ITEM 1B. RISK FACTORS
We have identified the following risks and uncertainties that may have a material adverse effect on our business, financial condition or results of operations. The risks described below are not the only ones we face. Additional risks not presently known to us or that we currently believe are immaterial may also significantly impair our business operations. Our business could be harmed by any of these risks. The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment. In assessing these risks, you should refer to the other information contained in this annual report on Form 10-Q, including our condensed consolidated financial statements and related notes.
Risks Related to Our Business
Our strategic transaction with Molecular Templates may not be consummated or may not deliver the anticipated benefits we expect.
In March 2017, we entered into a Merger Agreement with Molecular Templates pursuant to which the shareholders of Molecular Templates will become the majority owners of Threshold. In addition the proposed $20 million commitment from Longitude is subject to certain conditions, including the closing of the Merger and the Company having secured commitments from additional investors for the purchase of an additional $20 million of such securities (the “Financing”). The Merger, however, is not conditioned upon the closing of the Financing. We are devoting substantially all of our time and resources to consummating the Merger and the Financing, however, there can be no assurance that such activities will result in the consummation of the Merger and the Financing or that such transaction will deliver the anticipated benefits or enhance shareholder value. We cannot assure you that we will complete the Transaction in a timely manner or at all. The Merger Agreement is subject to many closing conditions and termination rights. If the Merger does not occur, our board of directors may elect to attempt to complete another strategic transaction similar to the Merger and the Financing. Attempting to complete another similar strategic transaction will be costly and time-consuming, and we cannot make any assurances that a future strategic transaction will occur on terms that provide the same or greater opportunity for potential value to our stockholders, or at all. If we are unable to close another strategic transaction and unable to successfully obtain funding for the continued development of evofosfamide and/or partner TX-3424 or HX4, our board of directors may determine to sell or otherwise dispose of our various assets, and distribute any remaining cash proceeds to our stockholders.
In that event, the Company would be required to pay all of its debts and contractual obligations, and to set aside certain reserves for potential future claims, there would be no assurances as to the amount or timing of available cash remaining to distribute to stockholders after paying its obligations and setting aside funds for reserves.
Prior to September 2016, our business was almost entirely dependent on the success of evofosfamide and tarloxotinib, and we have suspended further clinical development of tarloxotinib.
Prior to September 2016, we invested substantially all of our efforts and financial resources in the research and development of evofosfamide and tarloxotinib. In December 2015, we announced topline results from two pivotal Phase 3 clinical trials of evofosfamide: TH-CR-406 conducted by Threshold in patients with soft tissue sarcoma and MAESTRO conducted by Merck KGaA, Darmstadt, Germany (“, or Merck KGaA”), in patients with advanced pancreatic cancer; and that neither trial met its primary endpoint of demonstrating a statistically significant improvement in overall survival. In March 2017, we received minutes from the Company’s formal meeting with the PMDA indicating that the Company’s analysis of the data from the randomized Phase III study, EMR200592-001 (N=693), conducted under a Special Protocol Agreement with the FDA, and the data from the supporting randomized Phase II study, TH-CR-404 (N=214),would not provide adequate efficacy data to support the submission of a New Drug Application (“JNDA”) for evofosfamide for the treatment of patients with locally advanced unresectable or metastatic pancreatic adenocarcinoma previously untreated with chemotherapy. In September, 2016, the Company announced that its Phase 2 proof-of-concept trial evaluating tarloxotinib bromide for the treatment of patients with mutant EGFR-positive, T790M-negative advanced non-small cell lung cancer(NSCLC) progressing on an EGFR tyrosine kinase inhibitor (TH-CR-601) did not achieve its primary interim response rate endpoint. We are conducting only limited evofosfamide development activities and have suspended all further development of tarloxotinib.
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If we are unable to consummate the Merger with Molecular Templates, there can be no assurance that we will conduct drug development activities in the future. Pharmaceutical product development is a highly speculative undertaki
ng and involves a substantial degree of risk. To date, we have focused substantially all of our efforts on our research and development activities on our lead product candidate, evofosfamide. To date, we have not commercialized any products or generated an
y revenue from product sales. We are not profitable and have incurred losses in each year since our inception in 2001, and we do not know whether or when we will become profitable. We have only a limited operating history upon which to evaluate our busines
s and prospects. We continue to incur significant development and other expenses related to our ongoing operations. Our net loss for the
quarter
ended
March
31, 201
7
was $
5.1
million and as of
March
31, 201
7
, we had an accumulated deficit of $35
8.6
million
. To date, we have financed our operations primarily through the sale of equity securities and debt facilities. The amount of our future net losses will depend, in part, on the rate of our future expenditures and our ability to obtain funding through equit
y and/or debt financings and strategic collaborations. It will be several years, if ever, before evofosfamide is ready for commercialization.
Our history of net losses and our expectation of future losses, together with our limited operating history, may make it difficult to evaluate our current business and predict our future performance. In addition, the net losses we incur may fluctuate significantly from quarter to quarter and year to year, such that a period-to-period comparison of our results of operations may not be a good indication of our future performance. In any particular quarter or quarters, our operating results could be below the expectations of securities analysts or investors, which could cause our stock price to decline.
We may not be able to complete the Merger, and we may not have sufficient funds to pursue another strategic transaction similar to such merger.
We cannot be sure that we will be able to complete the Merger in a timely manner, or at all. The Merger Agreement is subject to many closing conditions and termination rights.
If the Merger with Molecular Templates is not consummated, we may require substantial additional funding to operate.
Our future capital requirements will depend on many factors, including:
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our ability to identify and consummate a new strategic transaction for the company;
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the timing and nature of any new strategic transactions that we undertake, including, but not limited to potential joint developments or partnerships;
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whether, as a result of our strategic and financial review with a financial advisor we enter into a new partnership or business combination;
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the time and cost necessary to obtain regulatory approvals for evofosfamide and the costs of post-marketing studies that could be required by regulatory authorities;
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our ability to successfully commercialize evofosfamide;
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our ability to establish and maintain collaboration partnerships, in-license/out-license or other similar arrangements and the financial terms of such agreements;
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the costs of filing, prosecuting, maintaining, defending and enforcing any patent claims and other intellectual property rights, including litigation costs and the outcome of such litigation, including costs of defending any claims of infringement brought by others in connection with the development, manufacture or commercialization of evofosfamide or any other future product candidates; and
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the cost incurred in responding to disruptive actions by activist stockholders.
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Until such time, if ever, as we can generate substantial revenue, we would need to finance our cash needs through a combination of equity offerings, debt financings, government or other third-party funding and licensing or collaboration arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interests of our common stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through government or other third-party funding, marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us.
23
Additional funds may not be available when we need them on terms that are acceptable to us, or at all. If adequate funds are not available to us on
a timely basis, we may be required to curtail our operations
.
If we do not successfully consummate the Merger with Molecular Templates, our board of directors may decide to pursue a dissolution and liquidation of our company. In such an event, the amount of cash available for distribution to our stockholders will depend heavily on the timing of such liquidation as well as the amount of cash that will need to be reserved for commitments and contingent liabilities.
There can be no assurance that we can successfully consummate the Merger with Molecular Templates. If the transaction is not completed, our board of directors may decide to pursue a dissolution and liquidation of our company. In such an event, the amount of cash available for distribution to our stockholders will depend heavily on the timing of such decision and, ultimately, such liquidation, since the amount of cash available for distribution continues to decrease as we fund our operations in preparation for the consummation of the transaction with Molecular Templates. Further, the Merger Agreement with Molecular Templates contains certain termination rights for each party, and provides that, upon termination under specified circumstances, we may be required to pay Molecular Templates a termination fee of $750,000 and to reimburse certain fees and expenses incurred by Molecular Templates which would further decrease our available cash resources. If our board of directors were to approve and recommend, and our stockholders were to approve, a dissolution and liquidation of our company, we would be required under Delaware corporate law to pay our outstanding obligations, as well as to make reasonable provision for contingent and unknown obligations, prior to making any distributions in liquidation to our stockholders. Our commitments and contingent liabilities may include (i) regulatory and clinical obligations remaining under our evofosfamide trial; (ii) obligations under our employment and separation agreements with certain employees that provide for severance and other payments following a termination of employment occurring for various reasons, including a change in control of our company; and (iii) potential litigation against us, and other various claims and legal actions arising in the ordinary course of business. As a result of this requirement, a portion of our assets may need to be reserved pending the resolution of such obligations. In addition, we may be subject to litigation or other claims related to a dissolution and liquidation of our company. If a dissolution and liquidation were pursued, our board of directors, in consultation with its advisors, would need to evaluate these matters and make a determination about a reasonable amount to reserve. Accordingly, holders of our common stock could lose all or a significant portion of their investment in the event of a liquidation, dissolution or winding up of our company.
If the merger is not completed, and we would need to raise significant capital to support our operations, and successfully develop and complete clinical trials for our existing drug candidate, or acquire and develop other products or product candidates at all or on commercially reasonable terms.
Given the limited development of evofosfamide, our limited cash resources, and the additional capital and resources that would be required to pursue such development, if the Merger is not completed, we could be required to rely on securing a collaborative or strategic arrangement for one of our existing drug candidates to support our operations and our future development and clinical trial costs. Due to our history, limited cash resources, limited operational and management capabilities and the intense competition for pharmaceutical product candidates, even if we generate interest in a collaborative or strategic arrangement to support the further development of one of our drug candidates, we may not be able to enter into a final agreement on commercially reasonable terms, on a timely basis or at all. Proposing, negotiating and implementing an economically viable collaborative or strategic arrangement is a lengthy and complex process. As of March 31, 2017, Threshold had cash and cash equivalents totaling $17.6 million.
The cash, cash equivalents and marketable securities as of March 31, 2017 excludes a $2.0 million bridge loan to Molecular Templates, Inc. in the form of a promissory note.
Threshold believes that its current cash and cash equivalents will only be sufficient to fund its operations through next twelve months. Threshold competes for collaborative arrangements and license agreements with the drug candidates and technology developed by other pharmaceutical and biotechnology companies and academic research institutions. Threshold's competitors may have stronger relationships with third parties with whom they may be interested in collaborating, or which have greater financial, development and commercialization resources and/or more established histories of developing and commercializing products than Threshold. As a result, competitors may have a competitive advantage over Threshold in entering into collaborative arrangements with such third parties. In addition, even if Threshold enters into a collaborative or strategic arrangement, the arrangement may not provide Threshold with sufficient funds to support its operations and there is no assurance that its drug candidates would satisfy the development and/or clinical milestones established in the collaborative or strategic arrangement. Further, any drug candidate Threshold pursues will require additional development and regulatory efforts prior to commercial sale, including extensive clinical testing and approval by the FDA and other non-U.S. regulatory authorities. All product candidates are subject to the risks of failure inherent in pharmaceutical product development, including the possibility that the product candidate will not be shown to be sufficiently safe and effective for approval by regulatory authorities and the possibility that, due to strategic considerations, Threshold will discontinue research or development with respect to a product candidate for which it has already incurred significant expense. Even if the product candidates are approved, Threshold cannot be sure that they would be capable of economically feasible production or commercial success.
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If we do not successfully complete the Merger, we will require substantial additional funding in the event to continue our operations, and will need to curtail operations if we have insufficient capital.
Threshold had cash and cash equivalents of $17.6 million at March 31, 2017.
The cash, cash equivalents and marketable securities as of March 31, 2017 excludes a $2.0 million bridge loan to Molecular Templates, Inc. in the form of a promissory note.
Threshold believes that its current cash and cash equivalents will only be sufficient to fund its operations through next twelve months unless Threshold sells additional shares of its common stock through its ATM Sales Agreement or otherwise. Based on the development and clinical status of its existing drug candidates, Threshold expects its negative cash flows from operations to continue for the foreseeable future.
As such, if the Merger is not consummated, our future capital requirements will depend on many factors, including:
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our ability to identify, negotiate and consummate an alternate strategic transaction;
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our ability to secure a collaborative or licensing arrangement on commercially reasonable terms, on a timely basis or at all;
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the timing and nature of any future strategic transactions that Threshold undertake;
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the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;
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the effect of competing technological and market developments; and
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the cost incurred in responding to disruptive actions by activist stockholders.
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There can be no assurance that additional funds will be available when needed from any source or, if available, will be available on terms that are acceptable to us or our stockholders. As a result, if Threshold is unable complete the merger or otherwise raise funds to satisfy its capital needs on a timely basis, there can be no assurance that Threshold will be able to continue to operate its business beyond the next twelve months.
We are substantially dependent on our remaining employees to facilitate the consummation of a Merger.
Threshold’s
ability
to successfully
complete the merger depends in large part on Threshold’s ability to retain Threshold’s
remaining
personnel,
particularly
Wilfred
E. Jaeger,
M.D., Threshold’s
Interim
Chief
Executive
Officer,
Kristen
Quigley,
Threshold’s
Vice President
of Clinical
Operations,
and Joel
Fernandes,
Threshold’s Senior
Vice President
of Finance.
However, despite
Threshold’s
efforts
to retain
these
members
of Threshold’s management,
one or more
may
terminate
their
employment
with Threshold
on short
notice.
The loss
of the services
of any of these
employees
could
potentially
harm
Threshold’s
ability
to consummate
the
merge
r
, as well
as fulfill
Threshold’s
reporting
obligations
as a public
company.
Risks Related to the Merger
The exchange ratio is not adjustable based on the market price of the Company’s common stock so the merger consideration at the closing may have a greater or lesser value than at the time the Merger Agreement was signed.
The Merger Agreement has set the exchange ratio for the Molecular Templates common stock, and the exchange ratio is only adjustable upward or downward if the net cash of the Company changes, prior to completion of the Merger. Any changes in the market price of Threshold common stock before the completion of the Merger will not affect the number of shares Molecular Templates security holders will be entitled to receive pursuant to the Merger Agreement.
Failure to complete the Merger may result in us paying a termination fee or reimbursing expenses to Molecular Templates and could harm the price of our common stock.
If the merger is not completed, we are subject to the following risks:
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if the Merger Agreement is terminated under certain circumstances, we will be required to pay a termination fee of $750,0000 and reimburse certain transaction fees expenses incurred by Molecular Templates;
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the price of our stock may decline and remain volatile; and
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costs related to the merger, such as financial advisor, legal and accounting fees, some which must be paid even if the Merger is not completed.
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In addition, if the Merger is not consummated and Molecular Templates were to be unable to repay the $2.0 million bridge loan we made to Molecular Templates in connection with the execution of the Merger Agreement, we would be an unsecured creditor of Molecular Templates. Moreover, our bridge loan is effectively subordinated to Molecular Templates’ secured debt.
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In addition, if the Merger Agreement is terminated and our board of directors determines to seek another strategic transaction, there can be no a
ssurance that we will be able to find a partner willing to proscribe equivalent or more attractive value to us than the value proscribed by Molecular Templates in the Merger Agreement. Any termination or inability to complete the Merger could result in a
significant decline in our stock price and could have a material adverse effect on our business.
If
the conditions
to the Merger
are not met,
the Merger
may
not occur.
Even if
the
M
erger
is
approved
by the
stockholders
of Molecular
and the
related
share
issuance
is
approved
by the
Threshold
stockholders,
specified
conditions
must
be satisfied
or waived to complete
the
merger.
These conditions
are
set
forth
in the
M
erger
A
greement.
Threshold
and Molecular
cannot
assure
you that
all
of the
conditions
will
be satisfied
or waived. If
the
conditions
are
not satisfied
or waived, the
merger
may
not occur
or will
be delayed,
and Threshold
and Molecular
each
may
lose
some
or all
of the
intended
benefits
of the
M
erger.
The completion
of the Merger
is
not conditioned
upon Threshold holding a minimum
amount of net cash at the effective
time
of the Merger.
While
the
M
erger
A
greement
provides
that
the
exchange
ratio
may
be adjusted
upward or downward depending
on variations
in Threshold’s
net
cash
determined
shortly
prior
to the
closing
of the
merger,
the
merger agreement
does not condition
the
completion
of the
merger
upon Threshold’s
holding
a minimum
amount
of net cash
at
the
effective
time
of the
merger.
If
Threshold
has less
cash
at
the
time
of the
merger
than
the
parties currently
expect,
the
combined
company
will
need to raise
substantial
additional
capital
sooner
than
expected. Failure
to raise
capital
as and when needed,
on favorable
terms
or at
all,
would have a negative
impact
on the financial
condition
of the
combined
company
and its
ability
to develop
product
candidates.
If
the
combined company
is
unable
to obtain
funding
on a timely
basis,
it
may
be required
to delay
or discontinue
one or more
of its
development
programs
or the commercialization
of any product
candidates
or be unable
to expand its operations
or otherwise
capitalize
on potential
business
opportunities,
which could
materially
harm
its
business, financial
condition,
and results
of operations.
The merger may be completed even though material adverse changes may result from the announcement of the merger, industry-wide changes and other causes.
In general, either we or Molecular Templates can refuse to complete the merger if there is a material adverse change affecting the other party between March 16, 2017, the date of the Merger Agreement and the closing. However, certain types of changes do not permit either party to refuse to complete the merger, even if such change could be said to have a material adverse effect on us or Molecular Templates, including:
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any effect resulting from the execution, delivery, announcement or performance of obligations under the Merger Agreement or the announcement or pendency or anticipated consummation of the merger or any related transactions;
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any natural disaster or any act of terrorism, sabotage, military action or war (whether or not declared) or escalation or any worsening thereof;
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any change in United States generally accepted accounting principles or any change in applicable laws, rules or regulations or the interpretation thereof;
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any conditions generally affecting the industries in which Molecular Templates and Threshold and their respective subsidiaries participate or the United States or global economy or capital markets as a whole to the extent such conditions do not have a disproportionate impact on Molecular Templates or Threshold and their respective subsidiaries, as applicable;
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any failure by Molecular Templates or Threshold to meet internal projections of forecasts or third-party revenue or earnings predictions for any period ending on or after the date of the Merger Agreement; or
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the resignation or termination of a key director or officer of Molecular Templates or Threshold.
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If adverse changes occur and Threshold and Molecular Templates still complete the merger, the combined organization stock price may suffer. This in turn may reduce the value of the merger to the stockholders of Threshold, Molecular Templates or both.
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While
Threshold and Molecular
have received
commitmen
t
s for
t
he purchase of $40.0 million
in equity
securities of the combined company, consummation of the concurrent financing is subject to conditions and is
not a condition
to closing
the merger.
If
Molecular
and Threshold complete
the merger,
but they
do not
complete
the concurrent
financing,
then the combined
company
may
need to raise
additional
capital
by issuing
securities
or debt
or through licensing
arrangements,
which may
be on worse commercial
terms
than the concurrent
financing,
cause significant
dilution
to the combined
company’s
stockholders,
restrict
the combined
company’s
operations
or require
the combined
company
to relinquish
proprietary
rights.
Threshold
and Molecular
have received
from
Longitude
Venture
Partners
III,
L.P., or Longitude,
an equity commitment
letter,
pursuant
to which, immediately
following
the
closing
of the
merger,
Longitude
will
purchase
$20.0 million
of equity
securities
in the
combined
company.
Longitude’s
investment
is
subject
to certain conditions,
including
the
closing
of the
merger
and the
parties’ having
secured
commitments
from
additional investors for the purchase of an additional $20.0 million of such securities, which minimum condition has been
satisfie
d
. The closing
of the
merger
is
not contingent
upon the
completion
of this
financing.
Holders
of equity
in
the
combined
company
immediately
following
the
merger
will
experience
significant
dilution
as a result
of the closing
of the
concurrent
financing,
which, assuming
the
conditions
to the
closing
of the
concurrent
financing
are satisfied,
will
take
place
immediately
following
the
completion
of the
merger.
Since
the
concurrent
financing
is subject
to conditions
and is
not a condition
to the
merger,
Molecular
and Threshold
may
complete
the
merger
but not the
concurrent
financing.
If
this
were to occur,
the
combined
company
would have substantially
less
funds than
Molecular
and Threshold
currently
anticipate
and may
be required
to raise
additional
funds
sooner
than currently
planned.
Additional
financing
may
not be available
to the
combined
company
when it
needs
it
or may
not be
available
on favorable
terms.
To the
extent
that
the
combined
company
raises
additional
capital
by issuing
equity securities,
the
terms
of such an issuance
may
be on worse commercial
terms
than
the
concurrent
financing
and may
cause
more
significant
dilution
to the
combined
company’s
stockholders’
ownership,
and the
terms
of any new equity
securities
may
have preferences
over
the
combined
company’s
common
stock.
Any debt
financing the
combined
company
enters
into
may
involve
covenants
that
restrict
its
operations.
These restrictive
covenants
may
include
limitations
on additional
borrowing
and specific
restrictions
on the
use of the
combined
company’s assets,
as well
as prohibitions
on its
ability
to create
liens,
pay dividends,
redeem
its
stock
or make
investments. In addition,
if
the
combined
company
raises
additional
funds
through
licensing
arrangements,
it
may
be necessary
to relinquish
potentially
valuable
rights
to current
product
candidates
and potential
products
or
proprietary
technologies,
or grant
licenses
on terms
that
are
not favorable
to the
combined
company.
Some Threshold officers and directors have interests in the merger that are different from yours and that may influence them to support or approve the merger without regard to your interests.
Certain officers and directors of Threshold participate in arrangements that provide them with interests in the merger that are different from yours, including, among others, severance benefits, the acceleration of stock option vesting, the ability to require Threshold to repurchase certain warrants, payment of deferred and current year incentive compensation,, continued indemnification
and the
potential
ability
to sell
an increased
number
of shares
of common
stock
of the
combined
company
in accordance
with Rule 144 under
the
Securities
Act of 1933, as amended,
or the
Securities
Act.
For example, in connection with Threshold hiring its executive officers, Threshold entered into customary severance agreements with its executive officers that provide them with cash severance payments, reimbursement for health coverage costs and the acceleration of their outstanding equity awards by 24 months in the event their employment is terminated without cause in connection with or following a change of control of Threshold. Based on the terms of these employment agreements, Threshold's executive officers are contractually entitled to these severance payments, benefits and accelerated vesting because they will be terminated in connection with the consummation of the merger.
Based on the terms of their respective severance agreements, Threshold's executive officers will be entitled to receive an aggregate total value of approximately $1.4 million in severance benefits due to the terminations of their employment
upon a change of control to occur in connection with the consummation of the Merger. These interests, among others, may influence the officers and directors of Threshold to support or approve the merger.
The market price of Threshold common stock following the Merger may decline as a result of the Merger.
The market price of Threshold common stock may decline as a result of the Merger for a number of reasons including if:
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investors react negatively to the prospects of the combined organization's business and prospects from the Merger;
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the effect of the Merger on the combined organization's business and prospects is not consistent with the expectations of financial or industry analysts; or
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the combined organization does not achieve the perceived benefits of the Merger as rapidly or to the extent anticipated by financial or industry analysts.
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Threshold stockholders may not realize a benefit from the Merger commensurate with
the ownership dilution they will experience in connection with the merger.
If the combined organization is unable to realize the full strategic and financial benefits currently anticipated from the Merger, Threshold stockholders will have experienced substantial dilution of their ownership interests in their respective companies without receiving any commensurate benefit, or only receiving part of the commensurate benefit to the extent the combined organization is able to realize only part of the strategic and financial benefits currently anticipated from the Merger. Threshold stockholders will experience further dilution upon the closing of the Financing, which is expected to occur immediately following the closing of the Merger.
If the merger is not completed, our stock price may decline significantly.
The market price of our common stock is subject to significant fluctuations. During the 12-month period ended December 31, 2016, the sales price of our common stock on The NASDAQ Capital Market ranged from a high of $1.22 in September 2016 to a low of $0.27 in February 2016. Market prices for securities of early-stage pharmaceutical, biotechnology and other life sciences companies have historically been particularly volatile. In addition, the market price of our common stock will likely be volatile based on whether stockholders and investors believe that we can complete the Merger or otherwise raise additional capital to support our operations if the merger is not consummated and another strategic transaction cannot be identified, negotiated and consummated in a timely manner, if at all. The volatility of the market price of Threshold common stock is exacerbated by low trading volume. Additional factors that may cause the market price of our common stock to fluctuate include:
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the initiation of, material developments in, or conclusion of litigation to enforce or defend its intellectual property rights or defend against the intellectual property rights of others;
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the entry into any in-licensing agreements securing licenses, patents or development rights;
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the entry into, or termination of, key agreements, including commercial partner agreements;
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announcements by commercial partners or competitors of new commercial products, clinical progress or the lack thereof, significant contracts, commercial relationships or capital commitments;
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adverse publicity relating to antibody-based drug candidates, including with respect to other products and potential products in such markets;
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the introduction of technological innovations or new therapies that compete with its potential products;
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•
|
the loss of key employees;
|
|
•
|
future sales of its common stock;
|
|
•
|
general and industry-specific economic conditions that may affect its research and development expenditures; and
|
|
•
|
period-to-period fluctuations in financial results.
|
Moreover, the stock markets in general have experienced substantial volatility that has often been unrelated to the operating performance of individual companies. These broad market fluctuations may also adversely affect the trading price of Threshold common stock. In the past, following periods of volatility in the market price of a company's securities, stockholders have often instituted class action securities litigation against the company. Such litigation, if instituted, could result in substantial costs and diversion of management attention and resources, which could significantly harm Threshold's profitability and reputation.
During the pendency of the Merger, we may not be able to enter into a business combination with another party at a favorable price because of restrictions in the Merger Agreement, which could adversely affect our businesses.
Covenants in the Merger Agreement impede our ability to make acquisitions, subject to certain exceptions relating to fiduciaries duties, as set forth below, or complete other transactions that are not in the ordinary course of business pending completion of the Merger. As a result, if the Merger is not completed, we may be at a disadvantage to our competitors during that period. In addition, while the Merger Agreement is in effect, we are generally prohibited from, among other things, soliciting, initiating, knowingly encouraging or entering into certain extraordinary transactions, such as a merger, sale of assets or other business combination outside the ordinary course of business, with any third party. Any such transactions could be favorable to our stockholders.
Certain provisions of the Merger Agreement may discourage third parties from submitting alternative takeover proposals, including proposals that may be superior to the arrangements contemplated by the Merger Agreement.
28
The terms
of the
merger
agreement
prohibit
each
of Threshold
and
Molecular
from
soliciting
competing
proposals
or cooperating
with persons
making
unsolicited
takeover
proposals,
except
in limited
circumstances when such party’s
board
of directors
determines
in good faith,
after
consultation
with its
independent
financial advisor,
if
any, and outside
counsel,
that
an unsolicited
competing
proposal
constitutes,
or would reasonably
be expected
to result
in, a superior
competing
proposal
and that
failure
to take
such action
would be reasonably likely
to result
in a breach
of the
fiduciary
duties
of the
board
of directors.
In addition,
if
Threshold
or Molecular terminates
the
merger
agreement
under
specified
circumstances,
including
terminating
because
of a decision
of a board
of directors
to recommend
a superior
competing
proposal,
Threshold
or Molecular
would be required
to pay a termination
fee
of $750,000 and reimburse
up to $150,000 of the
other
party’s
non-legal
third-party expenses
as well
as all
of its
legal
third-party
expenses
associated
with preparing
this
Registration
Statement
on Form
S-4. This termination
fee
may
discourage
third
parties
from
submitting
competing
proposals
to Threshold or Molecular
or their
stockholders,
and may
cause
the
respective
boards
of directors
to be less
inclined
to recommend
a competing
proposal.
During the pendency of the merger,
Threshold and Molecular
may
not be able
to enter
into
a business combination
with another party
on favorable
terms
because
of restrictions
in the merger
agreement,
which could adversely
affect
their
respective
businesses.
Covenants
in the
merger
agreement
impede
the
ability
of Threshold
and Molecular
to make
acquisitions, subject
to specified
exceptions
relating
to fiduciary
duties
or complete
other
transactions
that
are
not in the ordinary
course
of business
pending
completion
of the
merger.
As a result,
if
the
merger
is
not completed,
the parties
may
be at
a disadvantage
to their
competitors
during
that
period.
In addition,
while
the
merger
agreement is
in effect,
each
party
is
generally
prohibited
from
soliciting,
initiating,
encouraging
or entering
into
specified extraordinary
transactions,
such as a merger,
sale
of assets
or other
business
combination,
with any third
party,
subject
to specified
exceptions.
Any such transactions
could
be favorable
to such party’s
stockholders.
Certain
provisions
of the merger
agreement
may
discourage
third
parties
from
submitting
competing proposals,
including
proposals
that
may
be superior
to the arrangements
contemplated
by the merger agreement.
The terms
of the
merger
agreement
prohibit
each
of Threshold
and Molecular
from
soliciting
competing proposals
or cooperating
with persons
making
unsolicited
takeover
proposals,
except
in limited
circumstances when such party’s
board
of directors
determines
in good faith,
after
consultation
with its
independent
financial advisor,
if
any, and outside
counsel,
that
an unsolicited
competing
proposal
constitutes,
or would reasonably
be expected
to result
in, a superior
competing
proposal
and that
failure
to take
such action
would be reasonably likely
to result
in a breach
of the
fiduciary
duties
of the
board
of directors.
In addition,
if
Threshold
or Molecular terminates
the
merger
agreement
under
specified
circumstances,
including
terminating
because
of a decision
of a board
of directors
to recommend
a superior
competing
proposal,
Threshold
or Molecular
would be required
to pay a termination
fee
of $750,000 and reimburse
up to $150,000 of the
other
party’s
non-legal
third-party expenses
as well
as all
of its
legal
third-party
expenses
associated
with preparing
this
Registration
Statement
on Form
S-4. This termination
fee
may
discourage
third
parties
from
submitting
competing
proposals
to Threshold or Molecular
or their
stockholders,
and may
cause
the
respective
boards
of directors
to be less
inclined
to recommend
a competing
proposal.
Because the lack
of a public
market
for
Molecular’s
capital
stock
makes
it
difficult
to evaluate
the fair market
value
of Molecular’s
capital
stock,
the stockholders
of Molecular
may
receive
consideration
in the merger
that
is
less
than the fair
market
value
of Molecular’s
capital
stock
and/or Threshold may
pay more than the fair
market
value
of Molecular’s
capital
stock.
The outstanding
capital
stock
of Molecular
is
privately
held
and is
not traded
in any public
market.
The lack of a public
market
makes
it
extremely
difficult
to determine
the
fair
market
value
of Molecular’s
capital
stock. Because
the
percentage
of Threshold
equity
to be issued
to Molecular
stockholders
was determined
based
on negotiations
between
the
parties,
it
is
possible
that
the
value
of the
Threshold
common
stock
to be received
by Molecular
stockholders
will
be less
than
the
fair
market
value
of Molecular’s
capital
stock,
or Threshold
may
pay
more
than
the
aggregate
fair
market
value
for
Molecular’s
capital
stock.
29
Threshold’s
severance
agreements
with Threshold’s
executive
officers
and certain
other
employees require
Threshold to pay severance
benefits
to any of those
persons
who
are terminated
under
specified circumstances,
including
in connection
with a change of control
of Threshold, which could harm Threshold’s financial
condition
or results.
Threshold’s
executive
officers
and certain
other
employees
are
parties
to severance
agreements
that
contain change
of control
and severance
provisions
providing
for
severance
and other
benefits
and acceleration
of vesting of stock
options
in the
event
of a termination
of employment
under
specified
circumstances.
Based on the
terms
of their
respective
severance
agreements,
Threshold’s
executive
officers
will
be entitled
to receive
an aggregate total value of approximately $1.4 million in severance benefits due to the terminations of their employment a change
of control
to occur
in connection
with the
consummation
of the
merger.
The payment
of these
severance
benefits
could
harm
Threshold’s
financial
condition
and results
and reduce
the
cash
available
to the
combined
company
following
the
merger.
Risks Related to Drug Discovery, Development and Commercialization
We remain dependent upon the success of evofosfamide. If we are unable to successfully develop and obtain regulatory approval for evofosfamide, our business and future prospects will be severely harmed.
We have focused our development act
ivities on evofosfamide, and substantially all of our efforts and expenditures continue to be devoted to evofosfamide. Accordingly, our future prospects are dependent on the successful development, regulatory approval and commercialization of evofosfamide.
On June 2, 2016, we received preliminary comments from the FDA relating to our request for a meeting indicating that our analysis of the data from the MAESTRO study and the data from a supporting randomized Phase 2 study would not provide adequate efficacy data to support the submission of a new drug application, or NDA, for evofosfamide for the treatment of patients with locally advanced unresectable or metastatic pancreatic adenocarcinoma previously untreated with chemotherapy. Accordingly, we would be required to successfully conduct one or more additional Phase 3 clinical trials before the FDA would accept any NDA for evofosfamide.
Our inability to submit an NDA to the FDA for
evofosfamide in the absence of additional Phase 3 development
has significantly harmed our business and future prospects. We have conducted
additional analyses of the data from MAESTRO trial and have
reviewed and discussed the results of our analyses
with the Pharmaceuticals and Medical Devices Agency, or PMDA, in Japan,
to deter
mine potential registration pathways. However, in March 2017, Threshold received minutes from its formal meeting with the
PMDA
in Japan
indicating
that
its
analysis
of the
data
from
the
MAESTRO
trial
and the
data
from
the
supporting randomized
Phase II
study
would not provide
adequate
efficacy
data
to support
the
submission
of a New
Drug Application,
or JNDA,
to the
PDMA
for
evofosfamide
for
the
treatment
of patients
with locally
advanced unresectable
or metastatic
pancreatic
adenocarcinoma
previously
untreated
with chemotherapy.
While
Threshold is
currently
in discussions
with the
PMDA
to clarify
the
scope
of a new clinical
trial
for
which the
PMDA
would consider
necessary
to accept
a JNDA
for
evofosfamide
in Japan
based
on the
previous
results
observed
in the Japanese
sub-population
in the
MAESTRO
trial,
Threshold
would be required
to obtain
additional
capital
in order
to conduct
any such new clinical
trial,
and there
can be no assurances
that
Threshold
would be successful
in obtaining
the
additional
funding,
whether
through
new collaborative,
partnering
or other
strategic
arrangements or otherwise,
necessary
to support
any additional
clinical
development
of evofosfamide.
Our current evofosfamide development strategy is limited to the planned Phase 1 clinical trial of evofosfamide in combination with immune checkpoint antibodies in collaboration with researchers and clinicians at The University of Texas MD Anderson Cancer Center, and we do not expect to conduct any further development of evofosfamide beyond the planned Phase 1 clinical trial unless such development is part of a new collaborative or partnering arrangement or other strategic transaction or we are otherwise able to raise significant additional funding.
30
In
any event, the
process of obtaining regulatory approvals is expensive, often takes many years, if approval is obtained at all, and can vary substantially based upon the type, complexity and novelty of the product candidates involved. Changes in the enactme
nt of additional statutes or regulations, or changes in regulatory review for each submitted product application, may cause delays in the approval or rejection of an application. In addition, varying interpretations of the data obtained from preclinical an
d clinical testing could delay, limit or prevent regulatory approval of evofosfamide.
Any regulatory approval we
may
ultimately obtain
, from the PMDA or otherwise,
may be limited in scope or subject to restrictions or post-approval commitments that render
evofosfamide or potential future
product
candidates
not commercially viable.
In particular, even if we are able to obtain and maintain regulatory approval of evofosfamide in Japan, the commercial prospects for evofosfamide could be diminished as a result o
f the more limited patient population in Japan.
If any regulatory approval that we
do
obtain
, including from the PMDA,
is delayed or is limited, we may decide not to commercialize the
applicable
product candidate after receiving the approval. In addition
, in March 2016, we and Merck KGaA
agreed to terminate our collaboration and, as a result, we will not receive any clinical development milestones or any other funding from Merck KGaA for the purpose of conducting any further clinical development of
evofosfamide
.
Under our former collaboration with Merck KGaA,
Merck KGaA was responsible for 70% of the worldwide development expenses for evofosfamide
. If we are unable to obtain sufficient additional funding for the further development of
evofosfamide
, w
hether through new
collaborative,
partnering or
other strategic
arrangements or otherwise, we may be required to cease further development of our
evofosfamide
program
. Also, issues with the successful and timely transfer of evofosfamide development activit
ies from Merck KGaA could significantly impact our ability to pursue registration with regulatory authorities and potential partners, and there can be no assurance that such development activities will be successfully transferred to us in a timely manner
or at all
. For these and other reasons, we cannot assure you that we will be able to advance the development of evofosfamide.
In such event, we may be required to abandon the development of
evofosfamide
and forego any return on our investment from our
evo
fosfamide
program, which would severely harm our future prospects and may cause us to cease operations.
Even if we are able to meaningfully advance the development of
evofosfamide
,
the failure of evofosfamide in the future to achieve successful clinical trial endpoints, delays in clinical trial enrollment or events or in the clinical development of evofosfamide, unanticipated adverse side effects related to evofosfamide or any other unfavorable developments or information related to evofosfamide would further significantly harm our business and our future prospects. For example, in January 2016, we announced that an IDSMB concluded that our registrational Phase 2 clinical trial of evofosfamide plus pemetrexed versus pemetrexed alone in patients with non-squamous non-small cell lung cancer was unlikely to reach its primary endpoint of improving overall survival with statistical significance and, as a result, enrollment in this trial was closed and in connection therewith, we determined to cease enrollment in all Threshold-sponsored trials of evofosfamide. Moreover, evofosfamide is not expected to be commercially available in the near term, if at all. Further, the commercial success of evofosfamide, if any, will depend upon its acceptance by physicians, patients, third party payors and other key decision-makers as a therapeutic and cost effective alternative to currently available products. In any event, if we are unable to successfully develop, obtain regulatory approval for and commercialize evofosfamide, our ability to generate revenue from product sales will be significantly delayed or precluded altogether and our business would be materially and adversely affected, and we may not be able to continue as a going concern.
31
We currently lack the ability to discov
er additional prodrug product candidates and we also may not be able to successfully acquire or in-license and develop additional prodrug product candidates or programs
suitable for clinical testing
, either of which could limit our growth and revenue poten
tial.
Evofosfamide
is currently our only product
candidate
in the clinical development stage and we may be unable to develop additional product candidates suitable for clinical testing. In this regard, as part of our workforce reduction in December 2015 that followed the reported negative results from the two Phase 3 clinical trials of evofosfamide, we eliminated our discovery research activities conducted in-house, which prevents our ability to discover additional prodrug product candidates at this time. In addition, given the uncertain prospects for evofosfamide, our strategy includes evaluating opportunities to acquire or in-license additional product candidates or development programs that build on our expertise and complement our pipeline. Any growth through acquisition or in-licensing will depend upon the availability of suitable product candidates at favorable prices and upon advantageous terms and conditions. Even if appropriate acquisition or in-licensing opportunities are available, we currently do not have, and may not in the future have, the financial resources necessary to pursue them. In addition, other companies, many of which may have substantially greater financial, marketing and sales resources, compete with us for acquisition or in-licensing opportunities. In addition, we may not be able to realize the anticipated benefits of any acquisition or in-licensing opportunity for a variety of reasons, including the possibility that a product candidate proves not to be safe or effective in later cli
nical trials or the integration of an acquired or licensed product candidate gives rise to unforeseen difficulties and expenditures.
For example, in September 2014, we licensed rights to tarloxotinib, a clinical-stage investigational compound that we evaluated in two Phase 2 proof-of-concept clinical trials. However, based on the interim results of the two Phase 2 proof-of-concept clinical trials
, we determined in September 2016 to discontinue any further development of
tarloxotinib and we will therefore not realize any return on our investment in tarloxotinib.
In any event, any growth through development of additional product candidates will depend principally on our ability to identify, and then to obtain the necessary funding to pursue the acquisition of in-licensing of, additional product candidates on commercially reasonable terms, as well as our ability to develop those product candidates and our ability to obtain additional funding, whether through partnering arrangements or otherwise, to complete the development of, obtain regulatory approval for and commercialize these product candidates. If we are unable to discover or obtain suitable product candidates for development, our growth and revenue potential could be significantly harmed, and we could be
required to cease operations.
If we do not establish collaborations or other strategic transactions for our current and potential future product candidates or otherwise raise substantial additional capital, we will likely need to alter, delay or abandon our development and any commercialization plans.
Our strategy includes selectively partnering or collaborating with other pharmaceutical and biotechnology companies to assist us in furthering the development and potential commercialization of our current and potential future product candidates. In this regard, as a result of the termination of our collaboration with Merck KGaA, we are no longer eligible to receive any further milestone payments or other funding from Merck KGaA, including the
70% of worldwide development costs for evofosfamide that were previously borne by Merck KGaA. Since we are no
w solely responsible for the further development and commercialization of
evofosfamide at our own cost, we are
evaluating potential partnering opportunities for evofosfamide, and in this regard, we are currently seeking a pharmaceutical partner for evofosfamide with a commercial presence in oncology in Japan. In this regard, our ability to advance the clinical development of evofosfamide is dependent upon our abili
ty to enter into new partnering,
collaborative or other strategic
arrangements for evofosfamide, or to otherwise obtain sufficient additional funding for such development. We face significant competition in seeking appropriate strategic partners, and colla
borative
and partnering arrangements
are complex and time consuming to negotiate and document. We may not be successful in entering into new partnering,
collaborative
or other strategic arrangements with third parties on acceptable terms, or at all. In add
ition, we are unable to predict when, if ever, we will enter into any additional partnering,
collaborative or other strategic arrangements because of the numerous risks and uncertainties associated with establishing such arrangements. If we are unable to n
egotiate new partnering, collaborative or other strategic arrangements, we may have to curtail the development of a particular product candidate, reduce, delay, or terminate its development or one or more of our other development programs, delay its potential commercialization or reduce the scope of our sales or marketing activities or increase our expenditures and undertake development or commercialization activities at our own expense. For example, we may have to cease further development of our evofosfam
ide program if we are unable to raise sufficient funding for any additional clinical development of evofosfamide through new partnering,
collaborative or other strategic arrangements with third parties or other financing alternatives. In this regard, if w
e decide to undertake any further development of evofosfamide
beyond our planned Phase 1
clinical trial of evofosfamide
, we would need to obtain additional funding for such development, either through financing or by entering into partnering, collaborative
or other strategic
arrangements with third parties for any such further development and we may be unable to do. While we are currently determining third party interest in partnering or acquiring TH-3424 and HX4, we may be unable to partner or divest these
assets
in a timely manner, or at all, and therefore may not receive any return on our investment in these assets. If we do not have sufficient funds, we will not be able to advance the development of our product candidates or otherwise bring our product candidates to market and generate product revenues.
32
Any
partnering,
collaborative
or other strategic
arrangements that we establish in the future may not be successful or we may otherwise not realize the anticipated benefits from these
arrangements
.
In addition, any
such
future arrangements may place the development and commercialization of our product candidates outside our control, may require us to relinquish important rights or may otherwise be on terms unfavorable to us
We have in the past esta
blished and intend to continue to establish partnering,
collaborative
or other strategic arrangements
with third parties to develop and commercialize our product candidates, and these arrangements may not be successful or we may otherwise not realize the a
nticipated benefits from these arrangements. For example, in March 2016, we and Merck KGaA, mutually agreed to terminate our collaboration for the development and commercialization of our evofosfamide product candidate, and, as a result, we will not receive any additional milestone payments or other funding from Merck KGaA on account of our collaboration with Merck KGaA. As of the date of this report, we have no ongoing collaborations for the development and commercialization of our product candidates. We
may not be able to locate third-party strategic partners to develop and market our product candidates, and we lack the capital and resources necessary to develop our product candidates alone.
Dependence on partnering,
collaborative or other strategic arrangements subjects us to a number of risks, including:
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•
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we may not be able to control the amount and timing of resources that our potential strategic partners may devote to our product candidates;
|
|
•
|
potential strategic partners may experience financial difficulties or changes in business focus;
|
|
•
|
we may be required to relinquish important rights such as marketing and distribution rights;
|
|
•
|
should a strategic partner fail to develop or commercialize one of our compounds or product candidates, we may not receive any future milestone payments and will not receive any royalties for the compound or product candidate;
|
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•
|
business combinations or significant changes in a strategic partner’s business strategy may also adversely affect a collaborator’s willingness or ability to complete its obligations under any arrangement;
|
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•
|
under certain circumstances, a strategic partner could move forward with a competing product candidate developed either independently or in collaboration with others, including our competitors; and
|
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•
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partnering, collaborative
and other strategic arrangements are often terminated or allowed to expire, which could delay the development and may increase the cost of developing our product candidates.
|
Preclinical studies and Phase 1
or 2 clinical trials of our product candidates may not predict the results of subsequent human clinical trials.
Preclinical studies, including studies of our product candidates in animal models of disease, may not accurately predict the results of human clinical trials of those product candidates. In particular, promising animal studies suggesting the efficacy of evofosfamide for the treatment of different types of cancer may not accurately predict the ability of evofosfamide to treat cancer effectively in humans. Evofosfamide or any other compounds we may develop may be found not to be efficacious in treating cancer, alone or in combination with other agents, when studied in human clinical trials. In addition, we will not be able to commercialize our product candidates until we obtain FDA approval in the United States or approval by comparable regulatory agencies in Japan, Europe and other countries. A number of companies in the pharmaceutical industry, including us and those with greater resources and experience than us, have suffered significant setbacks in Phase 3 clinical trials, even after encouraging results in earlier clinical trials.
33
To satisfy FDA, PMDA or
other
foreign regulatory approval standards for the commercial sale of our product candidates, we must demonstrate in adequate a
nd controlled clinical trials that our product candidates are safe and effective. Success in early clinical trials, including in Phase 1 and Phase 2 clinical trials, does not ensure that later clinical trials will be successful. Initial results from Phase
1 and Phase 2 clinical trials of evofosfamide have in the past not been, and may again in the future not be, confirmed by later analysis or in subsequent larger clinical trials. For example, the results that achieved the primary endpoint for progression-fr
ee survival in the Phase 2b trial of evofosfamide in pancreatic cancer did not predict the results of overall survival for patients in the MAESTRO trial. Likewise, the results in the Phase 1/2 trial of evofosfamide in patients with soft tissue sarcoma did
not predict the results of overall survival for patients in the 406 trial. In both cases, the
406 trial and the MAESTRO trial failed to meet their primary endpoints of
demonstrating a statistically significant improvement in overall survival, based on our
analyses for the 406 trial and Merck KGaA’s analyses for the MAESTRO trial, notwithstanding positive results in earlier clinical trials.
In addition, in January 2016, we announced that an IDSMB concluded that our registrational Phase 2 clinical trial of ev
ofosfamide plus pemetrexed versus pemetrexed alone in patients with non-squamous non-small cell lung cancer was unlikely to reach its primary endpoint of improving overall survival with statistical significance and, as a result, enrollment in this trial wa
s closed.
As these examples illustrate, despite the results reported in earlier clinical trials for evofosfamide, we do not know whether potential future clinical trials that we may conduct will demonstrate adequate efficacy and safety to result in regula
tory approval to market evofosfamide. Our failure to successfully complete any potential future clinical trials and obtain regulatory approval for evofosfamide would materially and adversely affect our business and severely harm our future prospects.
Delays in our
potential future clinical trials could result in us not achieving anticipated developmental milestones when expected, increased costs and delay our ability to obtain regulatory approval and commercialize our product candidates.
Delays in the progr
ession of our potential future clinical trials could result in us not meeting previously announced clinical milestones and could materially impact our product development costs and milestone revenue and delay regulatory approval of our product candidates.
We do not know whether our potential future clinical trials of evofosfamide, including our planned Phase 1 clinical trial of evofosfamide, will be completed on schedule, if at all. Clinical trials can be delayed for a variety of reasons, including:
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•
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adverse safety events experienced during our clinical trials;
|
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a lower than expected frequency of clinical trial events;
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delays in obtaining clinical materials;
|
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•
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slower than expected patient recruitment to participate in clinical trials;
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•
|
delays in reaching agreement on acceptable clinical trial agreement terms with prospective sites or obtaining institutional review board approval,
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•
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delays in obtaining regulatory approval to commence new trials;
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changes to clinical trial protocols.
|
Delays in clinical trials can also
result from difficulties in enrolling patients in our potential future clinical trials, which could increase the costs or affect the timing or outcome of these clinical trials. This is particularly true with respect to diseases with relatively small patient populations. Timely completion of clinical trials depends, in addition to the factors outlined above, on our ability to enroll a sufficient number of patients, which itself is a function of many factors, including:
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the therapeutic endpoints chosen for evaluation;
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•
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the eligibility criteria defined in the protocol;
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•
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the perceived benefit of the investigational drug under study;
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•
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the size of the patient population required for analysis of the clinical trial’s therapeutic endpoints;
|
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•
|
our ability to recruit clinical trial investigators and sites with the appropriate competencies and experience;
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•
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our ability to obtain and maintain patient consents; and
|
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•
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competition for patients by clinical trial programs for other treatments.
|
If we do not successfully complete our potential future clinical trials on schedule, the price of our common stock may further decline.
34
Our product candidates must undergo rigorous clinical testing, the results of which are uncertain and could substantially delay or prevent us from bringing them t
o market.
Before we can obtain regulatory approval for a product candidate, we must undertake extensive clinical testing in humans to demonstrate safety and efficacy to the satisfaction of the FDA or other regulatory agencies. Clinical trials of new drug candidates sufficient to obtain regulatory marketing approval are expensive and take years to complete.
We cannot be certain of our successfully completing clinical testing within the time frames we have planned or anticipated, or at all. We may experience numerous unforeseen events during, or as a result of, the clinical trial process that could delay or prevent us from receiving regulatory approval or commercializing our product candidates, including the following:
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•
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our clinical trials may produce negative
or inconclusive results, such as the results in the 406 trial,
the MAESTRO trial and our Phase 2 proof-of-concept trials of
tarloxotinib
, and we may decide, or regulators may require us, to conduct additional clinical and/or preclinical testing or to abandon programs;
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the results obtained in earlier stage clinical testing may not be indicative of results in future clinical trials;
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clinical trial results may not meet the level of statistical significance required by the FDA, the PMDA or other regulatory agencies;
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enrollment in clinical trials for our product candidates may be slower than we anticipate, resulting in significant delays and additional expense;
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we or regulators may suspend or terminate our clinical trials if the participating patients are being exposed to unacceptable health risks; and
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the effects of our product candidates on patients may not be the desired effects or may include undesirable side effects or other characteristics that may delay or preclude regulatory approval or limit their commercial use, if approved.
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In addition, clinical results are susceptible to varying interpretations that may delay, limit or prevent regulatory approvals. Negative or inconclusive results or adverse safety events, including patient fatalities that may be attributable to our product candidates, during a clinical trial could cause the trial to be terminated or require additional studies. Furthermore, any of our future clinical trials may be overseen by IDMCs or Data and Safety Monitoring Boards, or DSMBs. These independent oversight bodies are comprised of external experts who review the progress of the ongoing clinical trials as well as safety from other trials, and make recommendations concerning a trial’s continuation, modification, or termination based on periodic review of, unblinded data. Any of our potential future clinical trials overseen by an IDMC or DSMB may be discontinued or amended in response to recommendations made by responsible IDMCs or DSMBs based on their review of trial results and an IDMC or DSMB may determine to delay or suspend the trial due to safety or futility findings based on events occurring during a clinical trial. For example, in January 2016, we announced that an IDSMB concluded that our registrational Phase 2 clinical trial of evofosfamide plus pemetrexed versus pemetrexed alone in patients with non-squamous non-small cell lung cancer was unlikely to reach its primary endpoint of improving overall survival with statistical significance and, as a result, enrollment in this trial was closed and in connection therewith, we determined to cease enrollment in all Threshold-sponsored trials of evofosfamide. The recommended termination or modification of any of our potential future clinical trials by an IDMC or DSMB, could materially and adversely impact the future development of our product candidates, and our business, prospects, operating results, and financial condition may be materially harmed.
We are subject to significant regulatory approval requirements, which could delay, prevent or limit our ability to market our product candidates.
Our research and development activities, preclinical studies, clinical trials and the anticipated manufacturing and marketing of our product candidates are subject to extensive regulation by the FDA, the PMDA and other regulatory agencies in the United States and Japan and by comparable authorities in Europe and elsewhere. We require the approval of the relevant regulatory authorities before we may commence commercial sales of our product candidates in a given market. The regulatory approval process is expensive and time consuming, and the timing of receipt of regulatory approval is difficult to predict. Our product candidates could require a significantly longer time to gain regulatory approval than expected, or may never gain approval. We cannot be certain that, even after expending substantial time and financial resources, we will obtain regulatory approval for any of our product candidates. This was the case with the FDA, which would not accept an NDA based on the data from the MAESTRO study. A delay or denial of regulatory approval could delay or prevent our ability to generate product revenues and to achieve profitability.
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Changes in regulatory approval policies during the development period of any
of our product candidates, changes in, or the enactment of, additional regulations or statutes, or changes in regulatory review practices for a submitted product application may cause a delay in obtaining approval or result in the rejection of an applicat
ion for regulatory approval. Regulatory approval, if obtained, may be made subject to limitations on the indicated uses for which we may market a product. These limitations could adversely affect our potential product revenues. Regulatory approval may also
require costly post-marketing follow-up studies. In addition, the labeling, packaging, adverse event reporting, storage, advertising, promotion and record-keeping related to the product will be subject to extensive ongoing regulatory requirements. Further
more, for any marketed product, its manufacturer and its manufacturing facilities will be subject to continual review and periodic inspections by the FDA or other regulatory authorities. Failure to comply with applicable regulatory requirements may, among
other things, result in fines, suspensions of regulatory approvals, product recalls, product seizures, operating restrictions and criminal prosecution.
Evofosfamide are based on targeting the microenvironment of solid tumors and some hematological malignancies, which currently is an unproven approach to therapeutic intervention.
Our product candidates are designed to target the microenvironment of solid tumors and some hematological malignancies by, in the case of evofosfamide, harnessing hypoxia for selective toxin activation. We have not nor, to our knowledge, has any other company, received regulatory approval for a drug based on these approaches. We cannot be certain that our approaches will lead to the development of approvable or marketable drugs. Our approaches may lead to unintended, or off-target, adverse effects or may lack efficacy or contribution to efficacy in combination with other anti-cancer drugs.
In addition, the FDA, the PMDA or other regulatory agencies may lack experience in evaluating th
e safety and efficacy of drugs based on these targeting approaches, which could lengthen the regulatory review process, increase our development costs and delay or prevent commercialization of our current and potential future product candidates.
Our product candidates may have undesirable side effects that prevent or delay their regulatory approval or limit their use if approved.
Anti-tumor drugs being developed by us are expected to have undesirable side effects. For example, in clinical trials of evofosfamide, some patients have exhibited skin and/or mucosal toxicities that have in some cases caused patients to stop or delay therapy. The extent, severity and clinical significance of these or other undesirable side effects may not be apparent initially and may be discovered or become more significant during drug development or even post-approval. These expected side effects or other side effects identified in the course of clinical trials or that may otherwise be associated with our product candidates may outweigh the benefits of our product candidates. Side effects may prevent or delay regulatory approval or limit market acceptance if our products are approved. In this regard, our product candidates may prove to have undesirable or unintended side effects or other characteristics adversely affecting their safety, efficacy or cost effectiveness that could prevent or limit their approval for marketing and successful commercial use, or that could delay or prevent the commencement and/or completion of clinical trials for our product candidates.
We have not yet gained sufficient experience with a commercial formulation of evofosfamide.
The formulation of evofosfamide that was the subject of our prior
clinical trials and is the subject of our planned Phase 1 clinical trial was changed to address issues with a prior formulation that was subject to storage and handling requirements that were not suitable for a commercial product. The current formulation of evofosfamide may be suitable for a commercial product, but additional data will be required to verify this and there can be no assurance that we will be able to do so in a timely manner, if at all. If we are not able to develop a viable commercial formulation of evofosfamide, then we may be required to conduct additional Phase 3 clinical trials of evofosfamide, or we may need to develop an alternative commercial formulation, either of which could delay, perhaps substantially, our ability to obtain any regulatory approvals of evofosfamide.
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The initial clinical formulations developed for evofosfamide or
other
potential future product candidates may not remain stable throughout the clinical testing phase.
We have limited experience and data on the drug substance synthesis and the initial formulation for evofosfamide. This initial formulation and those of our potential future product candidates may not remain stable during the clinical testing phase. If these formulations were found to be unstable during clinical testing, we may be required to repeat the initial clinical trials which could increase our costs and delay the development of the applicable product candidate. We may be required to reformulate these product candidates, including evofosfamide, to improve stability. However, it is possible that we might not be able to develop a formulation of evofosfamide or other future product candidates with adequate quality that meets the need for testing in our clinical trials. We may also be required to perform additional clinical bridging studies which may further delay development. We may also be unable to scale up the manufacturing process to synthesize the current drug substance and current formulations, or the newly developed formulations, any of which could adversely affect our ability to advance the development of, and potentially obtain regulatory approval of, the applicable product candidate.
Even if we obtain regulatory
approvals
for our current and potential future product candidates, our marketed drugs will be subject to ongoing regulator
y review. If we fail to comply with continuing U.S. and foreign regulations, we could lose our approvals to market drugs and our business would be seriously harmed.
Following initial regulatory approval of any drugs we may develop, we will be subject to continuing regulatory review, including review of adverse drug experiences and clinical results that are reported after our drug products become commercially available. This would include results from any post-marketing tests or vigilance required as a condi
tion of approval. The manufacturer and manufacturing facilities used to make any of our drug candidates will also be subject to periodic review and inspection by regulatory agencies, including the PMDA should we be able to obtain regulatory approval of evofosfamide in Japan
. If a previously unknown problem or problems with a product or a manufacturing and laboratory facility used by us is discovered, regulatory agencies, including potentially
the PMDA, may impose restrictions on that product or on the manufacturing facility, including requiring us to withdraw the product from the market. Any changes to an approved product, including the way it is manufactured or promoted, often require regulatory approval before the product, as modified, can be marketed. Man
ufacturers of our products, if approved, will be subject to ongoing regulatory agency requirements for submission of safety and other post- market information. If such manufacturers fail to comply with applicable regulatory requirements, a regulatory agency may:
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impose civil or criminal penalties;
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suspend or withdraw our regulatory approval;
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suspend or terminate any of our ongoing clinical trials;
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refuse to approve pending applications or supplements to approved applications filed by us;
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impose restrictions on our operations;
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close the facilities of our contract manufacturers;
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seize or detain products or require a product recall, or
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revise or restrict labeling and promotion.
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Regulatory authorities may impose significant restrictions on
the indicated uses and marketing of pharmaceutical products.
Even if we obtain regulatory approval for evofosfamide, we would be subject to ongoing requirements by the regulatory authorities governing the manufacture, quality control, further development, labeling, packaging, storage, distribution, safety surveillance, import, export, advertising, promotion, recordkeeping and reporting of safety and other post-market information. The safety profile of any product will continue to be closely monitored by regulatory authorities after approval. If the regulatory authorities become aware of new safety information after approval of any of our product candidates, they may require labeling changes or establishment of a REMS or similar strategy, impose significant restrictions on a product’s indicated uses or marketing, or impose ongoing requirements for potentially costly post-approval studies or post-market surveillance. For example, the label ultimately approved for evofosfamide, if it achieves marketing approval, may include restrictions on use. Advertising and promotion of any product candidate that obtains approval will be heavily scrutinized by government agencies and the public. Violations, including promotion of our products for unapproved or off-label uses, are subject to enforcement letters, inquiries and investigations, and civil and criminal sanctions by regulatory authorities. Engaging in impermissible promotion of any approved products for off-label uses could also subject us to false claims litigation
under U.S.
federal and state statutes and comparable foreign rules and regulations, which could lead to civil and criminal penalties and fines and agreements that materially restrict the manner in which we promote or distribute any approved products.
If we do not lawfully promote any approved products, we may become subject to such litigation and, if we are not successful in defending against such actions, those actions could compromise our ability to become profitable.
We do not have a sales force or marketing infrastructure and may not develop an effective one.
We have no sales experience, as a company. There are risks involved with establishing our own sales and marketing capabilities, as well as entering into arrangements with third parties to perform these services. Developing an internal sales force and function will require substantial expenditures and will be time-consuming, and we may not be able to effectively recruit, train or retain sales personnel. On the other hand, if we enter into arrangements with third parties to perform sales, marketing and distribution services, our product revenues will be lower than if we market and sell any products that we develop ourselves. We may not be able to effectively sell our product candidates, if approved, which could materially harm our business and our financial condition.
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Risks Related to Our Financial Performance and Operations
We have incurred losses since our inception and anticipate that we will continue to incur significant losses for the foreseeable future, and our future profitability is uncertain.
Due to the recognition of the remaining $65.9 million of deferred revenue from our former collaboration with Merck KGaA during the quarter ended December 31, 2015, we reported net income of $
43.8 million for the year ended December 31, 2015. However, during the quarter ended March 31, 2017 we had a net loss of $5.1 million and we
have incurred losses in each of our other years since our inception in 2001, and we expect to incur losses for the foreseeable future. We have devoted and, subject to our ability to obtain additional funding and to otherwise
meaningfully advance the development of our product candidates, we
expect to continue to devote, substantially all of our resources to the development of evofosfamide. Accordingly, our future prospects remain dependent on the successful development, regulatory approval and commercialization of evofosfamide. In this regard, a substantial portion of our efforts have been devoted to the two pivotal Phase 3 clinical trials of evofosfamide. The failure of the 406 trial and the MAESTRO trial to meet their primary endpoints of
demonstrating a statistically significant improvement in overall survival as agreed upon with the FDA, based on our analyses for the 406 trial and Merck K
GaA’s analyses for the MAESTRO trial, has significantly depressed our stock price and harmed our future prospects. Likewise, the announcement of our decision to discontinue the development of
tarloxotinib following our analysis of the interim results of two Phase 2 proof-of-concept trials of tarloxotinib has
depressed our stock price and harmed our future prospects.
Although we have conducted
our own analyses of the data from MAESTRO trial and
have reviewed and discussed the results of our analyses
with the PMDA in Japan
to determine whether there is an appropriate path forward for submitting marketing authorization applications based on the data from the MAESTRO trial along with a bridging study, the PMDA and other health regulatory authorities may determine that the data from the MAESTRO trial and a bridging study are insufficient to support the approval of any marketing authorizations and that one or more additional clinical trials of
evofosfamide
would be required to be successfully conducted by us in or
der to support any such approval, including with respect to the Japanese sub-population we are targeting. If we are required to successfully conduct and complete any additional clinical trials of
evofosfamide
in order to support potential approval of
evofosfamide in Japan
, we would be required to obtain additional capital and there can be no assurances that we would be successful in obtaining the additional funding, whether through new collaborative,
partnering or other strategic arrangements or otherwise, necessary to support any additional clinical development of
evofosfamide.
Moreover, apart from the
planned Phase 1 clinical trial of
evofosfamide, we cannot currently predict whether and to what extent we may continue or increase evofosfamide development activities in future periods, if at all, and what our future cash needs may be for any such activities. For these and other reasons, we cannot assure you that we will be able to advance the development of evofosfamide.
In such event, we may be required to abandon the development of
evofosfamide
and forego any return on our investment from our
evofosfamide
program, which would severely harm our future prospects and may cause us to cease operations. In any event,
we do not expect to generate any revenue fro
m the commercial sales of evofosfamide or any potential future
product candidates, including evofosfamide, in the near term, and we expect to continue to have significant losses for the foreseeable future.
To attain ongoing profitability, we will need to develop products successfully and market and sell them effectively, or rely on other parties to do so. We cannot predict when we will achieve ongoing profitability, if at all. We have never generated revenue from the commercial sales of our product candidates, and there is no guarantee that we will be able to do so in the future. If we fail to become profitable, or if we are unable to fund our continuing losses, we would be unable to continue our research and development programs.
We need substantial additional funding and may be unable to raise capital, which could force us to delay, reduce or eliminate our drug discovery, product development and commercialization activities.
Developing drugs, conducting clinical trials, and commercializing products is expensive. Our future funding requirements will depend on many factors, including:
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the terms and timing of any future collaborative, licensing, acquisition or other strategic arrangements that we may establish for our product candidates;
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the amount and timing of any licensing fees, milestone payments and royalty payments from potential future partners or collaborators, if any;
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the amount and timing of contingent licensing fees, milestone payments and royalty payments that we are obligated to pay to third parties;
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the scope, rate of progress and cost of our potential
clinical trials, including our
planned Phase 1 clinical trial of
evofosfamide, and other development activities;
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the costs and timing of obtaining regulatory approvals;
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the cost of manufacturin
g clinical, and establishing commercial, supplies of our product candidates and any products that we may develop;
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the cost and timing of establishing sales, marketing and distribution capabilities;
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the costs of filing, prosecuting, defending and enforcing any patent applications, claims, patents and other intellectual property rights;
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the cost and timing of securing manufacturing capabilities for our clinical product candidates and commercial products, if any; and
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the costs of lawsuits involving us or our product candidates.
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We believe that our cash, cash equivalents and marketable securities will be sufficient to fund our projected operating requirements for the next twelve
months based upon current operating plans and spending assumptions. However, we will need to raise substantial
additional capital to meaningfully
advance the clinical development of evofosfamide, whether through new collaborative, partnering
or other strategic
arrangements or otherwise, and to in-license or otherwise acquire and develop additional product candidates or programs. In particular, our ability to meaningfully advance the clinical development of evofosfamide is dependent upon our ability to ente
r into new partnering,
collaborative or other strategic arrangements for evofosfamide, or to otherwise obtain sufficient additional funding for such development, particularly since we are no longer eligible to receive any further milestone payments or othe
r funding from Merck KGaA for evofosfamide, including the
70% of worldwide development costs for evofosfamide that were previously borne by Merck KGaA
.
While we have been able to fund our operations to date, we currently have no ongoing collaborations for
the development and commercialization of
evofosfamide,
and no source of revenue, nor do we expect to generate revenue for the foreseeable future. We also do not have any commitments for future external funding.
Until we can generate a sufficient amount of product revenue, which we may never do, we expect to finance future cash needs
through a variety of sources, including:
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the public equity market;
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private equity financing;
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collaborative arrangements;
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licensing arrangements; and/or
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public or private debt.
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Our ability to raise additional funds and the terms upon which we are able to raise such funds have been severely harmed by the negative results reported from our two pivotal Phase 3 clinical trials of
evofosfamide
and our decision to discontinue development of tarloxotinib, and may in the future be adversely impacted by the uncertainty regarding the prospects for future development of
evofosfamide
and our ability to advance the development of e
vofosfamide
or otherwise
realize any return on our investments in e
vofosfamide
, if at all. Our ability to raise additional funds and the terms upon which we are able to raise such funds may also be adversely affected by the uncertainties regarding our financial condition, the sufficiency of our capital resources, our ability to maintain the listing of our common stock on The NASDAQ Capital Market and recent and potential future management turnover. As a result of these and other factors, we
cannot be certain that sufficient funds will be available to us or on satisfactory terms, if at all.
To the extent we raise additional funds by issuing equity securities, our stockholders may experience significant dilution, particularly given our currently depressed stock price, and debt financing, if available, may involve restrictive covenants.
If adequate funds are not available, we may be required to significantly reduce or refocus our operations or to obtain funds through arrangements that may require us to relinquish rights to our product candidates, technologies or potential markets, any of which could
result in our stockholders having little or no continuing interest in our
evofosfamide
program as stockholders or otherwise, or which could
delay or require that we curtail or eliminate some or all of our development activities or otherwise have a material adverse effect on our business, financial condition and results of operations.
If we are unable to secure additional funding on a timely basis or on terms favorable to us, we may be required to cease or reduce any product development activities, to conduct additional workforce reductions, to sell some or all of our technology or assets or to merge all or a portion of our business with another entity. Insufficient funds may require us to delay, scale back, or eliminate some or all of our activities, and if we are unable to obtain additional funding, there is uncertainty regarding our continued existence.
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Our financial results are likely to fluctuate from period to period, making it difficult to evaluate our stock based on financia
l performance.
We believe that period-to-period comparisons of our operating results should not be relied upon as predictive of future performance. Our prospects must be considered in light of the risks, expenses and difficulties encountered by companies w
ith no approved pharmaceutical products, and with only
one product candidate in clinical development.
Our success depends in part on attracting, retaining and motivating key personnel and, if we fail to do so, it may be more difficult for us to execute our business strategy. As a small organization we are dependent on key employees and we will need to hire additional personnel to execute our business strategy successfully.
Our success depends on our continued ability to attract, retain and motivate highly qualified management, clinical and scientific personnel and on our ability to develop and maintain important relationships with leading academic institutions, clinicians and scientists. We are highly dependent upon our senior management. The loss of the services of one or more of our other key employees could delay or adversely impact the development of our product candidates.
In December 2015, we announced
a workforce reduction constituting approximately two-thirds of our workforce with an additional workforce reduction in September 2016, and
as of December 31, 2016, we had only 15 employees. Our success will depend on our ability to retain and motivate remaining personnel and hire additional qualified personnel when required, and our history of implementing workforce reductions, along with the potential for future workforce reductions, may negatively affect our ability to retain and/or attract talented employees. In addition, competition for qualified personnel in the biotechnology field is intense. We face competition for personnel from other biotechnology and pharmaceutical companies, universities, public and private research institutions and other organizations. We may not be able to attract and retain qualified personnel on acceptable terms given the competition for such personnel. If we are unsuccessful in our retention, motivation and recruitment efforts, we may be unable to execute our business strategy.
In addition, certain members of our management terms were part of our December 2015 and September 2016 workforce
reductions
, including our former senior vice presidents of regulatory affairs and pharmaceutical development and manufacturing as well as our former Chief Scientific Officer and our former Chief Operating Officer. Management transition inherently causes some loss of institutional knowledge, which can negatively affect strategy and execution and disrupt our ability to successfully manage and grow our business, and our results of operations and financial condition could suffer as a result.
Significant disruptions of information technology systems or breaches of data security could adversely affect our business.
Our business is increasingly dependent on critical, complex and interdependent information technology systems, including Internet-based systems, to support business processes as well as internal and external communications. The size and complexity of our computer systems make them potentially vulnerable to breakdown, malicious intrusion and computer viruses that may result in the impairment of production and key business processes.
In addition, our systems are potentially vulnerable to data security breaches — whether by employees or others — that may expose sensitive data to unauthorized persons. Such data security breaches could lead to the loss of trade secrets or other intellectual property, or could lead to the public exposure of personal information (including sensitive personal information) of our employees, clinical trial patients, customers and others. Such disruptions and breaches of security could have a material adverse effect on our business, financial condition and results of operations.
Our ability to use our net operating loss carryforwards and certain other tax attributes will be limited.
Under Section 382 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an “ownership change,” generally defined as a greater than 50% change (by value) in its equity ownership over a three-year period, the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes (such as research tax credits) to offset its post- change taxable income or taxes may be limited. Our prior and potential future equity offerings and other changes in our stock ownership, some of which are outside of our control, may have resulted or could in the future result in an ownership change. If a limitation were to apply, utilization of a portion of our domestic net operating loss and tax credit carryforwards could be limited in future periods and a portion of the carryforwards could expire before being available to reduce future income tax liabilities.
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Our facilities in California are located near an earthquake fault, and an earthquake or other natural disaster or resource shortage could disrupt
our operations.
Important documents and records, such as hard copies of our laboratory books and records for our product candidates, are located in our corporate facilities in South San Francisco, California, near active earthquake zones. In the event of a natural disaster, such as an earthquake, drought or flood, or localized extended outages of critical utilities or transportation systems, we do not have a formal business continuity or disaster recovery plan, and could therefore experience a significant business interruption. In addition, California from time to time has experienced shortages of water, electric power and natural gas. Future shortages and conservation measures could disrupt our operations and could result in additional expense. Although we maintain business interruption insurance coverage, the policy specifically excludes coverage for earthquake and flood.
Risks Related to Our Dependence on Third Parties
We rely on third parties to manufacture evofosfamide and expect to rely on third parties
to manufacture any other potential future product candidates that we may develop. If these parties do not manufacture the active pharmaceutical ingredients or finished drug products of satisfactory quality, in a timely manner, in sufficient quantities or at an acceptable cost, clinical development and commercialization of evofosfamide and any other product candidates we may develop could be delayed.
We do not have our own manufacturing capability for the evofosfamide active pharmaceutical ingredient, or API, or evofosfamide drug product. To date, we have relied on, and we expect to continue to rely on, a limited number of third party contract manufacturers and excipient suppliers for the evofosfamide API and evofosfamide drug product to meet our clinical supply needs of evofosfamide. We have no long-term commitments or commercial supply agreements with any of our evofosfamide suppliers. Our current and anticipated future dependence upon others for the manufacture of our product candidates may adversely affect our ability to develop and commercialize any product candidates on a timely and competitive basis.
We need to have sufficient evofosfamide API and drug product manufactured to meet the clinical supply demands for our clinical trials. If we are not successful in having sufficient quantities of evofosfamide API and drug product manufactured, or if manufacturing is interrupted at our contract manufacturers and excipient suppliers for evofosfamide API and our evofosfamide drug product manufacturers due to regulatory or other reasons, or consume more drug product than anticipated because of a higher than expected trial utilization or have quality issues that limit the utilization of the drug product, we may experience a significant delay in our evofosfamide clinical program. In any event, we will need to order additional evofosfamide API and drug product and we have in the past experienced delays in the receipt of satisfactory drug product, and any additional delays we may experience in the receipt of satisfactory evofosfamide API or drug product could cause significant delays in our potential future evofosfamide clinical trials, which would harm our business. Moreover the need for additional supplies and preparation for registration may require manufacturing process improvements in evofosfamide API and drug product. The manufacturing processes improvements for the evofosfamide API may require facilities upgrades at our suppliers, which may lead to delays or disruption in supply, or delays in regulatory approval of evofosfamide. Changes to the formulation of evofosfamide for our potential future clinical trials may also require bridging studies to demonstrate the comparability of the new formulation with the old. These studies may delay our clinical trials and may
not be successful. Even if we are successful in raising the additional capital necessary to meaningfully advance the development of evofosfamide, if we are not successful in procuring sufficient evofosfamide clinical trial material, we may experience a significant delay in our evofosfamide clinical program. Finally, we have not engaged any backup or alternative suppliers for parts of our evofosfamide supply chain for our potential future evofosfamide clinical trials. If we are required to engage a backup or alternative supplier, the transfer of technical expertise and manufacturing process to the backup or alternative supplier would be difficult, costly and time-consuming and would increase the likelihood of a significant delay or interruption in manufacturing or a shortage of supply of evofosfamide.
In any event, additional agreements for more supplies of each of our product candidates, including evofosfamide, will be needed to complete clinical development and/or commercialize them. In this regard, we may need to enter into agreements for additional supplies of evofosfamide to commercialize it or develop such capability itself. We cannot be certain that we can do so on favorable terms, if at all. We will need to satisfy all current good manufacturing practice, or cGMP, regulations, including passing specifications. Our inability to satisfy these requirements could delay our clinical programs and the potential commercialization of evofosfamide if approved for commercial sale.
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If evofosfamide or any of our othe
r product candidates is approved by the FDA
, the PMDA
or other regulatory agencies for commercial sale, we will need to have it manufactured in commercial quantities. It may not be possible to successfully manufacture commercial quantities of evofosfamide
or increase the manufacturing capacity for evofosfamide or any of our other product candidates in a timely or economically feasible manner. Prior to commercial launch of evofosfamide, we may be required to manufacture additional validation batches, which t
he FDA
, the PMDA
and other regulatory agencies must review and approve. If we are unable to successfully manufacture the additional validation batches or increase the manufacturing capacity for evofosfamide or any other product candidates, the regulatory a
pproval or commercial launch of that product candidate may be delayed, or there may be a shortage of supply which could limit sales.
In addition, if the facility or the equipment in the facility that produces our product candidates is significantly damaged or destroyed, adversely impacted by an action of a regulatory agency or if the facility is located in another country and trade or commerce with or exportation from such country is interrupted or delayed, we may be unable to replace the manufacturing capacity quickly or inexpensively. The inability to obtain manufacturing agreements, the damage or destruction of a facility on which we rely for manufacturing or any other delays in obtaining supply would delay or prevent us from completing our clinical trials and commercializing our current product candidates.
In addition, the evofosfamide formulation includes excipients that might be available from a limited number of suppliers. We have not signed long term supply agreements with these excipient suppliers. We will need to enter into long term supply agreements to ensure uninterrupted supply of these excipients to continuously manufacture clinical batches or commercial supplies, which we may be unable to do in a timely or economically feasible manner or at all.
We also expect to rely on contract manufacturers or other third parties to produce sufficient quantities of clinical trial product for any other product candidates that we may develop. It is possible that we might not be able to develop a formulation for
evofosfamide with adequate quality that meets the need for testing in our clinical trials. In any event, in order for us to commence any potential future clinical trials of our current and potential future
product candidates, including our planned Phase 1 clinical trial of evofosfamide, we need to obtain or have manufactured sufficient quantities of clinical trial product and there can be no assurance that we will be able to obtain sufficient quantities of clinical trial product in a timely manner or at all. Any delay in receiving sufficient supplies of clinical trial product for our potential future studies could negatively impact our development programs.
We have no control over our manufacturers’ and suppliers’ compliance with manufacturing regulations, and their failure to comply could result in an interruption in the supply of our product candidates.
The facilities used by our single source contract manufacturers must undergo an inspection by the FDA, the PMDA and other foreign agencies for compliance with cGMP regulations, before the respective product candidates can be approved in their region. In the event these facilities do not receive a satisfactory cGMP inspection for the manufacture of our product candidates, we may need to fund additional modifications to our manufacturing process, conduct additional validation studies, or find alternative manufacturing facilities, any of which would result in significant cost to us as well as a delay of up to several years in obtaining approval for such product candidate. In addition, our contract manufacturers, and any alternative contract manufacturer we may utilize, will be subject to ongoing periodic inspection by the FDA and corresponding state agencies, the PMDA and other foreign agencies for compliance with cGMP regulations, similar foreign regulations and other regulatory standards. We do not have control over our contract manufacturers’ compliance with these regulations and standards. Any failure by our third-party manufacturers or suppliers to comply with applicable regulations could result in sanctions being imposed on them (including fines, injunctions and civil penalties), failure of regulatory authorities to grant marketing approval of our product candidates, delays, suspension or withdrawal of approvals, warning letters, license revocation, seizures or recalls of product candidates or products, operating restrictions and criminal prosecution.
We expect to rely on third parties to conduct some of our
potential future clinical trials, and their failure to perform their obligations in a timely or competent manner may delay development and commercialization of our product candidates.
We may use clinical research organizations to assist in conduct of our clinical trials. There are numerous alternative sources to provide these services. However, we may face delays outside of our control if these parties do not perform their obligations in a timely or competent fashion or if we are forced to change service providers. This risk is heightened for clinical trials
conducted outside of the United States, where it may be more difficult to ensure that clinical trials are conducted in compliance with FDA and applicable foreign regulatory requirements. Any third-party that we hire to conduct clinical trials may also provide services to our competitors, which could compromise the performance of their obligations to us. If we experience significant delays in the progress of our future clinical trials, if any, and in our plans to submit NDAs to the FDA and PMDA, the commercial prospects for product candidates could be harmed and our ability to generate product revenue would be delayed or prevented.
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We are dependent on Eleison Pharmaceuticals, Inc. to develop and commercialize glufosfamide
We are dependent upon Eleison Pharmaceuticals, Inc., or Eleison to whom we exclusively licensed glufosfamide in October 2009, to develop and commercialize glufosfamide. Any profit sharing or other payments to us under the Eleison license depend almost entirely upon the efforts of Eleison, which may not be able to raise sufficient funds to continue clinical development activities with glufosfamide. Even if Eleison is successful at raising sufficient funding, it may not be successful in developing and commercializing glufosfamide. We may also be asked to provide technical assistance related to the development of glufosfamide, which may divert our resources from other activities. If the Eleison license terminates in such a way that glufosfamide reverts to us and we seek alternative arrangements with one or more other parties to develop and commercialize glufosfamide, we may not be able to enter into such an agreement with another suitable third party or third parties on acceptable terms or at all. In such event, since we have no further development plans for glufosfamide, we may not receive any further return on our investment in glufosfamide.
Risks Related to Our Intellectual Property
Hypoxia-targeted prodrug technology is not a platform technology broadly protected by patents, and others may be able to develop competitive drugs using this approach.
Although we have U.S. and foreign issued patents that cover certain hypoxia- and AKR1C3 -targeted prodrugs, including evofosfamide, respectively, we have no issued patents or pending patent applications
that would prevent others from taking advantage of hypoxia-prodrug technology generally to discover and develop new therapies for cancer or other diseases. Consequently, our competitors may seek to discover and develop potential therapeutics that operate by mechanisms of action that are the same or similar to the mechanism of action of our hypoxia-prodrug product candidate.
We are dependent on patents and proprietary technology. If we fail to adequately protect this intellectual property or if we otherwise do not have exclusivity for the marketing of our products, our ability to commercialize products could suffer.
Our commercial success will depend in part on our ability to obtain and maintain patent protection sufficient to prevent others from marketing our product candidates, as well as to defend and enforce these patents against infringement and to operate without infringing the proprietary rights of others. We will only be able to protect our product candidates from unauthorized use by third parties to the extent that valid and enforceable patents cover our product candidates or their manufacture or use or if they are effectively protected by trade secrets. If our patent applications do not result in issued patents, or if our patents are found to be invalid, we will lose the ability to exclude others from making, using or selling the inventions claimed therein. We have a limited number of patents and pending patent applications.
The patent positions of pharmaceutical and biotechnology companies can be highly uncertain and involve complex legal and factual questions. No consistent policy regarding the breadth of claims allowed in biotechnology patents has emerged to date in the United States. The laws of many countries may not protect intellectual property rights to the same extent as United States laws, and those countries may lack adequate rules and procedures for defending our intellectual property rights. Changes in either patent laws or in interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property. We do not know whether any of our patent applications will result in the issuance of any patents and we cannot predict the breadth of claims that may be allowed in our patent applications or in the patent applications we may license from others.
The degree of future protection for our proprietary rights is uncertain because legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep our competitive advantage. For example:
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we might not have been the first to make the inventions covered by each of our pending patent applications and issued patents, and we may have to participate in expensive and protracted interference proceedings to determine priority of invention;
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we might not have been the first to file patent applications for these inventions;
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others may independently develop identical, similar or alternative product candidates to any of our product candidates;
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our pending patent applications may not result in issued patents;
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our issued patents may not provide a basis for commercially viable products or may not provide us with any competitive advantages or may be challenged by third parties;
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others may design around our patent claims to produce competitive products that fall outside the scope of our patents;
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we may not develop additional patentable proprietary technologies related to our product candidates; or
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the patents of others may prevent us from marketing one or more of our product candidates for one or more indications that may be valuable to our business strategy.
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Moreover, an issued patent does not guarantee us the right to practice the patented technology or commercialize the patented product. Third parties may have blocking patents that could be used to prevent us from commercializing our patented products and practicing our patented technology. Our issued patents and those that may be issued in the future may be challenged, invalidated or circumvented, which could limit our ability to prevent competitors from marketing the same or related product candidates or could limit the length of the term of patent protection of our product candidates. In addition, the rights granted under any issued patents may not provide us with proprietary protection or competitive advantages against competitors with similar technology. Furthermore, our competitors may independently develop similar technologies. Moreover, because of the extensive time required for development, testing and regulatory review of a potential product, it is possible that, before any of our product candidates can be commercialized, any related patent may expire or remain in force for only a short period following commercialization, thereby reducing any advantage of the patent. Patent term extensions may not be available for these patents. If we are not able to obtain adequate protection for, or defend, the intellectual property position of evofosfamide or any other potential future product candidates, then we may not be able to retain or attract collaborators to partner our development programs, including evofosfamide. Further, even if we can obtain protection for and defend the intellectual property position of evofosfamide or any potential future product candidates, we or any of our p
otential future strategic partners
still may not be able to exclude competitors from developing or marketing competing drugs. Should this occur, we, and potential future strategic partners may not generate any revenues or profits from evofosfamide or any p
otential future product candidates, or our revenue or profit potential would be significantly diminished.
We rely on trade secrets and other forms of non-patent intellectual property protection. If we are unable to protect our trade secrets, other companies may be able to compete more effectively against us.
We rely on trade secrets to protect certain aspects of our technology, especially where we do not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to protect, especially in the pharmaceutical industry, where much of the information about a product must be made public during the regulatory approval process. Although we use reasonable efforts to protect our trade secrets, our employees, consultants, contractors, outside scientific collaborators and other advisors may unintentionally or willfully disclose our information to competitors. Enforcing a claim that a third party illegally obtained and is using our trade secret information is expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the United States may be less willing to or may not protect trade secrets. Moreover, our competitors may independently develop equivalent knowledge, methods and know-how.
If we are sued for infringing intellectual property rights of third parties or if we are forced to engage in an interference proceeding, it will be costly and time consuming, and an unfavorable outcome in that litigation or interference would have a material adverse effect on our business.
Our ability to commercialize our product candidates depends on our ability to develop, manufacture, market and sell our product candidates without infringing the proprietary rights of third parties. Numerous United States and foreign patents and patent applications, which are owned by third parties, exist in the general field of cancer therapies or in fields that otherwise may relate to our product candidates. If we are shown to infringe, we could be enjoined from use or sale of the claimed invention if we are unable to prove that the patent is invalid. In addition, because patent applications can take many years to issue, there may be currently pending patent applications, unknown to us, which may later result in issued patents that our product candidates may infringe, or which may trigger an interference proceeding regarding one of our owned or licensed patents or applications. There could also be existing patents of which we are not aware that our product candidates may inadvertently infringe or which may become involved in an interference proceeding.
The biotechnology and pharmaceutical industries are characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement. For so long as our product candidates are in clinical trials, we believe our clinical activities fall within the scope of the exemptions provided by 35 U.S.C. Section 271(e) in the United States, which exempts from patent infringement liability activities reasonably related to the development and submission of information to the FDA. As our clinical investigational drug product candidates progress toward commercialization, the possibility of a patent infringement claim against us increases. While we attempt to ensure that our active clinical investigational drugs and the methods we employ to manufacture them, as well as the methods for their use we intend to promote, do not infringe other parties’ patents and other proprietary rights, we cannot be certain they do not, and competitors or other parties may assert that we infringe their proprietary rights in any event.
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We may be exposed to future litigation based on claims that our product candidates, or the methods we employ to manufacture them, or the uses for which we
intend to promote them, infringe the intellectual property rights of others. Our ability to manufacture and commercialize our product candidates may depend on our ability to demonstrate that the manufacturing processes we employ and the use of our product
candidates do not infringe third-party patents. If third-party patents were found to cover our product candidates or their use or manufacture, we could be required to pay damages or be enjoined and therefore unable to commercialize our product candidates,
unless we obtained a license. A license may not be available to us on acceptable terms, if at all.
Risks Related To Our Industry
If our competitors are able to develop and market products that are more effective, safer or more affordable than ours, or obtain marketing approval before we do, our commercial opportunities may be limited.
Competition in the biotechnology and pharmaceutical industries is intense and continues to increase, particularly in the area of cancer treatment. Most major pharmaceutical companies and many biotechnology companies are aggressively pursuing oncology development programs, including traditional therapies and therapies with novel mechanisms of action. Our cancer product candidates face competition from established biotechnology and pharmaceutical companies and from generic pharmaceutical manufacturers. In particular, if approved for commercial sale for pancreatic cancer, evofosfamide would compete with Gemzar®, marketed by Eli Lilly and Company; Tarceva®, marketed by Roche/Genentech and Astellas Oncology; Abraxane® marketed by Celgene; and FOLFIRINOX, which is a combination of generic products that are sold individually by many manufacturers. There may also be product candidates of which we are not aware at an earlier stage of deve
lopment that may compete with evofosfamide or other potential future
product candidates, we may develop. In short, each cancer indication for which we are or may be developing product candidates has a number of established medical therapies with which our candidates will compete. Our evofosfamide product candidate for targeting the tumor hypoxia is likely to be in highly competitive markets and may eventually compete with other therapies offered by companies who are developing or were developing drugs that target tumor hypoxia.
We also face potential competition from academic institutions, government agencies and private and public research institutions engaged in the discovery and development of drugs and therapies. Many of our competitors have significantly greater financial resources and expertise in research and development, preclinical testing, conducting clinical trials, obtaining regulatory approvals, manufacturing, sales and marketing than we do. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established pharmaceutical companies.
Our competitors may succeed in developing products that are more effective, have fewer side effects and are safer or more affordable than our product candidates, which would render our product candidates less competitive or noncompetitive. These competitors also compete with us to recruit and retain qualified scientific and management personnel, establish clinical trial sites and patient registration for clinical trials, as well as to acquire technologies and technology licenses complementary to our programs or advantageous to our business. Moreover, competitors that are able to achieve patent protection obtain regulatory approvals and commence commercial sales of their products before we do, and competitors that have already done so, may enjoy a significant competitive advantage.
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Our relationships with customers and third-party payors will be subject to applicable anti-kickback, fraud
and abuse and other healthcare laws and regulations, which could expose us to criminal sanctions, civil penalties, contractual damages, reputational harm and diminished profits and future earnings.
Healthcare providers, physicians and third-party payors will play a primary role in the recommendation and prescription of any product candidates for which we obtain marketing approval. Our future arrangements with third-party payors and customers may expose us to broadly applicable fraud and abuse and other healthcare laws and regulations that may constrain the business or financial arrangements and relationships through which we would market, sell and distribute our products. As a biotechnology company, even though we do not and will not control referrals of healthcare services or bill directly to Medicare, Medicaid or other third-party payors, federal and state healthcare laws and regulations pertaining to fraud and abuse and patients’ rights are and will be applicable to our business. The laws that may affect our ability to operate include:
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Federal healthcare Anti-Kickback Statute will constrain our marketing practices, educational programs, pricing policies, and relationships with healthcare providers or other entities, by prohibiting, among other things, persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward, or in return for, either the referral of an individual for, or the purchase, order or recommendation of, any good or service, for which payment may be made under a federal healthcare program such as Medicare and Medicaid. A person or entity does not need to have actual knowledge of the statute or specific intent to violate it to have committed a violation;
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Federal civil and criminal false claims laws and civil monetary penalty laws impose criminal and civil penalties, including through civil whistleblower or qui tam actions, against individuals or entities for knowingly presenting, or causing to be presented, to the federal government, including the Medicare and Medicaid programs, claims for payment that are false or fraudulent or making a false statement to avoid, decrease or conceal an obligation to pay money to the federal government;
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The Federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, imposes criminal and civil liability for executing a scheme to defraud any healthcare benefit program and also created federal criminal laws that prohibit knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false statements in connection with the delivery of or payment for healthcare benefits, items or services. Similar to the Federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of these statutes or specific intent to violate them to have committed a violation;
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HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH, also imposes obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individually identifiable health information;
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The federal physician sunshine requirements under the Affordable Care Act requires manufacturers of drugs, devices, biologics and medical supplies to report annually to HHS information related to payments and other transfers of value to physicians, other healthcare providers, and teaching hospitals, and ownership and investment interests held by physicians and other healthcare providers and their immediate family members and applicable group purchasing organizations; and
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Analogous state and foreign laws and regulations, such as state anti-kickback and false claims laws, may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payors, including private insurers; some state laws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government and may require drug manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures and state and foreign laws that govern the privacy and security of health information in specified circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.
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Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs. It is possible that governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, imprisonment, exclusion from government funded healthcare programs, such as Medicare and Medicaid, and the curtailment or restructuring of our operations. If any physicians or other healthcare providers or entities with whom we expect to do business are found to not be in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government funded healthcare programs.
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There is a substantial risk of product liability claims in our business. If we do not obtain sufficient liability insurance, a product liability claim could result in substantial liabilities.
Our business exposes us to significant potential product liability risks that are inherent in the development, manufacturing and marketing of human therapeutic products. Regardless of merit or eventual outcome, product liability claims may result in:
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delay or failure to complete our clinical trials;
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withdrawal of clinical trial participants;
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decreased demand for our product candidates;
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injury to our reputation;
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substantial monetary awards against us; and
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diversion of management or other resources from key aspects of our operations.
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If we succeed in marketing products, product liability claims could result in an FDA or foreign regulatory
investigation of the safety or efficacy of our products, our manufacturing processes and facilities or our marketing programs. An FDA or foreign regulatory investigation could also potentially lead to a recall of our products or more serious enforcement actions, or limitations on the indications, for which they may be used, or suspension or withdrawal of approval.
We have product liability insurance that covers our clinical trials up to a $5 million annual aggregate limit. We intend to expand our insurance coverage to include the sale of commercial products if marketing approval is obtained for our product candidates or any other compound that we may develop. However, insurance coverage is expensive and we may not be able to maintain insurance coverage at a reasonable cost or at all, and the insurance coverage that we obtain may not be adequate to cover potential claims or losses.
Even if we receive regulatory approval to market our product candidates, the market may not be receptive to our product candidates upon their commercial introduction, which would negatively affect our ability to achieve profitability.
Our product candidates may not gain market acceptance among physicians, patients, healthcare payors and the medical community. The degree of market acceptance of any approved products will depend on a number of factors, including:
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the effectiveness of the product;
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the prevalence and severity of any side effects;
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potential advantages or disadvantages over alternative treatments;
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relative convenience and ease of administration;
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the strength of marketing and distribution support;
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the price of the product, both in absolute terms and relative to alternative treatments; and
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sufficient third-party coverage or reimbursement.
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If our product candidates receive regulatory approval but do not achieve an adequate level of acceptance by physicians, patients, healthcare payors and the medical community, we may not generate product revenues sufficient to attain profitability.
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If third-party payors do not cover or adequately reimburse patients for any of our product candidates, if approved for marketing, we may not be successful in selling them.
Our ability to commercialize any approved products successfully will depend in part on the extent to which coverage and reimbursement will be available from governmental and other third-party payors, both in the United States and in foreign markets. Even if we succeed in bringing one or more products to the market, the amount reimbursed for our products may be insufficient to allow us to compete effectively and could adversely affect our profitability. Coverage and reimbursement by a governmental and other third-party payor may depend upon a number of factors, including a governmental or other third-party payor’s determination that use of a product is:
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a covered benefit under its health plan;
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safe, effective and medically necessary;
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appropriate for the specific patient;
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neither experimental nor investigational.
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Obtaining coverage and reimbursement approval for a product from each third-party and governmental payor is a time consuming and costly process that could require us to provide supporting scientific, clinical and cost effectiveness data for the use of our products to each payor. We may not be able to provide data sufficient to obtain coverage and reimbursement.
Eligibility for coverage does not imply that any drug product will be reimbursed in all cases or at a rate that allows us to make a profit. Interim payments for new products, if applicable, may also not be sufficient to cover our costs and may not become permanent. Reimbursement rates may vary according to the use of the drug and the clinical setting in which it is used, may be based on payments allowed for lower-cost drugs that are already reimbursed, may be incorporated into existing payments for other products or services and may reflect budgetary constraints and/or Medicare or Medicaid data used to calculate these rates. Net prices for products also may be reduced by mandatory discounts or rebates required by government health care programs or by any future relaxation of laws that restrict imports of certain medical products from countries where they may be sold at lower prices than in the United States.
The health care industry is experiencing a trend toward containing or reducing costs through various means, including lowering reimbursement rates, limiting therapeutic class coverage and negotiating reduced payment schedules with service providers for drug products. The Medicare Prescription Drug, Improvement and Modernization Act of 2003, or MMA, became law in November 2003 and created a broader prescription drug benefit for Medicare beneficiaries. The MMA also contains provisions intended to reduce or eliminate delays in the introduction of generic drug competition at the end of patent or nonpatent market exclusivity. The impact of the MMA on drug prices and new drug utilization over the next several years is unknown. The MMA also made adjustments to the physician fee schedule and the measure by which prescription drugs are presently paid, changing from Average Wholesale Price to Average Sales Price. The effects of these changes are unknown but may include decreased utilization of new medicines in physician prescribing patterns, and further pressure on drug company sponsors to provide discount programs and reimbursement support programs.
In March 2010, the United States Congress enacted the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, collectively, the Affordable Care Act, which, among other things, subjected manufacturers to new annual fees and taxes for certain branded prescription drugs and included the following changes to the coverage and payment for drug products under government health care programs:
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expanded manufacturers’ rebate liability under the Medicaid Drug Rebate Program by increasing the minimum rebate for both branded and generic drugs and revising the definition of “average manufacturer price,” or AMP, for calculating and reporting Medicaid drug rebates on outpatient prescription drug prices;
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addressed a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for drugs that are inhaled, infused, instilled, implanted or injected;
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extended Medicaid drug rebates, previously due only on fee-for-service utilization, to Medicaid managed care utilization, and created an alternate rebate formula for new formulations of certain existing products that is intended to increase the amount of rebates due on those drugs;
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expanded the types of entities eligible for the 340B drug discount program that mandates discounts to cert
ain hospitals, community centers and other qualifying providers; and
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established the Medicare Part D coverage gap discount program by requiring manufacturers to provide a 50% point-of-sale- discount off the negotiated price of applicable brand drugs to eligible beneficiaries during their coverage gap period as a condition for the manufacturers’ outpatient drugs to be covered under Medicare Part D.
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Other legislative changes have been proposed and adopted in the United States since the Affordable Care Act was enacted. In August 2011, the Budget Control Act of 2011, among other things, created measures for spending reductions by Congress. A Joint Select Committee on Deficit Reduction, tasked with recommending a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, was unable to reach required goals, thereby triggering the legislation’s automatic reduction to several government programs. This includes aggregate reductions of Medicare payments to providers up to 2% per fiscal year, which went into effect in April 2013 and will remain in effect through 2024 unless additional Congressional action is taken. In January 2013, President Obama signed into law the American Taxpayer Relief Act of 2012, which, among other things, further reduced Medicare payments to several providers, including hospitals and cancer treatment centers. Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payors, which may adversely affect our future profitability.
There have been, and we expect that there will continue to be, federal and state proposals to constrain expenditures for medical products and services, which may affect reimbursement levels for our future products or otherwise result in pricing pressures with respect to our future products. In this regard, we expect further federal and state proposals and healthcare reforms to continue to be proposed to limit the price of, or to curb pricing increases for, prescription drugs, including as a result of negative publicity regarding drug pricing strategies by pharmaceutical companies and pricing increases on pharmaceutical products generally, which could limit the prices that can be charged for our future products, which in turn may limit our commercial opportunity and/or negatively impact revenues from sales of our future products. In addition, the Centers for Medicare & Medicaid Services frequently change product descriptors, coverage policies, product and service codes, payment methodologies and reimbursement values. Third-party payors often follow Medicare coverage policy and payment limitations in setting their own reimbursement rates and may have sufficient market power to demand significant price reductions.
Foreign governments tend to impose strict price controls, which may adversely affect our potential future profitability.
In some foreign countries, particularly in the European Union and Japan, prescription drug pricing is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a product. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our product candidate to other available therapies. If reimbursement of our products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, our potential future profitability will be negatively affected.
We may incur significant costs complying with environmental laws and regulations, and failure to comply with these laws and regulations could expose us to significant liabilities.
Our research and development activities use biological and hazardous materials that are dangerous to human health and safety or the environment. We are subject to a variety of federal, state and local laws and regulations governing the use, generation, manufacture, storage, handling and disposal of these materials and wastes resulting from these materials. We are also subject to regulation by the Occupational Safety and Health Administration, or OSHA, the California and federal environmental protection agencies and to regulation under the Toxic Substances Control Act. OSHA or the California or federal environmental protection agencies, may adopt regulations that may affect our research and development programs. We are unable to predict whether any agency will adopt any regulations that could have a material adverse effect on our operations. We have incurred, and will continue to incur, capital and operating expenditures and other costs in the ordinary course of our business in complying with these laws and regulations. Although we believe our safety procedures for handling and disposing of these materials comply with federal, state and local laws and regulations, we cannot entirely eliminate the risk of accidental injury or contamination from the use, storage, handling or disposal of hazardous materials. In the event of contamination or injury, we could be held liable for any resulting damages, and any liability could significantly exceed our insurance coverage.
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reduced liquidity for our stockholders;
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potential loss of confidence by employees and potential future partners or collaborators; and
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loss of institutional investor interest and fewer business development opportunities.
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Risks Related to Ownership of our Common Stock
We may not be able to correctly estimate our future operating expenses or our operating expenses may exceed our expectations, which could cause the ownership percentage retained by the Threshold stockholders in the combined organization to be reduced.
Pursuant to the terms of the Merger Agreement, if Threshold’s net cash at the consummation of the merger is less than $12.5 million, the ownership percentage of Threshold’s stockholders, option holders and warrant holders in the combined organization immediately following the consummation of the merger will be reduced. As of March 31, 2017, we had cash and cash equivalents totaling $17.6 million.
The cash, cash equivalents and marketable securities as of March 31, 2017 excludes a $2.0 million bridge loan to Molecular Templates, Inc. in the form of a promissory note.
However, certain contingent payments related to the Merger, including severance and change of control payments payable to our existing and former executive officers, will become due and payable in connection with the closing of the Merger.
Our operating expenses and expenses associated with the Merger and our obligations thereunder may exceed our estimates as a result of a variety of factors, many of which are outside of its control. These factors include:
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the time, resources and costs associated with the merger, including legal and accounting costs;
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the costs associated with complying with its obligations under the Merger Agreement; and
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the costs of any claims or liabilities related to the proposed merger.
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If we have not correctly estimated our future operating expenses or our operating expenses exceed our expectations, we may be below the $12.5 million level at the time of the merger’s closing, which would result in an adjustment to the exchange ratio in the Merger Agreement such that the ownership percentage retained by the our stockholders in the combined organization immediately following the merger may be reduced.
If we fail to continue to meet all applicable NASDAQ Global Market requirements and NASDAQ determines to delist our common stock, the delisting could adversely affect the market liquidity of our common stock and the market price of our common stock could decrease.
Our common stock is listed on The NASDAQ Global Market. In order to maintain our listing, we must meet minimum financial and other requirements, including requirements for a minimum amount of capital, a minimum price per share and continued business operations so that we are not characterized as a “public shell company.” On November 11, 2016, we received a notice from the staff (the “Staff”) of The NASDAQ Stock Market LLC (“Nasdaq”) that, for the previous 30 consecutive business days, the closing bid price for our common stock was below the $1.00 per share minimum bid price requirement for continued listing on The NASDAQ Capital Market under Nasdaq Listing Rule 5550(a)(2) (the “Bid Price Rule”). In accordance with Nasdaq Listing Rule 5810(c)(3)(A), we will have 180 calendar days, or until May 10, 2017, to regain compliance with the Bid Price Rule. To regain compliance with the Bid Price Rule, the closing bid price of our common stock must be at least $1.00 per share for a minimum of 10 consecutive business days at any time during this 180-day period. In March 2017, the Company’s board of directors approved a reverse stock split, within a range which shall be no less than 5:1 or more than 15:1 of the Company’s common and preferred stock, which would be contingent upon shareholder approval of the Merger and the stock split. We did not regain compliance with the rule by May 10, 2017, but became eligible for an additional 180 calendar day compliance period by meeting the continued listing requirement for market value of publicly held shares and all other applicable standards for initial listing on The NASDAQ Capital Market, with the exception of the bid price requirement, and by providing written notice of its intention to cure the deficiency during the second compliance period by effecting a reverse stock split, if necessary. If we regain compliance with the Bid Price Rule, Nasdaq will provide us with written confirmation and will close the matter. However, if it appears to the Staff that we will not be able to cure the deficiency, Nasdaq will notify us that its common stock will be subject to delisting. In the event of such a notification, we may appeal the Staff’s determination to delist its securities, but there can be no assurance the Staff would grant our request for continued listing. If we fail to continue to meet all applicable NASDAQ Global Market requirements, Nasdaq may determine to delist our common stock from The NASDAQ Global Market. If our common stock is delisted for any reason, it could reduce the value of our common stock and its liquidity.
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If our common stock is delisted as a result of our failure to comply with the Bid Price Requirement
or any other Nasdaq continued listing requirement
, we would expect our common stock to be traded in the o
ver-the-counter market, which could adversely affect the liquidity of our common stock. Additionally, delisting would substantially impair our ability to raise additional funds to fund our operations, to meaningfully advance the development of evofosfamide
and/or to acquire or in-license additional product candidates or development programs, and we could face other significant material adverse consequences, including:
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a limited availability of market quotations for our common stock;
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a reduced amount of news and analyst coverage for us;
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reduced liquidity for our stockholders;
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potential loss of confidence by employees and potential future partners or collaborators; and
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loss of institutional investor interest and fewer business development opportunities.
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The price of our common stock has been and may continue to be volatile.
The stock markets in general, the markets for biotechnology stocks and, in particular, the stock price of our common stock, have experienced extreme volatility. Further price declines in our common stock could result from general market and economic conditions and a variety of other factors, including:
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announcements regarding the development of our product candidates, including any delays in any potential future clinical trials, and investor perceptions of our ability to advance the development of evofosfamide;
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adverse results or delays in potential future clinical trials of evofosfamide;
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our ability to raise additional capital to advance the development of
evofosfamide
and the terms of any related financing arrangements;
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announcements of regulatory approval or non-approval of our product candidates, or delays in the applicable regulatory agency review process;
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adverse actions taken by regulatory agencies with respect to our product candidates, clinical trials, manufacturing processes or sales and marketing activities;
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our ability to enter into new collaborative, licensing or other strategic arrangements with respect to our product candidates;
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the terms and timing of an
y future collaborative, licensing or other strategic arrangements that we may establish;
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announcements of technological innovations, patents or new products by us or our competitors;
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regulatory developments in the United States, Japan and other foreign countries;
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any lawsuit involving us or our product candidates;
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our ability to comply with the minimum listing requirements of The NASDAQ Stock Market LLC;
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announcements concerning our competitors, or the biotechnology or pharmaceutical industries in general;
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developments concerning any strategic alliances or acquisitions we may enter into;
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actual or anticipated variations in our operating results;
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changes in recommendations by securities analysts or lack of analyst coverage;
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deviations in our operating results from the estimates of analysts;
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sales of our common stock by us, including under our sales agreement with Cowen and Company, LLC, or Cowen;
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sales of our common stock by our executive officers, directors and significant stockholders or sales of substantial amounts of common stock; and
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additional losses of any of our key scientific or management personnel.
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In the past, following periods of volatility in the market price of a particular company’s securities, litigation has often been brought against that company. Any such lawsuit could consume resources and management time and attention, which could adversely affect our business.
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If there are large sales of our common stock, the market price of our common stock could drop substantially. In addition, a signifi
cant number of shares of our common stock are subject to issuance upon exercise of outstanding options and warrants, which upon such exercise would result in dilution to our security holders.
If we or our existing stockholders sell a large number of shares of our common stock or the public market perceives that we or our existing stockholders might sell shares of our common stock, the market price of our common stock could decline significantly. As of March 31, 2017, we had 71,591,918 outstanding shares of common stock, substantially all of which may be sold in the public market without restriction, subject to any affiliate restrictions. On November 2, 2015, we entered into a sales agreement with Cowen, under which we may sell shares of our common stock from time to time through Cowen, as our agent for the offer and sale of the shares, in an aggregate amount not to exceed $50 million. Though our ability to sell shares of common stock through Cowen under our sales agreement with Cowen is practically limited or precluded altogether due to our currently-depressed stock price, to the extent that we sell shares of our common stock pursuant to the sales agreement with Cowen in the future, our stockholders will experience dilution. In addition, a significant number of shares of our common stock are subject to issuance upon the exercise of outstanding options and warrants. On February 18, 2015, we issued warrants to purchase an aggregate of 8,300,000 shares of our common stock, at an initial exercise price per share of $10.86, which exercise price was adjusted to $3.62 on January 21, 2016. In addition, as of March 31, 2017, there were 10,827,481 shares of our common stock issuable upon the exercise of outstanding options having a weighted-average exercise price of $3.01 per share. Although we cannot determine at this time how many of the currently outstanding options and warrants will ultimately be exercised, the options and warrants will likely be exercised only if the exercise price is below the market price of our common stock. To the extent that the options and warrants are exercised, additional shares of our common stock will be issued that will be eligible for resale in the public market, which will result in dilution to our security holders.
Failure to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 could have a material adverse effect on our stock price.
Section 404 of the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the Securities and Exchange Commission, or SEC, require annual management assessments of the effectiveness of our internal control over financial reporting. If we fail to maintain the adequacy of our internal control over financial reporting, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the SEC. If we cannot favorably assess, or our independent registered public accounting firm is unable to provide an unqualified attestation report on, the effectiveness of our internal control over financial reporting, investor confidence in the reliability of our financial reports may be adversely affected, which could have a material adverse effect on our stock price.
Our certificate of incorporation, our bylaws and Delaware law contain provisions that could discourage another company from acquiring us and may prevent attempts by our stockholders to replace or remove our current management.
Provisions of Delaware law, where we are incorporated, our certificate of incorporation and bylaws may discourage, delay or prevent a merger or acquisition that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace or remove our board of directors. These provisions include:
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authorizing the issuance of “blank check” preferred stock without any need for action by stockholders;
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providing for a classified board of directors with staggered terms;
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requiring supermajority stockholder voting to effect certain amendments to our certificate of incorporation and bylaws;
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eliminating the ability of stockholders to call special meetings of stockholders;
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prohibiting stockholder action by written consent; and
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establishing advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings.
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Claims for indemnification by our directors and officers may reduce our available funds to satisfy successful third-party claims against us and may reduce the amount of money available to us.
Our amended and restated certificate of incorporation and amended and restated bylaws provide that we will indemnify our directors and officers, in each case to the fullest extent permitted by Delaware law.
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In addition, as permitted by Section 145 of the Delaware General Corporation Law, our amended and restated bylaws and our indemnificati
on agreements that we have entered into with our directors and officers provide that:
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We will indemnify our directors and officers for serving us in those capacities or for serving other business enterprises at our request, to the fullest extent permitted by Delaware law. Delaware law provides that a corporation may indemnify such person if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the registrant and, with respect to any criminal proceeding, had no reasonable cause to believe such person’s conduct was unlawful.
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We may, in our discretion, indemnify employees and agents in those circumstances where indemnification is permitted by applicable law.
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We are required to advance expenses, as incurred, to our directors and officers in connection with defending a proceeding, except that such directors or officers shall undertake to repay such advances if it is ultimately determined that such person is not entitled to indemnification.
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The rights conferred in our amended and restated bylaws are not exclusive, and we are authorized to enter into indemnification agreements with our directors, officers, employees and agents and to obtain insurance to indemnify such persons.
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We may not retroactively amend our amended and restated bylaw provisions to reduce our indemnification obligations to directors, officers, employees and agents.
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Our ability to use our net operating losses to offset future taxable income, if any, may be subject to certain limitations.
In general, under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, a corporation that undergoes an “ownership change” (generally defined as a greater than 50-percentage-point cumulative change (by value) in the equity ownership of certain stockholders over a rolling three-year period) is subject to limitations on its ability to utilize its pre-change net operating losses, or NOLs, to offset future taxable income. If we undergo additional ownership changes (some of which changes may be outside our control), our ability to utilize our NOLs could be further limited by Section 382 of the Code. Our NOLs may also be impaired under state law. Accordingly, we may not be able to utilize a material portion of our NOLs. Furthermore, our ability to utilize our NOLs is conditioned upon our attaining profitability and generating U.S. federal taxable income. We have incurred net losses since our inception and anticipate that we will continue to incur significant losses for the foreseeable future; thus, we do not know whether or when we will generate the U.S. federal taxable income necessary to utilize our NOLs. See the risk factors described above under “Risks Related to Related to Our Financial Performance and Operations.”
We have never paid dividends on our common stock, and we do not anticipate paying any cash dividends in the foreseeable future.
We have never declared or paid cash dividends on our common stock. We do not anticipate paying any cash dividends on our common stock in the foreseeable future. We currently intend to retain all available funds and any future earnings to fund the development and growth of our business. As a result, capital appreciation, if any, of our common stock will be our stockholders’ sole source of gain for the foreseeable future.
Our employment agreements with our executive officers and certain other employees may require us to pay severance benefits to any of those persons who are terminated under specified circumstances, including in connection with a change of control of us, which could harm our financial condition or results.
Our executive officers and certain other employees are parties to employment agreements that contain change of control and severance provisions providing for severance and other benefits and acceleration of vesting of stock options in the event of a termination of employment under specified circumstances. The payment of these severance benefits could harm our financial condition and results. In addition, these potential severance payments may discourage or prevent third parties from seeking a business combination with us
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