filing the applications necessary to gain regulatory
approvals and expect to rely on consultants and third party contract research organizations, or “CROs”, with expertise
in this area to assist us in this process. Securing regulatory approvals to market a product requires the submission of pre-clinical,
clinical, and/or pharmacokinetic data, information about product manufacturing processes and inspection of facilities and supporting
information to the appropriate regulatory authorities for each therapeutic indication to establish a drug candidate’s safety
and efficacy for each indication. Our drug candidates may prove to have undesirable or unintended side effects, toxicities or
other characteristics that may preclude us from obtaining regulatory approval or prevent or limit commercial use with respect
to one or all intended indications.
The
process of obtaining regulatory approvals is expensive, often takes many years, if approval is obtained at all, and can vary substantially
based upon, among other things, the type, complexity and novelty of the drug candidates involved, the jurisdiction in which regulatory
approval is sought and the substantial discretion of the regulatory authorities. Changes in regulatory approval policies during
the development period, changes in or the enactment of additional statutes or regulations, or changes in regulatory review for
a submitted product application may cause delays in the approval or rejection of an application. Regulatory approval obtained
in one jurisdiction does not necessarily mean that a drug candidate will receive regulatory approval in all jurisdictions in which
we may seek approval, but the failure to obtain approval in one jurisdiction may negatively impact our ability to seek approval
in a different jurisdiction. Failure to obtain regulatory marketing approval for our drug candidates in any indication will prevent
us from commercializing the drug candidate, and our ability to generate revenue will be materially impaired.
If
we fail to successfully commercialize any of our drug candidates, we may need to acquire additional drug candidates and our business
will be adversely affected.
We
have never commercialized any drug candidates and do not have any other compounds in pre-clinical testing, lead optimization or
lead identification stages beyond our drug candidates. We cannot be certain that any of our drug candidates will prove to be sufficiently
effective and safe to meet applicable regulatory standards for any indication. If we fail to successfully commercialize any of
our drug candidates for their targeted indications, whether as stand-alone therapies or in combination with other therapeutic
agents, our business would be adversely affected.
Even
if we receive regulatory approval for any of our drug candidates, we may not be able to successfully commercialize the product
and the revenue that we generate from its sales, if any, may be limited.
If
approved for marketing, the commercial success of our drug candidates will depend upon each product’s acceptance by the
medical community, including physicians, patients and health care payors. The degree of market acceptance for any of our drug
candidates will depend on a number of factors, including:
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demonstration
of clinical safety and efficacy;
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relative
convenience, dosing burden and ease of administration;
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the
prevalence and severity of any adverse effects;
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the
willingness of physicians to prescribe our drug candidates, and the target patient population to try new therapies;
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efficacy
of our drug candidates compared to competing products;
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the
introduction of any new products that may in the future become available targeting indications for which our drug candidates
may be approved;
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new
procedures or therapies that may reduce the incidences of any of the indications in which our drug candidates may show utility;
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pricing
and cost-effectiveness;
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the
inclusion or omission of our drug candidates in applicable therapeutic and vaccine guidelines;
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the
effectiveness of our own or any future collaborators’ sales and marketing strategies;
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limitations
or warnings contained in approved labeling from regulatory authorities;
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our
ability to obtain and maintain sufficient third-party coverage or reimbursement from government health care programs, including
Medicare and Medicaid, private health insurers and other third-party payors or to receive the necessary pricing approvals
from government bodies regulating the pricing and usage of therapeutics; and
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the
willingness of patients to pay out-of-pocket in the absence of third-party coverage or reimbursement or government pricing
approvals.
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If
any of our drug candidates are approved, but do not achieve an adequate level of acceptance by physicians, health care payors,
and patients, we may not generate sufficient revenue and we may not be able to achieve or sustain profitability. Our efforts to
educate the medical community and third-party payors on the benefits of our drug candidates may require significant resources
and may never be successful.
In
addition, even if we obtain regulatory approvals, the timing or scope of any approvals may prohibit or reduce our ability to commercialize
our drug candidates successfully. For example, if the approval process takes too long, we may miss market opportunities and give
other companies the ability to develop competing products or establish market dominance. Any regulatory approval we ultimately
obtain may be limited or subject to restrictions or post-approval commitments that render our drug candidates not commercially
viable. For example, regulatory authorities may approve any of our drug candidates for fewer or more limited indications than
we request, may not approve the price we intend to charge for any of our drug candidates, may grant approval contingent on the
performance of costly post-marketing clinical trials, or may approve any of our drug candidates with a label that does not include
the labeling claims necessary or desirable for the successful commercialization of that indication. Further, the FDA or comparable
foreign regulatory authorities may place conditions on approvals or require risk management plans or a Risk Evaluation and Mitigation
Strategy, “REMS”, to assure the safe use of the drug. If the FDA concludes a REMS is needed, the sponsor of the NDA
must submit a proposed REMS; the FDA will not approve the NDA without an approved REMS, if required. A REMS could include medication
guides, physician communication plans, or elements to assure safe use, such as restricted distribution methods, patient registries
and other risk minimization tools. The FDA may also require a REMS for an approved product when new safety information emerges.
Any of these limitations on approval or marketing could restrict the commercial promotion, distribution, prescription or dispensing
of our drug candidates. Moreover, product approvals may be withdrawn for non-compliance with regulatory standards or if problems
occur following the initial marketing of the product. Any of the foregoing scenarios could materially harm the commercial success
of our drug candidates.
Even
if we obtain marketing approval for any of our drug candidates, we will be subject to ongoing obligations and continued regulatory
review, which may result in significant additional expense. Additionally, our drug candidates could be subject to labeling and
other restrictions and withdrawal from the market and we may be subject to penalties if we fail to comply with regulatory requirements
or if we experience unanticipated problems with our drug candidates.
Even
if we obtain regulatory approval for any of our drug candidates for an indication, the FDA or foreign equivalent may still impose
significant restrictions on their indicated uses or marketing or the conditions of approval, or impose ongoing requirements for
potentially costly and time-consuming post-approval studies, including Phase 4 clinical trials, and post-market surveillance to
monitor safety and efficacy. Our drug candidates will also be subject to ongoing regulatory requirements governing the manufacturing,
labeling, packaging, storage, distribution, safety surveillance, advertising, promotion, recordkeeping and reporting of adverse
events and other post-market information. These requirements include registration with the FDA, as well as continued compliance
with current Good Clinical Practices regulations, or “cGCPs”, for any clinical trials that we conduct post-approval.
In addition, manufacturers of drug products and their facilities are subject to continual review and periodic inspections by the
FDA and other regulatory authorities for compliance with current cGMP, requirements relating to quality control, quality assurance
and corresponding maintenance of records and documents.
The
FDA has the authority to require a REMS as part of an NDA or after approval, which may impose further requirements or restrictions
on the distribution or use of an approved drug, such as limiting prescribing to certain physicians or medical centers that have
undergone specialized training, limiting treatment to patients who meet certain safe-use criteria or requiring patient testing,
monitoring and/or enrollment in a registry.
With
respect to sales and marketing activities by us or any future partner, advertising and promotional materials must comply with
FDA rules in addition to other applicable federal, state and local laws in the United States and similar legal requirements in
other countries. In the United States, the distribution of product samples to physicians must comply with the requirements of
the U.S. Prescription Drug Marketing Act. Application holders must obtain FDA approval for product and manufacturing changes,
depending on the nature of the change. We may also be subject, directly or indirectly through our customers and partners, to various
fraud and abuse laws, including, without limitation, the U.S. Anti-Kickback Statute, U.S. False Claims Act, and similar state
laws, which impact, among other things, our proposed sales, marketing, and scientific/educational grant programs. If we participate
in the U.S. Medicaid Drug Rebate Program, the Federal Supply Schedule of the U.S. Department of Veterans Affairs, or other government
drug programs, we will be subject to complex laws and regulations regarding reporting and payment obligations. All of these activities
are also potentially subject to U.S. federal and state consumer protection and unfair competition laws. Similar requirements exist
in many of these areas in other countries.
In
addition, if any of our drug candidates are approved for a particular indication, our product labeling, advertising and promotion
would be subject to regulatory requirements and continuing regulatory review. The FDA strictly regulates the promotional claims
that may be made about prescription products. In particular, a product may not be promoted for uses that are not approved by the
FDA as reflected in the product’s approved labeling. If we receive marketing approval for our drug candidates, physicians
may nevertheless legally prescribe our products to their patients in a manner that is inconsistent with the approved label. If
we are found to have promoted such off-label uses, we may become subject to significant liability and government fines. The FDA
and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses, and a company that is
found to have improperly promoted off-label uses may be subject to significant sanctions. The federal government has levied large
civil and criminal fines against companies for alleged improper promotion and has enjoined several companies from engaging in
off-label promotion. The FDA has also requested that companies enter into consent decrees of permanent injunctions under which
specified promotional conduct is changed or curtailed.
If
we or a regulatory agency discovers previously unknown problems with a product, such as adverse events of unanticipated severity
or frequency, problems with the facility where the product is manufactured, or we or our manufacturers fail to comply with applicable
regulatory requirements, we may be subject to the following administrative or judicial sanctions:
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restrictions
on the marketing or manufacturing of the product, withdrawal of the product from the market, or voluntary or mandatory product
recalls;
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issuance
of warning letters or untitled letters;
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clinical
holds;
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injunctions
or the imposition of civil or criminal penalties or monetary fines;
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suspension
or withdrawal of regulatory approval;
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suspension
of any ongoing clinical trials;
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refusal
to approve pending applications or supplements to approved applications filed by us, or suspension or revocation of product
license approvals;
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suspension
or imposition of restrictions on operations, including costly new manufacturing requirements; or
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product
seizure or detention or refusal to permit the import or export of product.
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The
occurrence of any event or penalty described above may inhibit our ability to commercialize our drug candidates and generate revenue.
Adverse regulatory action, whether pre- or post-approval, can also potentially lead to product liability claims and increase our
product liability exposure.
Obtaining
and maintaining regulatory approval of our drug candidates in one jurisdiction does not mean that we will be successful in obtaining
regulatory approval of our drug candidates in other jurisdictions.
Obtaining
and maintaining regulatory approval of our drug candidates in one jurisdiction does not guarantee that we will be able to obtain
or maintain regulatory approval in any other jurisdiction, but a failure or delay in obtaining regulatory approval in one jurisdiction
may have a negative effect on the regulatory approval process in others. For example, even if the FDA grants marketing approval
of a drug candidate, comparable regulatory authorities in foreign jurisdictions must also approve the manufacturing, marketing
and promotion of the drug candidate in those countries. Approval procedures vary among jurisdictions and can involve requirements
and administrative review periods different from those in the United States, including additional preclinical studies or clinical
trials, as clinical studies conducted in one jurisdiction may not be accepted by regulatory authorities in other jurisdictions.
In many jurisdictions outside the United States, a drug candidate must be approved for reimbursement before it can be approved
for sale in that jurisdiction. In some cases, the price that we intend to charge for our products is also subject to approval.
Obtaining
foreign regulatory approvals and compliance with foreign regulatory requirements could result in significant delays, difficulties
and costs for us and could delay or prevent the introduction of our products in certain countries. If we fail to comply with the
regulatory requirements in international markets and/ or to receive applicable marketing approvals, our target market will be
reduced and our ability to realize the full market potential of our drug candidates will be harmed.
Current
and future legislation may increase the difficulty and cost for us to obtain marketing approval of and commercialize our drug
candidates and affect the prices we may obtain.
In
the United States and some foreign jurisdictions, there have been a number of legislative and regulatory changes and proposed
changes regarding the healthcare system that could prevent or delay marketing approval for our drug candidates, restrict or regulate
post-approval activities and affect our ability to profitably sell our drug candidates. Legislative and regulatory proposals have
been made to expand post-approval requirements and restrict sales and promotional activities for pharmaceutical products. We do
not know whether additional legislative changes will be enacted, or whether the FDA regulations, guidance or interpretations will
be changed, or what the impact of such changes on the marketing approvals of our drug candidates, if any, may be. In addition,
increased scrutiny by the U.S. Congress of the FDA’s approval process may significantly delay or prevent marketing approval,
as well as subject us to more stringent product labeling and post-marketing testing and other requirements.
In
the United States, the Medicare Modernization Act, or “MMA”, changed the way Medicare covers and pays for pharmaceutical
products. The legislation expanded Medicare coverage for drug purchases by the elderly and introduced a new reimbursement methodology
based on average sales prices for drugs. In addition, this legislation authorized Medicare Part D prescription drug plans to use
formularies where they can limit the number of drugs that will be covered in any therapeutic class. As a result of this legislation
and the expansion of federal coverage of drug products, we expect that there will be additional pressure to contain and reduce
costs. These cost reduction initiatives and other provisions of this legislation could decrease the coverage and price that we
receive for our drug candidates and could seriously harm our business. 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 reimbursement
rates, and any reduction in reimbursement that results from the MMA may result in a similar reduction in payments from private
payors.
The
Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act of 2010
or, collectively, the Health Care Reform Law, is a sweeping law intended to broaden access to health insurance, reduce or constrain
the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for healthcare
and health insurance industries, impose new taxes and fees on the health industry and impose additional health policy reforms.
The Health Care Reform Law revised the definition of “average manufacturer price” for reporting purposes, which could
increase the amount of Medicaid drug rebates to states. Further, the law imposed a significant annual fee on companies that manufacture
or import branded prescription drug products.
The
Health Care Reform Law remains subject to legislative efforts to repeal, modify or delay the implementation of the law. Efforts
to date have generally been unsuccessful as a result of the balance of power in Congress and the President’s veto power.
However, the recent Presidential and Congressional elections, which resulted in the election of the Republican presidential nominee
and Republican majorities in both houses of Congress, may result in additional efforts to repeal, modify or delay implementation
of the Health Reform Law. If the Health Care Reform Law is repealed or modified, or if implementation of certain aspects of the
Health Care Reform Law are delayed, such repeal, modification or delay may materially adversely impact our business, strategies,
prospects, operating results or financial condition. We are unable to predict the full impact of any repeal, modification or delay
in the implementation of the Health Care Reform Law on us at this time. Due to the substantial regulatory changes that will need
to be implemented by Centers for Medicare & Medicaid Services (“CMS”) and others, and the numerous processes required
to implement these reforms, we cannot predict which healthcare initiatives will be implemented at the federal or state level,
the timing of any such reforms, or the effect such reforms or any other future legislation or regulation will have on our business.
In
addition, other legislative changes have been proposed and adopted in the United States since the Health Care Reform Law was enacted.
We expect that additional federal healthcare reform measures will be adopted in the future, any of which could limit the amounts
that federal and state governments will pay for healthcare products and services, and in turn could significantly reduce the projected
value of certain development projects and reduce or eliminate our profitability.
Our
drug candidates may face competition sooner than expected.
Our
success will depend in part on our ability to obtain and maintain patent protection for our certain of our drug candidates and
technologies and to prevent third parties from infringing upon our proprietary rights. We must also operate without infringing
upon patents and proprietary rights of others, including by obtaining appropriate licenses to patents or other proprietary rights
held by third parties, if necessary. However, the applications we have filed or may file in the future may never yield patents
that protect our inventions and intellectual property assets. Failure to obtain patents that sufficiently cover our formulations
and technologies would limit our protection against compounding pharmacies, outsourcing facilities, generic drug manufacturers,
pharmaceutical companies and other parties who may seek to copy our products, produce products substantially similar to ours or
use technologies substantially similar to those we own.
We
also intend to seek data exclusivity or market exclusivity for our drug candidates provided under the FDCA, and similar laws in
other countries. The FDCA provides three years of marketing exclusivity for an NDA, 505(b)(2) NDA or supplement to an existing
NDA if new clinical investigations, other than bioavailability studies, that were conducted or sponsored by the applicant are
deemed by the FDA to be essential to the approval of the application, for example, for new indications, dosages, or strengths
of an existing drug. This three-year exclusivity covers only the conditions associated with the new clinical investigations and
does not prohibit the FDA from approving ANDAs for drugs containing the original active agent. Even if our drug candidates are
considered to be reference products eligible for 3 years of exclusivity under the FDCA, another company could market competing
products if the FDA approves a full NDA for such product containing the sponsor’s own preclinical data and data from adequate
and well-controlled clinical trials to demonstrate the safety, purity and potency of the products. Moreover, an amendment or repeal
of the FDCA could result in a shorter exclusivity period for our drug candidates, which would have a material adverse effect on
our business.
If
we market any of our drug candidates in a manner that violates healthcare fraud and abuse laws, or if we violate government price
reporting laws, we may be subject to civil or criminal penalties.
The
FDA enforces laws and regulations which require that the promotion of pharmaceutical products be consistent with the approved
prescribing information. While physicians may prescribe an approved product for a so-called “off label” use, it is
unlawful for a pharmaceutical company to promote its products in a manner that is inconsistent with its approved label and any
company which engages in such conduct can subject that company to significant liability. Similarly, industry codes in the EU and
other foreign jurisdictions prohibit companies from engaging in off-label promotion and regulatory agencies in various countries
enforce violations of the code with civil penalties. While we intend to ensure that our promotional materials are consistent with
our label, regulatory agencies may disagree with our assessment and may issue untitled letters, warning letters or may institute
other civil or criminal enforcement proceedings. In addition to FDA restrictions on marketing of pharmaceutical products, several
other types of state and federal healthcare fraud and abuse laws have been applied in recent years to restrict certain marketing
practices in the pharmaceutical industry. These laws include the U.S. Anti-Kickback Statute, U.S. False Claims Act and similar
state laws. Because of the breadth of these laws and the narrowness of the safe harbors, it is possible that some of our business
activities could be subject to challenge under one or more of these laws.
The
U.S. 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 for the purchase, lease or order of any healthcare item
or service reimbursable under Medicare, Medicaid or other federally financed healthcare programs. This statute has been interpreted
broadly to apply to arrangements between pharmaceutical manufacturers on the one hand and prescribers, purchasers and 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. Our
practices may not, in all cases, meet all of the criteria for safe harbor protection from anti-kickback liability. Moreover, recent
health care reform legislation has strengthened these laws. For example, the Health Care Reform Law, among other things, amends
the intent requirement of the U.S. Anti-Kickback Statute and criminal health care fraud statutes; a person or entity no longer
needs to have actual knowledge of this statute or specific intent to violate it. In addition, the Health Care Reform Law provides
that the government may assert that a claim including items or services resulting from a violation of the U.S. Anti-Kickback Statute
constitutes a false or fraudulent claim for purposes of the U.S. False Claims Act. Federal false claims laws prohibit any person
from knowingly presenting, or causing to be presented, a false claim for payment to the federal government or knowingly making,
or causing to be made, a false statement to get a false claim paid.
Over
the past few years, several pharmaceutical and other healthcare companies have been prosecuted under these laws for a variety
of alleged promotional and marketing activities, such as: allegedly providing free trips, free goods, sham consulting fees and
grants and other monetary benefits to prescribers; reporting to pricing services inflated average wholesale prices that were then
used by federal programs to set reimbursement rates; engaging in off-label promotion that caused claims to be submitted to Medicare
or Medicaid for non-covered, off-label uses; and submitting inflated best price information to the Medicaid Rebate Program to
reduce liability for Medicaid rebates. Most states also have statutes or regulations similar to the U.S. Anti-Kickback Statute
and the U.S. False Claims Act, which apply to items and services reimbursed under Medicaid and other state programs, or, in several
states, apply regardless of the payor. Sanctions under these federal and state laws may include substantial civil monetary penalties,
exclusion of a manufacturer’s products from reimbursement under government programs, substantial criminal fines and imprisonment.
We
will be completely dependent on third parties to manufacture our drug candidates, and our commercialization of our drug candidates
could be halted, delayed or made less profitable if those third parties fail to obtain manufacturing approval from the FDA or
comparable foreign regulatory authorities, fail to provide us with sufficient quantities of our drug candidates or fail to do
so at acceptable quality levels or prices.
We
do not currently have, nor do we plan to acquire, the capability or infrastructure to manufacture the active pharmaceutical ingredient,
(“API”), in our drug candidates for use in our clinical trials or for commercial product, if any. In addition, we
do not have the capability to encapsulate any of our drug candidates as a finished drug product for commercial distribution. As
a result, we will be obligated to rely on contract manufacturers, if and when any of our drug candidates are approved for commercialization.
We have not entered into an agreement with any contract manufacturers for commercial supply and may not be able to engage a contract
manufacturer for commercial supply of any of our drug candidates on favorable terms to us, or at all.
The
facilities used by our contract manufacturers to manufacture our drug candidates must be approved by the FDA or comparable foreign
regulatory authorities pursuant to inspections that will be conducted after we submit an NDA or BLA to the FDA or their equivalents
to other relevant regulatory authorities. We will not control the manufacturing process of, and will be completely dependent on,
our contract manufacturing partners for compliance with cGMPs for manufacture of both active drug substances and finished drug
products. These cGMP regulations cover all aspects of the manufacturing, testing, quality control and record keeping relating
to our drug candidates. If our contract manufacturers do not successfully manufacture material that conforms to our specifications
and the strict regulatory requirements of the FDA or others, they will not be able to secure and/or maintain regulatory approval
for their manufacturing facilities. If the FDA or a comparable foreign regulatory authority does not approve these facilities
for the manufacture of our drug candidates or if it withdraws any such approval in the future, we may need to find alternative
manufacturing facilities, which would significantly impact our ability to develop, obtain regulatory approval for or market our
drug candidates, if approved.
Our
contract manufacturers will be subject to ongoing periodic unannounced inspections by the FDA and corresponding state and foreign
agencies for compliance with cGMPs and similar regulatory requirements. We will not have control over our contract manufacturers’
compliance with these regulations and standards. Failure by any of our contract manufacturers to comply with applicable regulations
could result in sanctions being imposed on us, including fines, injunctions, civil penalties, failure to grant approval to market
any of our drug candidates, delays, suspensions or withdrawals of approvals, operating restrictions and criminal prosecutions,
any of which could significantly and adversely affect our business. In addition, we will not have control over the ability of
our contract manufacturers to maintain adequate quality control, quality assurance and qualified personnel. Failure by our contract
manufacturers to comply with or maintain any of these standards could adversely affect our ability to develop, obtain regulatory
approval for or market any of our drug candidates.
If,
for any reason, these third parties are unable or unwilling to perform, we may not be able to terminate our agreements with them,
and we may not be able to locate alternative manufacturers or formulators or enter into favorable agreements with them and we
cannot be certain that any such third parties will have the manufacturing capacity to meet future requirements. If these manufacturers
or any alternate manufacturer of finished drug product experiences any significant difficulties in its respective manufacturing
processes for our API or finished products or should cease doing business with us, we could experience significant interruptions
in the supply of any of our drug candidates or may not be able to create a supply of our drug candidates at all. Were we to encounter
manufacturing issues, our ability to produce a sufficient supply of any of our drug candidates might be negatively affected. Our
inability to coordinate the efforts of our third party manufacturing partners, or the lack of capacity available at our third
party manufacturing partners, could impair our ability to supply any of our drug candidates at required levels. Because of the
significant regulatory requirements that we would need to satisfy in order to qualify a new bulk or finished product manufacturer,
if we face these or other difficulties with our current manufacturing partners, we could experience significant interruptions
in the supply of any of our drug candidates if we decided to transfer the manufacture of any of our drug candidates to one or
more alternative manufacturers in an effort to deal with the difficulties.
Any
manufacturing problem or the loss of a contract manufacturer could be disruptive to our operations and result in lost sales. Additionally,
we rely on third parties to supply the raw materials needed to manufacture our potential products. Any reliance on suppliers may
involve several risks, including a potential inability to obtain critical materials and reduced control over production costs,
delivery schedules, reliability and quality. Any unanticipated disruption to a future contract manufacturer caused by problems
at suppliers could delay shipment of any of our drug candidates, increase our cost of goods sold and result in lost sales.
We
cannot guarantee that our future manufacturing and supply partners will be able to reduce the costs of commercial scale manufacturing
of any of our drug candidates over time. If the commercial-scale manufacturing costs of any of our drug candidates are higher
than expected, these costs may significantly impact our operating results. In order to reduce costs, we may need to develop and
implement process improvements. However, in order to do so, we will need, from time to time, to notify or make submissions with
regulatory authorities, and the improvements may be subject to approval by such regulatory authorities. We cannot be sure that
we will receive these necessary approvals or that these approvals will be granted in a timely fashion. We also cannot guarantee
that we will be able to enhance and optimize output in our commercial manufacturing process. If we cannot enhance and optimize
output, we may not be able to reduce our costs over time.
We
expect to rely on third parties to conduct clinical trials for our drug candidates. If these third parties do not successfully
carry out their contractual duties or meet expected deadlines, we may not be able to obtain regulatory approval for or commercialize
any of our drug candidates and our business would be substantially harmed.
We
expect to enter into agreements with third-party CROs to conduct and manage our clinical programs including contracting with clinical
sites to perform our clinical studies. We plan to rely heavily on these parties for execution of clinical studies for our drug
candidates and will control only certain aspects of their activities. Nevertheless, we will be responsible for ensuring that each
of our studies is conducted in accordance with the applicable protocol, legal, regulatory and scientific standards, and our reliance
on CROs and clinical sites will not relieve us of our regulatory responsibilities. We and our CROs will be required to comply
with cGCPs, which are regulations and guidelines enforced by the FDA, the Competent Authorities of the Member States of the European
Economic Area and comparable foreign regulatory authorities for any products in clinical development. The FDA and its foreign
equivalents enforce these cGCP regulations through periodic inspections of trial sponsors, principal investigators and trial sites.
If we or our CROs fail to comply with applicable cGCPs, the clinical data generated in our clinical trials may be deemed unreliable
and the FDA or comparable foreign regulatory authorities may require us to perform additional clinical trials before approving
our marketing applications. We cannot assure you that, upon inspection, the FDA or other regulatory authorities will determine
that any of our clinical trials comply with cGCPs. In addition, our clinical trials must be conducted with products produced under
cGMP regulations and will require a large number of test subjects. Our failure or the failure of our CROs or clinical sites to
comply with these regulations may require us to repeat clinical trials, which would delay the regulatory approval process and
could also subject us to enforcement action up to and including civil and criminal penalties.
Although
we intend to design the clinical trials for our drug candidates in consultation with CROs, we expect that the CROs will manage
all of the clinical trials conducted at contracted clinical sites. As a result, many important aspects of our drug development
programs would be outside of our direct control. In addition, the CROs and clinical sites may not perform all of their obligations
under arrangements with us or in compliance with regulatory requirements. If the CROs or clinical sites do not perform clinical
trials in a satisfactory manner, breach their obligations to us or fail to comply with regulatory requirements, the development
and commercialization of any of our drug candidates for the subject indication may be delayed or our development program materially
and irreversibly harmed. We cannot control the amount and timing of resources these CROs and clinical sites will devote to our
program or any of our drug candidates. If we are unable to rely on clinical data collected by our CROs, we could be required to
repeat, extend the duration of, or increase the size of our clinical trials, which could significantly delay commercialization
and require significantly greater expenditures.
If
any of our relationships with these third-party CROs or clinical sites terminate, we may not be able to enter into arrangements
with alternative CROs or clinical sites. If CROs do not successfully carry out their contractual duties or obligations or meet
expected deadlines, if they need to be replaced or if the quality or accuracy of the clinical data they obtain is compromised
due to the failure to adhere to our clinical protocols, regulatory requirements or for other reasons, any such clinical trials
may be extended, delayed or terminated, and we may not be able to obtain regulatory approval for or successfully commercialize
our drug candidates. As a result, our financial results and the commercial prospects for any of our drug candidates would be harmed,
our costs could increase and our ability to generate revenue could be delayed.
Any
termination or suspension of, or delays in the commencement or completion of, any necessary studies of any of our drug candidates
for any indications could result in increased costs to us, delay or limit our ability to generate revenue and adversely affect
our commercial prospects.
The
commencement and completion of clinical studies can be delayed for a number of reasons, including delays related to:
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the
FDA or a comparable foreign regulatory authority failing to grant permission to proceed and placing the clinical study on
hold;
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subjects
for clinical testing failing to enroll or remain in our trials at the rate we expect;
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a
facility manufacturing any of our drug candidates being ordered by the FDA or other government or regulatory authorities to
temporarily or permanently shut down due to violations of cGMP requirements or other applicable requirements, or cross-contaminations
of drug candidates in the manufacturing process;
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any
changes to our manufacturing process that may be necessary or desired;
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subjects
choosing an alternative treatment for the indications for which we are developing our drug candidates, or participating in
competing clinical studies;
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subjects
experiencing severe or unexpected drug-related adverse effects;
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reports
from clinical testing on similar technologies and products raising safety and/or efficacy concerns;
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third-party
clinical investigators losing their license or permits necessary to perform our clinical trials, not performing our clinical
trials on our anticipated schedule or employing methods consistent with the clinical trial protocol, cGMP requirements, or
other third parties not performing data collection and analysis in a timely or accurate manner;
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inspections
of clinical study sites by the FDA, comparable foreign regulatory authorities, or IRBs finding regulatory violations that
require us to undertake corrective action, result in suspension or termination of one or more sites or the imposition of a
clinical hold on the entire study, or that prohibit us from using some or all of the data in support of our marketing applications;
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third-party
contractors becoming debarred or suspended or otherwise penalized by the FDA or other government or regulatory authorities
for violations of regulatory requirements, in which case we may need to find a substitute contractor, and we may not be able
to use some or any of the data produced by such contractors in support of our marketing applications;
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one
or more IRBs refusing to approve, suspending or terminating the study at an investigational site, precluding enrollment of
additional subjects, or withdrawing its approval of the trial; reaching agreement on acceptable terms with prospective CROs
and clinical trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different
CROs and trial sites;
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deviations
of the clinical sites from trial protocols or dropping out of a trial;
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adding
new clinical trial sites;
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the
inability of the CRO to execute any clinical trials for any reason; and
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government
or regulatory delays or “clinical holds” requiring suspension or termination of a trial.
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Product
development costs for any of our drug candidates will increase if we have delays in testing or approval or if we need to perform
more or larger clinical studies than planned. Additionally, changes in regulatory requirements and policies may occur and we may
need to amend study protocols to reflect these changes. Amendments may require us to resubmit our study protocols to the FDA,
comparable foreign regulatory authorities, and IRBs for reexamination, which may impact the costs, timing or successful completion
of that study. If we experience delays in completion of, or if we, the FDA or other regulatory authorities, the IRB, or other
reviewing entities, or any of our clinical study sites suspend or terminate any of our clinical studies of any of our drug candidates,
its commercial prospects may be materially harmed and our ability to generate product revenues will be delayed. Any delays in
completing our clinical trials will increase our costs, slow down our development and approval process and jeopardize our ability
to commence product sales and generate revenues. Any of these occurrences may harm our business, financial condition and prospects
significantly. In addition, many of the factors that cause, or lead to, termination or suspension of, or a delay in the commencement
or completion of, clinical studies may also ultimately lead to the denial of regulatory approval of our drug candidates. In addition,
if one or more clinical studies are delayed, our competitors may be able to bring products to market before we do, and the commercial
viability of any of our drug candidates could be significantly reduced.
Clinical
drug development involves a lengthy and expensive process with an uncertain outcome, and results of earlier studies and trials
may not be predictive of future trial results.
Clinical
testing of drug candidates is expensive and can take many years to complete, and its outcome is inherently uncertain. Failure
can occur at any time during the clinical trial process. The results of pre-clinical studies and early clinical trials may not
be predictive of the results of later-stage clinical trials. We cannot assure you that the FDA or comparable foreign regulatory
authorities will view the results as we do or that any future trials of any of our drug candidates will achieve positive results.
Drug candidates in later stages of clinical trials may fail to show the desired safety and efficacy traits despite having progressed
through pre-clinical studies and initial clinical trials. A number of companies in the biopharmaceutical industry have suffered
significant setbacks in advanced clinical trials due to lack of efficacy or adverse safety profiles, notwithstanding promising
results in earlier trials. Any future clinical trial results for our drug candidates may not be successful.
In
addition, a number of factors could contribute to a lack of favorable safety and efficacy results for any of our drug candidates.
For example, such trials could result in increased variability due to varying site characteristics, such as local standards of
care, differences in evaluation period and surgical technique, and due to varying patient characteristics including demographic
factors and health status.
Even
though we may apply for orphan drug designation for a drug candidate, we may not be able to obtain orphan drug marketing exclusivity.
There
is no guarantee that the FDA, EMA or their foreign equivalents will grant any future application for orphan drug designation for
any of our drug candidates, which would make us ineligible for the additional exclusivity and other benefits of orphan drug designation.
Under
the Orphan Drug Act, the FDA may grant orphan drug designation to a drug intended to treat a rare disease or condition, which
is generally a disease or condition that affects fewer than 200,000 individuals in the United States and for which there is no
reasonable expectation that the cost of developing and making a drug available in the Unites States for this type of disease or
condition will be recovered from sales of the product. Orphan drug designation must be requested before submitting an NDA. After
the FDA grants orphan drug designation, the identity of the therapeutic agent and its potential orphan use are disclosed publicly
by the FDA. Orphan product designation does not convey any advantage in or shorten the duration of regulatory review and approval
process. In addition to the potential period of exclusivity, orphan designation makes a company eligible for grant funding of
up to $400,000 per year for four years to defray costs of clinical trial expenses, tax credits for clinical research expenses
and potential exemption from the FDA application user fee.
If
a product that has orphan designation subsequently receives the first FDA approval for the disease or condition for which it has
such designation, the product is entitled to orphan drug exclusivity, which means the FDA may not approve any other applications
to market the same drug for the same indication for seven years, except in limited circumstances, such as (i) the drug’s
orphan designation is revoked; (ii) its marketing approval is withdrawn; (iii) the orphan exclusivity holder consents to the approval
of another applicant’s product; (iv) the orphan exclusivity holder is unable to assure the availability of a sufficient
quantity of drug; or (v) a showing of clinical superiority to the product with orphan exclusivity by a competitor product. If
a drug designated as an orphan product receives marketing approval for an indication broader than what is designated, it may not
be entitled to orphan drug exclusivity. There can be no assurance that we will receive orphan drug designation for any of our
drug candidates in the indications for which we think they might qualify, if we elect to seek such applications.
Although
we may pursue expedited regulatory approval pathways for a drug candidate, it may not qualify for expedited development or, if
it does qualify for expedited development, it may not actually lead to a faster development or regulatory review or approval process.
Although
we believe there may be an opportunity to accelerate the development of certain of our drug candidates through one or more of
the FDA’s expedited programs, such as fast track, breakthrough therapy, accelerated approval or priority review, we cannot
be assured that any of our drug candidates will qualify for such programs.
For
example, a drug may be eligible for designation as a breakthrough therapy if the drug is intended, alone or in combination with
one or more other drugs, to treat 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. Although
breakthrough designation or access to any other expedited program may expedite the development or approval process, it does not
change the standards for approval. If we apply for breakthrough therapy designation or any other expedited program for our drug
candidates, the FDA may determine that our proposed target indication or other aspects of our clinical development plans do not
qualify for such expedited program. Even if we are successful in obtaining a breakthrough therapy designation or access to any
other expedited program, we may not experience faster development timelines or achieve faster review or approval compared to conventional
FDA procedures. Access to an expedited program may also be withdrawn by the FDA if it believes that the designation is no longer
supported by data from our clinical development program. Additionally, qualification for any expedited review procedure does not
ensure that we will ultimately obtain regulatory approval for such drug candidate.
If
we are unable to protect our proprietary rights, we may not be able to prevent others from using our intellectual property, which
may reduce the competitiveness and value of the related assets.
Our
success will depend in part on our ability to obtain and maintain patent protection for our formulations and technologies and
to prevent third parties from infringing upon our proprietary rights. We must also operate without infringing upon patents and
proprietary rights of others, including by obtaining appropriate licenses to patents or other proprietary rights held by third
parties, if necessary. The primary means by which we will be able to protect our formulations and technologies from unauthorized
use by third parties is to obtain valid and enforceable patents that cover them. As of July 26, 2018, we own and/or license 34
U.S. patents or patent applications and we own 11 international patent applications filed under the Patent Cooperation Treaty
and 38 foreign patent or patent applications. However, the applications we have filed or may file in the future may never yield
patents that protect our inventions and intellectual property assets. Failure to obtain patents that sufficiently cover our formulations
and technologies would limit our protection against other compounding pharmacies and outsourcing facilities, generic drug manufacturers,
pharmaceutical companies and other parties who may seek to copy our products, produce products substantially similar to ours or
use technologies substantially similar to those we own. We have made, and expect to continue to make, significant investments
in certain of our proprietary formulations prior to the grant of any patents covering these formulations, and we may not receive
a sufficient return on these investments if patent coverage or other appropriate intellectual property protection is not obtained
and their competitiveness and value decreases.
The
patent and intellectual property positions of pharmacies and pharmaceutical companies, including ours, are uncertain and involve
complex legal and factual questions. There is no guarantee that we have developed or obtained or will in the future develop or
obtain the rights to products or processes that are patentable, that patents will issue from any pending applications or that
claims allowed will be sufficient to protect the technology we have developed or may in the future develop or to which we have
acquired or may in the future acquire development rights. In addition, we cannot be certain that patents issued to us will not
be challenged, invalidated, infringed or circumvented, including by our competitors, or that the rights granted thereunder will
provide competitive advantages to us.
We
also rely on unpatented trade secrets and know-how and continuing technological innovation in order to develop our formulations,
which we seek to protect, in part, by confidentiality agreements with our employees, consultants, collaborators and others, including
certain service providers. We also have invention or patent assignment agreements with our current employees and certain consultants.
Nonetheless, our employees and consultants may breach these agreements, and we may not have adequate remedies for the breach.
Our trade secrets may otherwise become known or be independently discovered by competitors or could be developed by a person not
bound by an invention assignment agreement with us, in which case we may have no rights to use the applicable invention.
We
may face additional competition outside of the U.S. as a result of a lack of patent coverage in some territories and differences
in patent prosecution and enforcement laws in foreign counties.
Filing,
prosecuting, defending and enforcing patents on our proprietary formulations throughout the world is extremely expensive. We do
not currently have patent protection outside of the U.S. that covers any of our proprietary formulations or other assets that
we are currently pursuing. Competitors may use our technologies to develop their own products in jurisdictions where we have not
obtained patent protection.
Even
if the international patent applications we have filed or may in the future file are issued or approved, it is likely that the
scope of protection provided by such patents would be different from, and possibly less than, the scope provided by corresponding
U.S. patents. As a result, patent rights we are able to obtain may not be sufficient to prevent generic competition. Further,
the extent of our international market opportunity may be dependent upon the enforcement of patent rights in various other countries.
A number of countries in which we could file patent applications have a history of weak enforcement and/or compulsory licensing
of intellectual property rights. Moreover, the legal systems of certain countries, particularly certain developing countries,
do not favor the aggressive enforcement of patents and other intellectual property protection, particularly those relating to
biotechnology and/or pharmaceuticals, which would make it difficult for us to stop a third party from infringing any of our intellectual
property rights. Moreover, attempting to enforce our patent rights in foreign jurisdictions could result in substantial costs
and divert our efforts and attention from other aspects of our business.
Our
proprietary formulations and technologies could potentially conflict with the rights of others.
The
preparation or sale of our proprietary formulations and use of our technologies may infringe on the patent or other intellectual
property rights of others. If our products infringe or conflict with the patent or other intellectual property rights of others,
third parties could bring legal actions against us claiming damages and seeking to enjoin our manufacturing and marketing of our
affected products. Patent litigation is costly and time consuming and may divert management’s attention and our resources.
We may not have sufficient resources to bring any actions to a successful conclusion. If we are not successful in defending against
these legal actions should they arise, we may be subject to monetary liability or be forced to alter our products, cease some
or all of our operations relating to the affected products, or seek to obtain a license in order to continue manufacturing and
marketing the affected products, which may not available on acceptable terms or at all.
We
are dependent on our Chief Executive Officer, Mark L. Baum, and other key persons for the continued growth and development of
our Company.
Our
Chief Executive Officer, Mark L. Baum, has played a primary role in creating and developing our current business model. Further,
Mr. Baum has played a primary role in securing much of our material intellectual property rights and related assets, as well as
the means to make and distribute our current products. We are highly dependent on Mr. Baum for the implementation of our business
plan and the future development of our assets and our business, and the loss of Mr. Baum’s services and leadership would
likely materially adversely impact our Company. We presently maintain key man insurance for Mr. Baum. In addition, our loan agreement,
identifies other key persons including, but not limited to, our Chief Financial Officer, Andrew R. Boll and our Chief Commercial
Officer, John P. Saharek.
If
we are unable to attract and retain key personnel and consultants, we may be unable to maintain or expand our business.
We
have been focusing on building our management, pharmacy, research and development, sales and marketing and other personnel to
pursue our current business model. To achieve our planned growth, we may have significant difficulty attracting and retaining
necessary employees. Because of the specialized nature of our business, the ability to develop products and to compete will remain
highly dependent upon our ability to attract and retain qualified pharmacy, scientific, technical and commercial employees and
consultants. There is intense competition for qualified personnel in our industry, and we may be unable to continue to attract
and retain the qualified personnel necessary for the development of our business. The loss of key employees or consultants or
the failure to recruit or engage new employees and consultants could have a material adverse effect on our business.
Risks
Related to Our Common Stock
Because
of their significant stock ownership, some of our existing stockholders are able to exert control over us and our significant
corporate decisions.
Our
executive officers and directors collectively own, or have the right to acquire within 60 days after August 3, 2018, approximately
14% of our common stock that would be outstanding following such issuances. These persons, acting together, have the ability to
exercise significant influence over or control the outcome of all matters submitted to our stockholders for approval, including
the election and removal of directors and any significant transaction involving us, and to control our management and affairs.
Additionally, since our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws permit our stockholders
to act by written consent, a limited number of stockholders may approve stockholder actions without holding a meeting of stockholders.
This concentration of ownership may harm the market price of our common stock by, among other things: delaying, deferring, or
preventing a change in control of our Company or changes to our board of directors; impeding a merger, consolidation, takeover
or other business combination involving our Company; causing us to enter into transactions or agreements that are not in the best
interests of all stockholders; or discouraging a potential acquiror from making a tender offer or otherwise attempting to obtain
control of our Company.
If
we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results, which
could cause our stock price to fall.
Effective
internal controls are necessary for us to provide reliable financial results. If we cannot provide reliable financial results,
our financial statements could be misstated, our reputation may be harmed and the trading price of our common stock could decline.
As we discussed in Item 9A of our 2017 Annual Report, our management concluded that our internal controls over financial reporting
were effective as of December 31, 2017. However, our controls over financial processes and reporting may not continue to be effective
or we may identify material weaknesses or significant deficiencies in our internal controls in the future. Any failure to remediate
any future material weaknesses or successfully implement required new or improved controls, could harm our operating results,
cause us to fail to meet our reporting obligations or result in material misstatements in our financial statements or other public
disclosures. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which
could have a negative effect on the trading price of our common stock.
A
consistently active trading market for shares of our common stock may not be sustained.
Historically,
trading in our common stock has been sporadic and volatile and our common stock has been “thinly-traded.” There have
been, and may in the future be, extended periods when trading activity in our shares is minimal, as compared to a seasoned issuer
with a large and steady volume of trading activity. The market for our common stock is also characterized by significant price
volatility compared to seasoned issuers, and we expect that such volatility may continue. As a result, the trading of relatively
small quantities of shares may disproportionately influence the market price of our common stock. A consistently active and liquid
trading market in our securities may never develop or be sustained.
Our
stock price may be volatile.
The
market price of our common stock is likely to be highly volatile and could fluctuate widely in response to various factors, many
of which are beyond our control, including the following: our ability to execute our business plan; operating results that fall
below expectations; industry or regulatory developments; investor perception of our industry or our prospects; economic and other
external factors; and the other risk factors discussed in this “Risk Factors” section.
In
addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated
to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market
price of our common stock.
We
have the right to issue shares of preferred stock without obtaining stockholder approval. If we were to issue preferred stock,
it may have rights, preferences and privileges superior to those of our common stock.
We
are authorized to issue 5,000,000 shares of “blank check” preferred stock, with such rights, preferences and privileges
as may be determined from time to time by our board of directors. Our board of directors is empowered, without stockholder approval,
to issue preferred stock at any time in one or more series and to fix the dividend rights, dissolution or liquidation preferences,
redemption prices, conversion rights, voting rights and other rights, preferences and privileges for any series of our preferred
stock that may be issued. The issuance of shares of preferred stock, depending on the rights, preferences and privileges attributable
to the preferred stock, could reduce the voting rights and powers of our common stockholders and the portion of our assets allocated
for distribution to our common stockholders in a liquidation event, and could also result in dilution to the book value per share
of our common stock. The preferred stock could also be utilized, under certain circumstances, as a method for raising additional
capital or discouraging, delaying or preventing a change in control of our Company.
We
have not paid dividends in the past and do not expect to pay dividends in the future. Any return on an investment will be limited
to any appreciation in the value of our common stock.
We
have never paid cash dividends on our common stock and do not anticipate doing so in the foreseeable future. Any payment of dividends
on our common stock would depend on contractual restrictions, such as those contained in our SWK loan agreement and convertible
note, as well as our earnings, financial condition and other business and economic factors as our board of directors may consider
relevant. If we do not pay dividends, our common stock may be less valuable because a return on your investment will only occur
if our stock price appreciates.
Offers
or availability for sale of a substantial number of shares of our common stock may cause the price of our common stock to decline.
The
sale of substantial amounts of our common stock in the public market, or the perception that sales could occur, may cause the
market price of our common stock to fall. Sales could occur upon the expiration of any statutory holding period, such as under
Rule 144 under the Securities Act of 1933, as amended, applicable to outstanding shares, upon expiration of any lock-up periods
applicable to outstanding shares, upon our issuance of shares upon the exercise of outstanding options or warrants, or upon our
issuance of shares pursuant offerings of our equity securities. The availability for sale of a substantial number of shares of
our common stock, whether or not sales have occurred or are occurring, also could make it more difficult for us to raise additional
financing through the sale of equity or equity-related securities in the future when needed, on acceptable terms or at all.