Item 1A. Risk Factors
This Quarterly Report on Form 10-Q contains forward-looking information based on our current expectations. Because our actual results may differ materially from any forward-looking statements made by
or on behalf of us, this section includes a discussion of important factors that could affect our actual future results, including, but not limited to, our revenues, expenses, net loss and loss per share. You should carefully consider these risk
factors, together with all of the other information included in this Quarterly Report on Form 10-Q as well as our other publicly available filings with the U.S. Securities and Exchange Commission, or SEC.
We have marked with an asterisk (*) those risks described below that reflect substantive changes from, or additions to, the risks described in
our Annual Report on Form 10-K for the year ended December 31, 2011.
Risks Related to Our Financial Condition and Need for
Additional Capital
We have incurred significant losses since our inception and anticipate that we will continue to incur significant
losses for the foreseeable future.
We are a development stage company with limited operating history. To date, we have focused
primarily on developing our lead product candidate, the Sufentanil NanoTab PCA System, or ARX-01. We have three additional product candidates, the Sufentanil NanoTab BTP Management System, or ARX-02, the Sufentanil/Triazolam NanoTab, or ARX-03 and
Sufentanil Single-Dose Acute Pain NanoTab, or ARX-04. We have incurred significant net losses in each year since our inception in July 2005 and as of September 30, 2012, we had an accumulated deficit of $111.5 million.
We have devoted most of our financial resources to research and development, including our non-clinical development activities and clinical trials. To
date, we have financed our operations primarily through the sale of equity securities and debt. The size of our future net losses will depend, in part, on the rate of future expenditures and our ability to generate revenues. To date, none of our
product candidates have been commercialized, and if our product candidates are not successfully developed or commercialized, or if revenues are insufficient following marketing approval, we will not achieve profitability and our business may fail.
Even if we successfully obtain regulatory approval to market our product candidates in the United States, our revenues are also dependent upon the size of the markets outside of the United States, as well as our ability to obtain market approval and
achieve commercial success.
We expect to continue to incur substantial and increased expenses as we expand our research and development
activities and advance our clinical programs. We also expect an increase in our expenses associated with preparing for the potential commercialization of ARX-01. As a result of the foregoing, we expect to continue to incur significant and increasing
operating losses and negative cash flows for the foreseeable future.
We have never generated any product or commercial revenue and may
never be profitable.
Our ability to generate revenue from commercial sales and achieve profitability depends on our ability, alone or
with collaborators, to successfully complete the development of, obtain the necessary regulatory approvals for, and commercialize our product candidates. Other than the revenue received from the US Army Medical Research and Materiel Command for
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research and development reimbursement under the terms of the grant for ARX-04, we do not anticipate generating revenues from sales of our product candidates for the foreseeable future, if ever.
Our ability to generate future revenues from product sales depends heavily on our success in:
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completing the clinical development of ARX-01, initially for the treatment of post-operative pain in the hospital setting;
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obtaining regulatory approval for ARX-01, which will require additional funding;
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launching and commercializing ARX-01, including building a hospital-directed sales force in the U.S. and collaborating with third parties
internationally, which will require additional funding; and
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completing the clinical development of, obtaining regulatory approval for, launching and commercializing ARX-02, ARX-03 and ARX-04, which will require
additional funding.
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Because of the numerous risks and uncertainties associated with pharmaceutical product development, we
are unable to predict the timing or amount of increased expenses, or when, or if, we will be able to achieve or maintain profitability. In addition, our expenses could increase beyond expectations if we are required by the United States Food and
Drug Administration, or FDA, to perform studies in addition to those that we currently anticipate.
Even if one or more of our product
candidates is approved for commercial sale, we anticipate incurring significant costs associated with commercializing any approved product candidate. Even if we are able to generate revenues from the sale of our products, we may not become
profitable and may need to obtain additional funding to continue operations.
We have a limited operating history that may make it
difficult to predict our future performance or evaluate our business and prospects.
We were incorporated in 2005. Since inception,
our operations have been primarily limited to organizing and staffing our company, developing our technology and undertaking preclinical studies and clinical trials for our product candidates. We have not yet obtained regulatory approval for any of
our product candidates. Consequently, any predictions you make about our future success or viability or evaluation of our business and prospects may not be accurate.
We require substantial additional capital and may be unable to raise capital, which would force us to delay, reduce or eliminate our product development programs and could cause us to cease
operations. We cannot be certain that funds will be available and, if they are not available, we may not be able to continue as a going concern which may result in actions that could adversely impact our stockholders
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Developing pharmaceutical products, including conducting preclinical studies and clinical trials, is expensive. We expect our
research and development expenses to substantially increase in connection with our ongoing activities, particularly as we advance our clinical programs, including our Phase 3 ARX-01 studies. As of September 30, 2012, we had working capital of
$13.1 million.
We believe that our current cash, cash equivalents and investments will be sufficient to fund our current operations into the
second quarter of 2013, including support for continuing development of our lead product candidate, ARX-01. We would be able to extend this time period to the extent that we can access additional capital through equity offerings, including our Sales
Agreement with MLV. However, we will need to raise substantial additional funds to support our future operations, and such funding may not be available to us on acceptable terms, or at all. Additionally, changing circumstances beyond our control may
cause us to consume capital more rapidly than we currently anticipate. For example, we believe our existing cash resources are adequate to complete all three ARX-01 Phase 3 clinical trials, based on our current estimates of clinical trial
expenditures and enrollment pace, and to commence preparation of a New Drug Application, or NDA. However, our clinical trials may encounter technical, enrollment or other difficulties that could increase our development costs more than we expected.
In any event, we will require substantial additional capital to obtain regulatory approval for, and to commercialize, our product candidates. Raising funds in the current economic environment, when the capital markets have been affected by the
global recession, may present additional challenges. To raise capital, we may seek to sell additional equity or debt securities, obtain a credit facility or enter into product development, license or distribution agreements with third parties or
divest one or more of our product candidates. Any product development, licensing, distribution or sale agreements that we enter into may require us to relinquish valuable rights. We may not be able to obtain sufficient additional funding or enter
into a strategic transaction in a timely manner.
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Securing additional financing may divert our management from our day-to-day activities, which may adversely
affect our ability to develop and commercialize our product candidates. In addition, we cannot guarantee that future financing will be available in sufficient amounts or on terms acceptable to us, if at all. If we are unable to raise additional
capital when required or on acceptable terms, we may be required to:
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significantly delay, scale back or discontinue the development or commercialization of our product candidates;
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seek corporate partners for ARX-01 on terms that might be less favorable than might otherwise be available; or
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relinquish or license on unfavorable terms, our rights to technologies or product candidates that we otherwise would seek to develop or commercialize
ourselves.
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If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we will not be
able to continue our planned level of operations through the second quarter of 2013 and beyond, complete the final planned ARX-01 Phase 3 study, complete the development activities required to submit a NDA to the FDA, nor pursue commercialization
efforts, all of which would have a material adverse effect on our business, operating results and prospects. If adequate funds are not available, we would be required to reduce our workforce, delay, reduce the scope of or eliminate one or more of
our research and development programs in advance of the date on which we exhaust our cash resources to ensure that we have sufficient capital to meet our obligations and continue on a path designed to preserve stockholder value.
We may sell additional equity or debt securities to fund our operations, which may result in dilution to our stockholders and impose restrictions
on our business.
In order to raise additional funds to support our operations, we may sell additional equity or debt securities,
including under our Sales Agreement with MLV, which would result in dilution to all of our stockholders or impose restrictive covenants that adversely impact our business. The sale of additional equity or convertible debt securities would result in
the issuance of additional shares of our capital stock and dilution to all of our stockholders. The incurrence of indebtedness would result in increased fixed payment obligations and could also result in certain restrictive covenants, such as
limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. If we are
unable to expand our operations or otherwise capitalize on our business opportunities, our business, financial condition and results of operations could be materially adversely affected and we may not be able to meet our debt service obligations.
We might be unable to service our current debt due to a lack of cash flow and might be subject to default.*
In June 2011, we entered into a loan and security agreement with Hercules Technology II, L.P. and Hercules Technology Growth Capital, Inc., collectively
referred to as Hercules, under which we borrowed $20.0 million in two tranches of $10.0 million each, represented by secured convertible term promissory notes. The interest rate is 8.50%, with the initial 12 months of the facility requiring interest
only payments. The notes issued pursuant to the loan and security agreement mature on December 1, 2014. Since entering into the agreement with Hercules, we have been making monthly interest-only payments to Hercules of approximately $140,000
per month until June 30, 2012. According to the terms of the Hercules agreement, on July 1, 2012, we began repaying Hercules principal, with equal monthly payments of $742,000, consisting of both principal and interest payments. As of
September 30, 2012, the outstanding principal owed to Hercules was $18.2 million. We granted Hercules a first priority security interest in substantially all of our assets, with the exception of our intellectual property, where the security
interest is limited to proceeds of intellectual property.
If we do not make the required payments when due, either at maturity, or at
applicable installment payment dates, if we breach the agreement or become insolvent, Hercules could elect to declare all amounts outstanding, together with accrued and unpaid interest and penalty, to be immediately due and payable. In order to
continue our planned operations and satisfy our debt obligations with Hercules, we will need to raise additional capital in the future. Additional capital may not be available in terms acceptable to us, or at all. Even if we were able to prepay the
full amount in cash, any such repayment could leave us with little or no working capital for our business. If we are unable to repay those amounts, Hercules will have a first claim on our assets pledged under the loan agreement. If Hercules should
attempt to foreclose on the collateral, it is unlikely that there would be any assets remaining after repayment in full of such secured indebtedness. Any default under the loan agreement and resulting foreclosure would have a material adverse effect
on our financial condition and our ability to continue our operations.
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Risks Related to Clinical Development and Regulatory Approval
We depend substantially on the success of our product candidate, ARX-01, which is still under clinical development, and may not obtain regulatory
approval or be successfully commercialized.*
We have not marketed, distributed or sold any products. The success of our business
depends primarily upon our ability to develop and commercialize ARX-01, for the treatment of post-operative pain. We believe our existing capital resources will be adequate to support operations into the second quarter of 2013 and will be adequate
to complete all three ARX-01 Phase 3 clinical trials based on our current estimates of clinical trial expenditures and enrollment pace. However, if our estimates are not accurate or additional funds are not available to support our operations
through and beyond the second quarter of 2013, we would be required to delay our final Phase 3 clinical study in advance of the date on which we exhaust our cash resources to ensure that we have sufficient capital to meet our obligations and
continue on a path designed to preserve stockholder value.
Contingent on our ability to raise additional funding, we intend to use these
completed trials, if successful, as a basis to submit an NDA for ARX-01 in the third quarter of 2013. There is no guarantee that our Phase 3 clinical trials, or any of the remaining Human Factors studies, pharmacokinetic studies, or PK studies, or
non-clinical studies to be included in the NDA, will be completed on schedule or at all, or if completed, will be successful. Even after we submit an NDA, the FDA could require us to complete further studies and delay approval of the NDA. Any such
additional studies would require significant additional resources and would have a material adverse effect on our business.
Any delay in
obtaining, or inability to obtain, regulatory approval would prevent us from commercializing ARX-01, generating revenues and achieving profitability. If any of these events occur, we may be forced to abandon our development efforts for ARX-01, which
would have a material adverse effect on our business and could potentially cause us to cease operations.
We depend substantially on the
successful completion of Phase 3 clinical trials for our product candidates. The positive clinical results obtained for our product candidates in Phase 2 clinical studies may not be repeated in Phase 3.
While we have completed multiple Phase 2 clinical studies for ARX-01, ARX-02 and ARX-03, we have never completed a Phase 3 clinical trial. Our product
candidates are subject to the risks of failure inherent in pharmaceutical and medical device development. Before obtaining regulatory approval for the commercial sale of any product candidate, we must successfully complete all required Phase 3
clinical trials. Negative or inconclusive results of a Phase 3 clinical trial could cause the FDA to require that we repeat it or conduct additional clinical studies. The FDA could analyze our data using alternative imputation strategies and
determine that the trial was negative or inconclusive. Furthermore, while we have obtained positive safety and efficacy results for our sufentanil-based product candidates during our prior clinical trials, we cannot be certain that these results
will be duplicated as our product candidates are tested in a larger number of patients in our Phase 3 clinical trials, and results in one of our Phase 3 trials do not guarantee similar results in any other Phase 3 trials.
Delays in clinical trials are common and have many causes, and any delay could result in increased costs to us and jeopardize or delay our ability
to obtain regulatory approval and commence product sales.*
We may experience delays in clinical trials of our product candidates. We
are currently conducting three Phase 3 studies for ARX-01 and we initiated a Phase 2 study for ARX-04 in November 2012. Our clinical trials may not begin on time, have an effective design, enroll a sufficient number of patients or be completed on
schedule, if at all. Our clinical trials for any of our product candidates could be delayed for a variety of reasons, including:
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inability to raise funding necessary to initiate or continue a trial;
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delays in pharmacokinetic studies required to submit an NDA;
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delays in obtaining regulatory approval to commence a trial;
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delays in reaching agreement with the FDA on final trial design;
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imposition of a clinical hold following an inspection of our clinical trial operations or trial sites by the FDA or other regulatory authorities;
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delays in reaching agreement on acceptable terms with prospective contract research organizations, or CROs, and clinical trial sites;
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delays in obtaining required institutional review board approval at each site;
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delays in recruiting suitable patients to participate in a trial;
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delays in the testing, validation, manufacturing and delivery of the device components of our product candidates;
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delays in having patients complete participation in a trial or return for post-treatment follow-up;
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clinical sites dropping out of a trial to the detriment of enrollment;
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time required to add new clinical sites; or
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delays by our contract manufacturers to produce and deliver sufficient supply of clinical trial materials.
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If completion of the ongoing Phase 3 trials or Phase 2 trial are delayed for our product candidates for any of the above reasons, our development costs
may increase, our approval process could be delayed and our ability to commercialize and commence sales of our product candidates could be materially harmed, which could have a material adverse effect on our business.
Our product candidates may cause adverse effects or have other properties that could delay or prevent their regulatory approval or limit the scope
of any approved label or market acceptance.
Adverse events, or AEs, caused by our product candidates could cause us, other reviewing
entities, clinical study sites or regulatory authorities to interrupt, delay or halt clinical studies and could result in the denial of regulatory approval. Phase 2 clinical studies conducted by us for our ARX-01, ARX-02 and ARX-03 product
candidates have generated some AEs, but no serious adverse events, or SAEs, related to the study drug. For example, in our ARX-01 Phase 2 clinical studies completed to date, 11% of the patients experienced vomiting and 8% experienced itching for 10
mcg and 15 mcg treated groups, as compared to the placebo treated subjects, of which 6% experienced vomiting and none experienced itching. If SAEs related to the study drug are observed in any of our clinical studies, our ability to obtain
regulatory approval for our product candidates may be adversely impacted.
Further, if our products cause serious or unexpected side effects
after receiving market approval, a number of potentially significant negative consequences could result, including:
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regulatory authorities may withdraw their approval of the product or impose restrictions on its distribution in a form of a modified Risk Evaluation
and Mitigation Strategy, or REMS;
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regulatory authorities may require the addition of labeling statements, such as warnings or contraindications;
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we may be required to change the way the product is administered or conduct additional clinical studies;
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we could be sued and held liable for harm caused to patients; or
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our reputation may suffer.
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Any of these events could prevent us from achieving or maintaining market acceptance of the affected product candidate and could substantially increase
the costs of commercializing our product candidates.
Additional time may be required to obtain regulatory approval for our ARX-01
product candidate because it is a drug/device combination.
ARX-01 is a drug/device combination product candidate with both drug and
device components submitted in the investigational new drug application. Based on our discussions with the FDA, we believe that ARX-01 is viewed as a combination product by the FDA, and both drug and device components will be required for review as
part of an NDA submission to be presented to the FDA through the Center for Drug Evaluation and Research. There are very few examples of the FDA approval process for drug/device combination products such as ARX-01. As a result, we have in the past
and may in the future experience delays for ARX-01 due to regulatory uncertainties in the product development and approval process, in particular as it relates to a drug/device combination product approval under an NDA.
After the completion of our clinical trials, we cannot predict whether or when we will obtain regulatory approval to commercialize any of our
product candidates, and we cannot, therefore, predict the timing of any future revenue.
We cannot commercialize any of our product
candidates, including ARX-01, until the appropriate regulatory authorities, such as the FDA or the European Medicines Agency, or EMA, have reviewed and approved the product candidate. The regulatory agencies may not complete their review processes
in a timely manner, or we may not be able to obtain regulatory approval for ARX-01. Additional delays may result if ARX-01 is taken before an FDA Advisory Committee which may recommend restrictions on approval or recommend non-approval. In addition,
we may experience delays or rejections based upon additional government regulation from future legislation or administrative action, or changes in regulatory agency policy during the period of product development, clinical studies and the review
process.
The process for obtaining approval of an NDA is time consuming, subject to unanticipated delays and costs, and requires the
commitment of substantial resources.*
If the FDA determines that the clinical trials submitted for a product candidate in support of
an NDA were not conducted in full compliance with the applicable protocols for these studies, as well as with applicable regulations and standards, or if the
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FDA does not agree with our interpretation of the results of such studies, the FDA may reject the data that resulted from such studies. The rejection of data from clinical trials required to
support an NDA could negatively impact our ability to obtain marketing authorization for a product candidate and would have a material adverse effect on our business and financial condition.
In addition, an NDA may not be approved, or approval may be delayed, as a result of changes in FDA policies for drug approval during the review period. For example, although many products have been
approved by the FDA in recent years under Section 505(b)(2) of the Federal Food, Drug, and Cosmetic Act, or FDCA, objections have been raised to the FDAs interpretation of Section 505(b)(2). If challenges to the FDAs
interpretation of Section 505(b)(2) are successful, the FDA may be required to change its interpretation, which could delay or prevent the approval of such an NDA. Any significant delay in the review or approval of an NDA that we submit would
have a material adverse effect on our business and financial condition.
Regulatory authorities may not approve our product candidates
even if they meet safety and efficacy endpoints in clinical trials.*
The FDA and other foreign regulatory agencies, such as the EMA,
can delay, limit or deny marketing approval for many reasons, including:
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a product candidate may not be considered safe or effective;
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the manufacturing processes or facilities we have selected may not meet the applicable requirements; and
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changes in their approval policies or adoption of new regulations may require additional work on our part.
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Part of the regulatory approval process includes compliance inspections of manufacturing facilities to ensure adherence to applicable regulations and
guidelines. The regulatory agency may delay, limit or deny marketing approval of our product candidates as a result of such inspections.
Any
delay in, or failure to receive or maintain, approval for any of our product candidates could prevent us from generating meaningful revenues or achieving profitability.
Our product candidates may not be approved even if they achieve their endpoints in clinical trials. Regulatory agencies, including the FDA, or their advisors may disagree with our trial design and our
interpretations of data from preclinical studies and clinical trials. Regulatory agencies may change requirements for approval even after a clinical trial design has been approved. The FDA exercises significant discretion over the regulation of
combination products, including the discretion to require separate marketing applications for the drug and device components in a combination product. To date, our products are being regulated as drug products under the new drug application process
administered by the FDA. The FDA could in the future require additional regulation of our products under the medical device provisions of the FDCA. Our systems are designed to comply with Quality Systems Regulation, or QSR, which sets forth the
FDAs current good manufacturing practice requirements for medical devices, and other applicable government regulations and corresponding foreign standards. If we fail to comply with these regulations, it could have a material adverse effect on
our business and financial condition.
Regulatory agencies also may approve a product candidate for fewer or more limited
indications than requested or may grant approval subject to the performance of post-marketing studies. In addition, regulatory agencies may not approve the labeling claims that are necessary or desirable for the successful commercialization of our
product candidates.
Even if we obtain regulatory approval for ARX-01 and our other product candidates, we will still face extensive
regulatory requirements and our products may face future development and regulatory difficulties.
Even if we obtain regulatory
approval in the United States, the FDA may still impose significant restrictions on the indicated uses or marketing of our product candidates, or impose ongoing requirements for potentially costly post-approval studies or post-market surveillance.
For example, the labeling ultimately approved for ARX-01 and our other product candidates will likely include restrictions on use due to the opioid nature of sufentanil. ARX-01 and our other product candidates will also be subject to ongoing FDA
requirements governing the labeling, packaging, storage, distribution, safety surveillance, advertising, promotion, record-keeping and reporting of safety and other post-market information. In addition, we will continue to be subject to FDA and
foreign regulatory authority review and periodic inspections to ensure adherence to applicable regulations. The holder of an approved NDA is obligated to monitor and report AEs and any failure of a product to meet the specifications in the NDA. The
holder of an approved NDA must also submit new or supplemental applications and obtain FDA approval for certain changes to the approved product, product labeling or manufacturing process. Advertising and promotional materials must comply with FDA
rules and are subject to FDA review, in addition to other potentially applicable federal and state laws.
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In addition, manufacturers of drug products and their facilities are subject to payment of user fees and
continual review and periodic inspections by the FDA and other regulatory authorities for compliance with current good manufacturing practices, or cGMP, and adherence to commitments made in the NDA. If we, or a regulatory agency, discover previously
unknown problems with a product, such as AEs of unanticipated severity or frequency, or problems with the facility where the product is manufactured, a regulatory agency may impose restrictions relative to that product or the manufacturing facility,
including requiring recall or withdrawal of the product from the market or suspension of manufacturing.
If we fail to comply with applicable
regulatory requirements following approval of our product candidate, a regulatory agency may:
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issue a warning letter asserting that we are in violation of the law;
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seek an injunction or impose civil or criminal penalties or monetary fines;
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suspend or withdraw regulatory approval;
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suspend any ongoing clinical trials;
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refuse to approve a pending NDA or supplements to an NDA submitted by us;
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refuse to allow us to enter into supply contracts, including government contracts.
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Any government investigation of alleged violations of law could require us to expend significant time and resources in response and could generate
negative publicity. The occurrence of any event or penalty described above may inhibit our ability to commercialize our products and generate revenues.
Even if we obtain FDA approval for ARX-01 or any of our product candidates in the United States, we may never obtain approval for or commercialize our products outside of the United States, which
would limit our ability to realize their full market potential.
In order to market any products outside of the United States, we must
establish and comply with numerous and varying regulatory requirements of other countries or regions regarding safety and efficacy. Clinical trials conducted in one country may not be accepted by regulatory authorities in other countries or regions,
and regulatory approval in one country does not mean that regulatory approval will be obtained in any other country or region. Approval processes vary among countries and can involve additional product testing and validation and additional
administrative review periods. Seeking foreign regulatory approval could result in difficulties and costs for us and require additional non-clinical studies or clinical trials which could be costly and time consuming. Regulatory requirements can
vary widely from country to country and could delay or prevent the introduction of our products in those countries. We do not have any product candidates approved for sale in any jurisdiction, including international markets, and we do not have
experience in obtaining regulatory approval in international markets. If we fail to comply with regulatory requirements in international markets or to obtain and maintain required approvals, or if regulatory approvals in international markets are
delayed, our target market will be reduced and our ability to realize the full market potential of our products will be harmed.
ARX-01
and our other product candidates will require Risk Evaluation and Mitigation Strategies, or REMS.
The FDA Amendments Act of 2007
implemented safety-related changes to product labeling and require the adoption of REMS. Our product candidates will require REMS. The REMS may include requirements for special labeling or medication guides for patients, special communication plans
to health care professionals and restrictions on distribution and use. While we have received information from the FDA regarding certain aspects of the required REMS for ARX-01, we cannot predict the specific REMS to be required as part of the
FDAs approval of ARX-01. Depending on the extent of the REMS requirements, our costs to commercialize ARX-01 may increase significantly. ARX-02, ARX-03 and ARX-04, if approved, will also require REMS programs that may increase our costs to
commercialize these product candidates. Furthermore, risks of sufentanil that are not adequately addressed through proposed REMS for our product candidates may also prevent or delay their approval for commercialization.
Risks Related to Our Reliance on Third Parties
We rely on third party manufacturers to produce our preclinical and clinical drug supplies, and we intend to rely on third parties to produce commercial supplies of any approved product
candidates.
Reliance on third party manufacturers entails many risks including:
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the inability to meet our product specifications and quality requirements consistently;
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a delay or inability to procure or expand sufficient manufacturing capacity;
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manufacturing and product quality issues related to scale-up of manufacturing;
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costs and validation of new equipment and facilities required for scale-up;
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a failure to comply with cGMP and similar foreign standards;
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a failure to comply with the Drug Enforcement Administration, or DEA, regulations;
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the inability to negotiate manufacturing agreements with third parties under commercially reasonable terms;
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termination or nonrenewal of manufacturing agreements with third parties in a manner or at a time that is costly or damaging to us;
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the reliance on a limited number of sources, and in some cases, single sources for product components, such that if we are unable to secure a
sufficient supply of these product components, we will be unable to manufacture and sell our product candidates in a timely fashion, in sufficient quantities or under acceptable terms;
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the lack of qualified backup suppliers for those components that are currently purchased from a sole or single source supplier;
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operations of our third party manufacturers or suppliers could be disrupted by conditions unrelated to our business or operations, including the
bankruptcy of the manufacturer or supplier;
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carrier disruptions or increased costs that are beyond our control; and
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the failure to deliver our products under specified storage conditions and in a timely manner.
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Any of these events could lead to clinical study delays, failure to obtain regulatory approval or impact our ability to successfully commercialize our
products. Some of these events could be the basis for FDA action, including injunction, recall, seizure, or total or partial suspension of production.
We rely on limited sources of supply for the drug component of our product candidates and any disruption in the chain of supply may cause delay in developing and commercializing our product
candidates.
Currently, we use two established suppliers of sufentanil citrate for our NanoTabs. For each product candidate, only one
of the two suppliers will be qualified as a vendor with the FDA. If supply from the approved vendor is interrupted, there could be a significant disruption in commercial supply. The alternative vendor would need to be qualified through an NDA
supplement which could result in further delay. The FDA or other regulatory agencies outside of the United States may also require additional studies if a new sufentanil supplier is relied upon for commercial production. In addition, the Drug
Enforcement Administration, or the DEA, may reduce, delay or refuse our quota for sufentanil, which would disrupt our supply of sufentanil citrate and cause delay in the development and commercialization of our product candidates.
Currently, we use one supplier of triazolam for our ARX-03 NanoTabs. Switching triazolam suppliers may involve substantial cost and is likely to result
in a delay in our desired clinical and commercial timelines.
These factors could cause the delay of clinical trials, regulatory submissions,
required approvals or commercialization of our product candidates, cause us to incur higher costs and prevent us from commercializing them successfully. Furthermore, if our suppliers fail to deliver the required commercial quantities of active
pharmaceutical ingredient on a timely basis and at commercially reasonable prices, and we are unable to secure one or more replacement suppliers capable of production at a substantially equivalent cost, our clinical trials may be delayed or we could
lose potential revenue.
Manufacture of sufentanil NanoTabs requires specialized equipment and expertise.
Ethanol, which is used in the manufacturing process, is flammable, and sufentanil is a highly potent, Schedule II compound. These factors necessitate the
use of specialized equipment and facilities for manufacture of sufentanil NanoTabs. There are a limited number of facilities that can accommodate our manufacturing process and we need to use dedicated equipment throughout development and commercial
manufacturing to avoid the possibility of cross-contamination. If our equipment breaks down or needs to be repaired or replaced, it may cause significant disruption in clinical or commercial supply, which could result in delay in the process of
obtaining approval for or sale of our products. Furthermore, we are using one manufacturer to produce our sufentanil NanoTabs and have not identified a back-up commercial facility to date. Any problems with our existing facility or equipment may
delay or impair our ability to complete our clinical trials or commercialize our product candidates and increase our cost.
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Manufacturing issues may arise that could increase product and regulatory approval costs or delay
commercialization.
As we scale up manufacturing of our product candidates and conduct required stability testing, product, packaging,
equipment and process-related issues may require refinement or resolution in order to proceed with our planned clinical trials and obtain regulatory approval for commercial marketing. In the past we have identified impurities in our product
candidates. In the future we may identify significant impurities, which could result in increased scrutiny by the regulatory agencies, delays in clinical program and regulatory approval, increases in our operating expenses, or failure to obtain or
maintain approval for our products.
Historically, we have manufactured the majority of our NanoTab supplies at Patheon in Toronto, Canada.
During the third quarter of 2011, we transferred our manufacturing capabilities to Patheons facility in Cincinnati, Ohio where we have built out a suite within their existing buildings that will serve as a manufacturing facility for clinical
and commercial supplies of NanoTabs. The new facility has been qualified; however, we have not yet produced commercial supplies out of this facility and issues may arise in production at the new facility, or otherwise, which may adversely affect our
clinical and commercial plans. In addition, the FDA or other regulatory agencies may require that a bioequivalence study be conducted, which is designed to ensure that the Phase 3 drug lots made at Patheon, Toronto are equivalent to one of the
registration drug lots made at Patheon, Cincinnati. There is risk that the study could fail the FDAs bioequivalence requirements which would adversely affect our clinical and commercial plans.
Our designs for the device components of our product candidates for Phase 3 clinical trials may not be fully functional or commercially viable.
The ARX-01 device we are using in Phase 3 clinical trials and plan to use commercially, or the Phase 3 device, has more features than
the device used in Phase 2, including additional software. We have conducted multiple Design Validation, Software Verification and Validation, Reprocessing and Human Factors studies, which have informed the design of the Phase 3 device and we plan
to conduct more summative Human Factors studies prior to submitting the NDA. However, we cannot predict if the Phase 3 device will be fully functional or acceptable throughout all the Phase 3 clinical trials or for commercial use. If we need to
modify the Phase 3 device either during or after the Phase 3 studies, we may incur higher costs and experience delay in regulatory approval and commercialization of ARX-01. Furthermore, if the changes to the device are substantial, we may need to
conduct further clinical studies in order to have the commercial device approved by the FDA.
We have limited experience manufacturing
the ARX-01 Phase 3 device on a clinical scale, no experience on a commercial scale and do not own or operate a manufacturing facility.
We have manufactured ARX-01 devices and supplies on a small scale, including those needed for our Phase 3 clinical studies. We continue to rely on
contract manufacturers, component fabricators and secondary service providers to produce the necessary ARX-01 devices for the Phase 3 clinical trials and the commercial marketplace. We currently outsource manufacturing and packaging of the
controller, dispenser and cartridge components of the ARX-01 device to third parties and intend to continue to do so. These purchases of Phase 3 devices and components were made and will continue to be made utilizing short term purchase agreements
and we may not be able to enter into long-term agreements for commercial supply of ARX-01 with third party manufacturers, or may be unable to do so on acceptable terms. We may encounter unanticipated problems in the scale-up and automation process
that will result in delays in the manufacturing of the ARX-01 cartridge, dispenser or controller.
We may not be able to establish additional
sources of supply for device manufacture. Such suppliers are subject to FDA regulations requiring that materials be produced under current Good Manufacturing Practices, or cGMPs, or Quality System Regulations, or QSR, and subject to ongoing
inspections by regulatory agencies. Failure by any of our suppliers to comply with applicable regulations may result in delays and interruptions to our product candidate supply while we seek to secure another supplier that meets all regulatory
requirements.
Reliance on third party manufacturers entails risks to which we would not be subject if we manufactured the product candidates
ourselves, including the possible breach of the manufacturing agreements by the third parties because of factors beyond our control; and the possibility of termination or nonrenewal of the agreements by the third parties because of our breach of the
manufacturing agreement or based on their own business priorities.
We rely on third parties to conduct, supervise and monitor our
clinical studies, and if those third parties perform in an unsatisfactory manner, it may harm our business.
We have selected and
executed agreements with our CRO to conduct our three Phase 3 clinical studies for ARX-01 and for the Phase 2 study for ARX-04. We will rely on this CRO, along with other CROs, as well as clinical trial sites, to ensure the proper and timely conduct
of our clinical trials. While we have agreements governing their activities, we have limited influence over their actual performance. We have relied and plan to continue to rely upon CROs to monitor and manage data
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for our ongoing clinical programs for ARX-01 and our other product candidates, as well as the execution of nonclinical studies. We control only certain aspects of our CROs activities.
Nevertheless, we are responsible for ensuring that each of our studies is conducted in accordance with the applicable protocol, legal, regulatory and scientific standards and our reliance on the CROs does not relieve us of our regulatory
responsibilities.
We and our CROs are required to comply with the FDAs current good clinical practices, or cGCPs, which are regulations
and guidelines enforced by the FDA for all of our product candidates in clinical development. The FDA enforces these cGCPs through periodic inspections of trial sponsors, principal investigators and clinical trial sites. If we or our CROs fail to
comply with applicable cGCPs, the clinical data generated in our clinical trials may be deemed unreliable and the FDA may require us to perform additional clinical trials before approving our marketing applications. Upon inspection, the FDA may
determine that our Phase 3 clinical trials do not comply with cGCPs. In addition, our Phase 3 clinical trials will require a sufficiently large number of test subjects to evaluate the safety and effectiveness of ARX-01. Accordingly, if our CROs fail
to comply with these regulations or fail to recruit a sufficient number of patients, we may be required to repeat the Phase 3 clinical trials, which would delay the regulatory approval process.
Our CROs are not our employees, and we cannot control whether or not they devote sufficient time and resources to our ongoing clinical and nonclinical
programs. These CROs may also have relationships with other commercial entities, including our competitors, for whom they may also be conducting clinical studies, or other drug development activities which could harm our competitive position. We
face the risk of potential unauthorized disclosure or misappropriation of our intellectual property by CROs, which may allow our potential competitors to access our proprietary technology. If our CROs do not successfully carry out their contractual
duties or obligations, fail to meet expected deadlines, or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements, or for any other reasons, our
clinical trials may be extended, delayed or terminated, and we may not be able to obtain regulatory approval for, or successfully commercialize ARX-01, or our other product candidates. As a result, our financial results and the commercial prospects
for ARX-01 and any future product candidates that we develop would be harmed, our costs could increase, and our ability to generate revenues could be delayed.
Development of ARX-04 is dependent on funding from our government grant with the US Army Medical Research and Materiel Command, or USAMRMC.
In May 2011, we received a grant from the USAMRMC, effective June 1, 2011, in which the USAMRMC granted a $5.6 million award to us in order to
support the development of ARX-04, a sufentanil NanoTab for the treatment of moderate-to-severe acute pain. Under the terms of the grant, the USAMRMC will reimburse us for development, manufacturing and clinical costs necessary to prepare for and
complete the Phase 2 dose-finding trial in a study of acute moderate-to-severe pain, and to prepare to enter Phase 3 development. The period of research under the grant ends on May 31, 2013, with a final report due on June 30, 2013. The
grant gives the USAMRMC the option to extend the term of the grant and provide additional funding for the research. In November 2012, following approval from the USAMRMC, we initiated a Phase 2 dose-finding clinical trial for ARX-04.
Development of ARX-04 is dependent on the continued performance by the USAMRMC of its responsibilities under this agreement, including adequate continued
funding of USAMRMC programs. We have no control over the resources and funding that USAMRMC may devote to this or future agreements, which may be subject to annual renewal and which generally may be terminated by USAMRMC at any time.
USAMRMC may fail to perform their responsibilities under the agreement, which may result in termination of the agreement. In addition, we may fail to
perform our responsibilities under the agreement. Our government agreement is subject to audits, which may occur several years after the period to which the audit relates. If an audit identifies significant unallowable costs, we could incur a
material charge to our earnings or reduction in our cash position. As a result, we may be unsuccessful in entering, or ineligible to enter, into future government agreements.
There can be no assurances that this agreement will continue or that we will be able to enter into new contracts with USAMRMC or obtain funding from other sources to continue to support development of
ARX-04 beyond the Phase 2 clinical study and preparation for Phase 3 activities. The process of obtaining USAMRMC contracts is lengthy and uncertain and we will have to compete with other companies for each contract. Further, changes in government
budgets and agendas may result in a decreased and de-prioritized emphasis on supporting research and development programs, including ARX-04.
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Risks Related to Commercialization of Our Product Candidates
The commercial success of ARX-01 and our other product candidates will depend upon the acceptance of these products by the medical community,
including physicians, nurses, patients and pharmacy and therapeutics committees.
The degree of market acceptance of any of our
product candidates will depend on a number of factors, including:
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demonstration of clinical safety and efficacy compared to other products;
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the relative convenience, ease of administration and acceptance by physicians, patients and health care payors;
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the prevalence and severity of any AEs;
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overcoming the perception of sufentanil as a potentially unsafe drug due to its high potency;
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limitations or warnings contained in the FDA-approved label for ARX-01;
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availability of alternative treatments;
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pricing and cost-effectiveness;
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the effectiveness of our or any future collaborators sales and marketing strategies;
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our ability to obtain hospital formulary approval;
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our ability to obtain and maintain sufficient third party coverage or reimbursement; and
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the willingness of patients to pay out-of-pocket in the absence of third party coverage.
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If ARX-01 is approved, but does not achieve an adequate level of acceptance by physicians, nurses, patients and pharmacy and therapeutics committees, or
P&T Committees, we may not generate sufficient revenue from ARX-01 and we may not become or remain profitable.
If we are unable to
establish sales and marketing capabilities or enter into agreements with third parties to market and sell our product candidates, we may be unable to generate any revenue.
We currently do not have an organization for the sales, marketing and distribution of pharmaceutical products and the cost of establishing and maintaining such an organization may exceed the
cost-effectiveness of doing so. In order to market any products that may be approved, we must build our sales, marketing, managerial and other non-technical capabilities or make arrangements with third parties to perform these services. We intend to
enter into strategic partnerships with third parties to commercialize our product candidates outside of the United States. We will also consider the option to enter into strategic partnerships for our product candidates in the United States.
To date, we have not entered into any strategic partnerships for any of our product candidates. We face significant competition in seeking
appropriate strategic partners, and these strategic partnerships can be intricate and time consuming to negotiate and document. We may not be able to negotiate strategic partnerships on acceptable terms, or at all. We are unable to predict when, if
ever, we will enter into any strategic partnerships because of the numerous risks and uncertainties associated with establishing strategic partnerships. Our strategy for ARX-01 is to develop a hospital-directed sales force and/or collaborate with
third parties to promote the product to healthcare professionals and third-party payors in the United States. Our future collaboration partners, if any, may not dedicate sufficient resources to the commercialization of our product candidates or may
otherwise fail in their commercialization due to factors beyond our control. If we are unable to establish effective collaborations to enable the sale of our product candidates to healthcare professionals and in geographical regions, including the
United States, that will not be covered by our own marketing and sales force, or if our potential future collaboration partners do not successfully commercialize our product candidates, our ability to generate revenues from product sales will be
adversely affected.
Until we are able to negotiate a strategic partnership or obtain additional financial resources for ARX-02 or ARX-03, we
will not progress development or generate any revenue from these product candidates. We are developing ARX-04 under a grant from USAMRMC and if new funding from USAMRMC to cover Phase 3 costs is not obtained, we may be required to curtail all
activities associated with ARX-04. In addition, without a partnership or additional grant funding, we would bear all the risk related to the development of ARX-02, ARX-03 or ARX-04. If we elect to increase our expenditures to fund development or
commercialization activities ourselves, we will need to obtain additional capital, which may not be available to us on acceptable terms, or at all. If we do not have sufficient funds, we will not be able to bring ARX-02, ARX-03 or ARX-04 to market
or generate product revenue.
If we are unable to establish adequate sales, marketing and distribution capabilities, whether independently or
with third parties, we may not be able to generate sufficient product revenue and may not become profitable. We will be competing
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with many companies that currently have extensive and well-funded marketing and sales operations. Without an internal team or the support of a third party to perform marketing and sales
functions, we may be unable to compete successfully against these more established companies.
If we obtain approval to commercialize
our products outside of the United States, a variety of risks associated with international operations could materially adversely affect our business.
If our product candidates are approved for commercialization, we intend to enter into agreements with third parties to market ARX-01 outside the United States. We expect that we will be subject to
additional risks related to entering into international business relationships, including:
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different regulatory requirements for drug approvals in foreign countries;
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reduced protection for intellectual property rights;
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unexpected changes in tariffs, trade barriers and regulatory requirements;
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economic weakness, including inflation, or political instability in particular foreign economies and markets;
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compliance with tax, employment, immigration and labor laws for employees living or traveling abroad;
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foreign taxes, including withholding of payroll taxes;
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foreign currency fluctuations, which could result in increased operating expenses and reduced revenues, and other obligations incident to doing
business in another country;
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workforce uncertainty in countries where labor unrest is more common than in the United States;
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production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad; and
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business interruptions resulting from geopolitical actions, including war and terrorism, or natural disasters including earthquakes, typhoons, floods
and fires.
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If we, or potential partners, are unable to compete effectively, our product candidates may not reach
their commercial potential.
The market for our product candidates is characterized by intense competition and rapid technological
advances. If our product candidates obtain FDA approval, they will compete with a number of existing and future pharmaceuticals and drug delivery devices developed, manufactured and marketed by others. We or potential partners will compete against
fully integrated pharmaceutical companies and smaller companies that are collaborating with larger pharmaceutical companies, academic institutions, government agencies and other public and private research organizations.
The primary competition for ARX-01 is the IV PCA pump, which is widely used in the post-operative setting. Leading manufacturers of IV PCA pumps include
Hospira Inc., CareFusion Corporation, Baxter International Inc., Curlin Medical, Inc. and Smiths Medical. The most common opioids used to treat post-operative pain are morphine, hydromorphone and fentanyl, all of which are available as generics.
Also available on the market is the Avancen Medication on Demand, or MOD, Oral PCA Device developed by Avancen Corporation. Also in development is MoxDuo, an orally administered, fixed ratio combination of morphine and oxycodone being developed by
QRx Pharma, an Australian company. This product is also in development as an IV product. The fentanyl iontophoretic transdermal system, IONSYS, originally developed by ALZA Corporation and Ortho-McNeil Pharmaceutical, Inc., both Johnson &
Johnson subsidiaries, is an approved product, and is currently under development by Incline Therapeutics, Inc.
Our potential competitors for
ARX-02 include products approved in the United States for cancer breakthrough pain, including: ACTIQ and FENTORA, currently manufactured by Teva Pharmaceuticals; Onsolis, currently manufactured by BioDelivery Sciences International, Inc.; Abstral,
currently manufactured by ProStrakan Group plc; Lazanda, currently manufactured by Archimedes Pharma Limited, as well as products approved in Europe, including: Instanyl, currently manufactured by Nycomed International Management GmbH. The active
ingredient in all approved products for cancer breakthrough pain is fentanyl. Additional potential competitors for ARX-02 include products in late stage development for cancer breakthrough pain, such as: Fentanyl TAIFUN, currently manufactured by
Akela Pharma, Inc.; and SL Spray, currently manufactured by Insys Therapeutics, Inc.
We are not aware of any approved or development stage
non-IV sedative/analgesic products that would present competition to ARX-03. In the future, there may be products developed or approved for this market which could directly compete with ARX-03.
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Competitors for ARX-04 within the military environment include intramuscular morphine injections which are
marketed by a variety of generic manufacturers. Within the civilian environment, there are a wide variety of approved injectable and oral opioid products to treat moderate-to-severe acute pain, including IV opioids such as morphine, fentanyl,
hydromorphone and meperidine or oral opioids such as oxycodone and hydrocodone.
It is possible that any of these competitors could develop or
improve technologies or products that would render our product candidates obsolete or non-competitive, which could adversely affect our revenue potential. Key competitive factors affecting the commercial success of our product candidates are likely
to be efficacy, safety profile, reliability, convenience of dosing, price and reimbursement.
Many of our potential competitors have
substantially greater financial, technical and human resources than we do and significantly greater experience in the discovery and development of drug candidates, obtaining FDA and other regulatory approval of products and the commercialization of
those products. Accordingly, our competitors may be more successful than we are in obtaining FDA approval for drugs and achieving widespread market acceptance. Our competitors drugs or drug delivery systems may be more effective, have fewer
adverse effects, be less expensive to develop and manufacture, or be more effectively marketed and sold than any product candidate we may commercialize. This may render our product candidates obsolete or non-competitive before we can recover our
losses. We anticipate that we will face intense and increasing competition as new drugs enter the market and additional technologies become available. These entities may also establish collaborative or licensing relationships with our competitors,
which may adversely affect our competitive position. Finally, the development of different methods for the treatment of post-operative pain or breakthrough pain could render ARX-01 and ARX-02, respectively, non-competitive or obsolete. These and
other risks may materially adversely affect our ability to attain or sustain profitable operations.
Hospital formulary approval and
reimbursement may not be available for ARX-01 and our other product candidates, which could make it difficult for us to sell our products profitably.
Obtaining formulary approval can be an expensive and time-consuming process. We cannot be certain if and when we will obtain formulary approval to allow us to sell our products into our target markets.
Failure to obtain timely formulary approval will limit our commercial success.
Furthermore, market acceptance and sales of ARX-01, or any
future product candidates that we develop, will depend on reimbursement policies and may be affected by future healthcare reform measures. Government authorities and third party payors, such as private health insurers, hospitals and health
maintenance organizations, decide which drugs they will pay for and establish reimbursement levels. We cannot be sure that reimbursement will be available for ARX-01, or any future product candidates. Also, reimbursement amounts may reduce the
demand for, or the price of, our products. If reimbursement is not available, or is available only to limited levels, we may not be able to successfully commercialize ARX-01, or any future product candidates that we develop.
There have been a number of legislative and regulatory proposals to change the healthcare system in the United States and in some foreign jurisdictions
that could affect our ability to sell our products profitably. These legislative and/or regulatory changes may negatively impact the reimbursement for our products, following approval. The availability of numerous generic pain medications may also
substantially reduce the likelihood of reimbursement for ARX-01. The potential application of user fees to generic drug products may expedite the approval of additional pain medication generic drugs. We expect to experience pricing pressures in
connection with the sale of ARX-01 and any other products that we develop, due to the trend toward managed healthcare, the increasing influence of health maintenance organizations and additional legislative changes. If we fail to successfully secure
and maintain reimbursement coverage for our products or are significantly delayed in doing so, we will have difficulty achieving market acceptance of our products and our business will be harmed.
Risks Related to Our Business Operations and Industry
Failure to comply with the Drug Enforcement Administration regulations, or the cost of compliance with these regulations, may adversely affect our business.
Our sufentanil-based products are subject to extensive regulation by the DEA, due to their status as scheduled drugs. Sufentanil is a Schedule II opioid,
considered to present the highest risk of abuse. The manufacture, shipment, storage, sale and use of controlled substances are subject to a high degree of regulation, including security, record-keeping and reporting obligations enforced by the DEA.
This high degree of regulation can result in significant costs in order to comply with the required regulations, which may have an adverse effect on the development and commercialization of our product candidates.
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The DEA limits the availability and production of all Schedule II substances, including sufentanil, through
a quota system. The DEA requires substantial evidence and documentation of expected legitimate medical and scientific needs before assigning quotas to manufacturers. Our contract manufacturers have applied annually for a quota on our behalf. In
future years, we will need significantly greater amounts of sufentanil to implement our commercialization plans if the FDA approves ARX-01. Any delay or refusal by the DEA in establishing the procurement quota or a reduction in our quota for
sufentanil or a failure to increase it over time to meet anticipated increases in demand could delay or stop the clinical development or commercial sale of ARX-01. This could have a material adverse effect on our business, results of operations,
financial condition and prospects.
In addition, historically we have purchased sufentanil in the United States and have shipped it to our
third party manufacturer, Patheon Inc. in Toronto, Canada, where much of our clinical trial manufacturing has been completed to date. While we transferred manufacturing responsibilities to Patheons facility in Cincinnati, Ohio in the third
quarter of 2011, we may elect or need to use Patheons facility in Toronto, Canada at some point in the future. Shipping across international borders is a bureaucratic process that takes a minimum of three months and requires permits for both
import and export. If we fail to comply with applicable regulatory requirements or fail to submit permit applications in a timely manner, the government could refuse to permit sufentanil to be exported and imported between Canada and the United
States. Our failure to comply with these requirements could result in increased costs, delayed shipments, the loss of DEA registration for one of our suppliers, significant restrictions on ARX-01 or any of our product candidates, civil penalties or
criminal prosecution and delays in conducting our clinical trials.
Drug Enforcement Administration regulations require that sufentanil
be manufactured in the United States if sufentanil-based products are to be marketed in the United States, and there is no guarantee that we will secure a commercial supply agreement with a manufacturer based in the United States.
A substantial portion of our clinical trial manufacturing to date has been completed at Patheon Inc. in Toronto, Canada. Because the
DEA requires that sufentanil be manufactured in the United States if our product candidates are marketed in the United States, we transferred our manufacturing capability in the third quarter of 2011 from Patheon in Toronto, Canada to Patheons
production facility in Cincinnati, Ohio. However, there can be no assurance that the commercial production technology transfer process will be completed in a timely manner which could result in a delay in product launch.
In addition, we do not yet have a commercial supply contract in place. If we cannot establish a supply contract on commercially reasonable terms, or if
equipment manufacture or modifications do not meet expected deadlines, the timing for NDA submission may be delayed.
Switching or adding
commercial manufacturing capability can involve substantial cost and require extensive management time and focus, as well as additional regulatory filings. In addition, there is a natural transition period when a new manufacturing facility commences
work. As a result, delays may occur, which can materially impact our ability to meet our desired commercial timelines, thereby increasing our costs and reducing our ability to generate revenue.
The facilities of any of our future manufacturers of sufentanil-containing NanoTabs must be approved by the FDA after we submit our NDA and before
approval of ARX-01 and our other product candidates. We do not control the manufacturing process of sufentanil NanoTabs and are completely dependent on these third party manufacturing partners for compliance with the FDAs requirements for
manufacture. In addition, although our third party manufacturers are well established commercial manufacturers, we are dependent on their continued adherence to cGMP manufacturing and acceptable changes to their process. If our manufacturers do not
meet the FDAs strict regulatory requirements, they will not be able to secure FDA approval for their manufacturing facilities. If the FDA does not approve these facilities for the commercial manufacture of sufentanil NanoTabs, we will need to
find alternative suppliers, which would result in significant delays in obtaining FDA approval for ARX-01. These challenges may have a material adverse impact on our business, results of operations, financial condition and prospects.
Business interruptions could delay us in the process of developing our products and could disrupt our sales.
Our headquarters is located in the San Francisco Bay Area, near known earthquake fault zones and is vulnerable to significant damage from earthquakes. We
are also vulnerable to other types of natural disasters and other events that could disrupt our operations. We do not carry insurance for earthquakes or other natural disasters and we may not carry sufficient business interruption insurance to
compensate us for losses that may occur. Any losses or damages we incur could have a material adverse effect on our business operations.
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Our future success depends on our ability to retain key executives and to attract, retain and motivate
qualified personnel.
We are highly dependent on principal members of our executive team, the loss of whose services may adversely
impact the achievement of our objectives. While we have entered into offer letters with each of our executive officers, any of them could leave our employment at any time, as all of our employees are at will employees. Recruiting and
retaining other qualified employees for our business, including scientific and technical personnel, will also be critical to our success. There is currently a shortage of skilled executives in our industry, which is likely to continue. As a result,
competition for skilled personnel is intense and the turnover rate can be high. We may not be able to attract and retain personnel on acceptable terms given the competition among numerous pharmaceutical companies for individuals with similar skill
sets. In addition, failure to succeed in clinical studies may make it more challenging to recruit and retain qualified personnel. The inability to recruit or loss of the services of any executive or key employee might impede the progress of our
research, development and commercialization objectives.
We will need to expand our organization, and we may experience difficulties in
managing this growth, which could disrupt our operations.
As of September 30, 2012, we had 23 full-time employees. As our
company matures, we expect to expand our employee base to increase our managerial, scientific and engineering, operational, sales, marketing, financial and other resources and to hire more consultants and contractors. Future growth would impose
significant additional responsibilities on our management, including the need to identify, recruit, maintain, motivate and integrate additional employees, consultants and contractors. Also, our management may need to divert a disproportionate amount
of its attention away from our day-to-day activities and devote a substantial amount of time to managing these growth activities. We may not be able to effectively manage the expansion of our operations, which may result in weaknesses in our
infrastructure, give rise to operational mistakes, loss of business opportunities, loss of employees and reduced productivity among remaining employees. Our expected growth could require significant capital expenditures and may divert financial
resources from other projects, such as the development of additional product candidates. If our management is unable to effectively manage our growth, our expenses may increase more than expected, our ability to generate and/or grow revenues could
be reduced, and we may not be able to implement our business strategy. Our future financial performance and our ability to commercialize ARX-01 and our other product candidates and compete effectively will depend, in part, on our ability to
effectively manage any future growth.
We face potential product liability, and, if successful claims are brought against us, we may
incur substantial liability.
The use of our product candidates in clinical studies and the sale of any products for which we obtain
marketing approval exposes us to the risk of product liability claims. Product liability claims might be brought against us by consumers, health care providers, pharmaceutical companies or others selling or otherwise coming into contact with our
products. If we cannot successfully defend against product liability claims, we could incur substantial liability and costs. In addition, regardless of merit or eventual outcome, product liability claims may result in:
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impairment of our business reputation;
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withdrawal of clinical study participants;
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costs due to related litigation;
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distraction of managements attention from our primary business;
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substantial monetary awards to patients or other claimants;
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the inability to commercialize our product candidates; and
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decreased demand for our product candidates, if approved for commercial sale.
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Our current product liability insurance coverage may not be sufficient to reimburse us for any expenses or losses we may suffer. Moreover, insurance
coverage is becoming increasingly expensive and in the future we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to liability. If and when we obtain marketing approval for
our product candidates, we intend to expand our insurance coverage to include the sale of commercial products; however, we may be unable to obtain product liability insurance on commercially reasonable terms or in adequate amounts. On occasion,
large judgments have been awarded in class action lawsuits based on drugs that had unanticipated adverse effects. A successful product liability claim or series of claims brought against us could cause our stock price to decline and, if judgments
exceed our insurance coverage, could adversely affect our results of operations and business.
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Risks Related to Our Intellectual Property
If our pending patent applications fail to issue, our business could be adversely affected.*
Our commercial success will depend in part on obtaining and maintaining patent protection for our product candidates, as well as successfully defending our current and future patents against third party
challenges. To protect our proprietary technology, we rely on patents as well as other intellectual property protections, including trade secrets, nondisclosure agreements and confidentiality provisions.
In addition, there can be no assurance that our pending patent applications will result in issued patents. As of October 1, 2012, we are the owner
of record of one issued European patent which expires in 2027, one Mexican patent which expires in 2029, five issued U.S. patents which provide coverage through at least 2027, and we are pursuing 15 U.S. non-provisional patent applications, one
pending international Patent Cooperation Treaty applications and 59 foreign national applications, including seven European Regional Phase applications directed to our product candidates. The patent applications that we have filed and have not yet
been granted may fail to result in issued patents in the United States or in foreign countries. Even if the patents do successfully issue, third parties may challenge the patents.
The patent positions of pharmaceutical companies, including us, can be highly uncertain and involve complex and evolving legal and factual questions. No consistent policy regarding the breadth of claims
allowed in pharmaceutical patents has emerged to date in the United States. Legal developments may preclude or limit the scope of available patent protection.
There is also no assurance that any patents issued to us will not become the subject of a re-examination, will provide us with competitive advantages, will not be challenged by any third parties, or that
the patents of others will not prevent the commercialization of products incorporating our technology. Furthermore, there can be no guarantee that others will not independently develop similar products, duplicate any of our products, or design
around our patents.
Litigation involving patents, patent applications and other proprietary rights is expensive and time consuming. If
we are involved in such litigation, it could cause delays in bringing our product candidates to market and interfere with our business.
Our commercial success depends in part on not infringing patents and proprietary rights of third parties. Although we are not currently aware of
litigation or other proceedings or third party claims of intellectual property infringement related to our product candidates, the pharmaceutical industry is characterized by extensive litigation regarding patents and other intellectual property
rights.
As we enter our target markets, it is possible that competitors or other third parties will claim that our products and/or processes
infringe their intellectual property rights. These third parties may have obtained and may in the future obtain patents covering products or processes that are similar to, or may include compositions or methods that encompass our technology,
allowing them to claim that the use of our technologies infringes these patents.
In a patent infringement claim against us, we may assert, as
a defense, that we do not infringe the relevant patent claims, that the patent is invalid or both. The strength of our defenses will depend on the patents asserted, the interpretation of these patents, and our ability to invalidate the asserted
patents. However, we could be unsuccessful in advancing non-infringement and/or invalidity arguments in our defense. In the United States, issued patents enjoy a presumption of validity, and the party challenging the validity of a patent claim must
present clear and convincing evidence of invalidity, which is a high burden of proof. Conversely, the patent owner need only prove infringement by a preponderance of the evidence, which is a lower burden of proof.
If we were found by a court to have infringed a valid patent claim, we could be prevented from using the patented technology or be required to pay the
owner of the patent for the right to license the patented technology. If we decide to pursue a license to one or more of these patents, we may not be able to obtain a license on commercially reasonable terms, if at all, or the license we obtain may
require us to pay substantial royalties or grant cross licenses to our patent rights. For example, if the relevant patent is owned by a competitor, that competitor may choose not to license patent rights to us. If we decide to develop alternative
technology, we may not be able to do so in a timely or cost-effective manner, if at all.
In addition, because patent applications can take
years to issue and are often afforded confidentiality for some period of time there may currently be pending applications, unknown to us, that later result in issued patents that could cover one or more of our products.
It is possible that we may in the future receive, particularly as a public company, communications from competitors and other companies alleging that we
may be infringing their patents, trade secrets or other intellectual property rights, offering licenses to such intellectual property or threatening litigation. In addition to patent infringement claims, third parties may assert copyright, trademark
or other proprietary rights against us. We may need to expend considerable resources to counter such claims and may not be able to successful in our defense. Our business may suffer if a finding of infringement is established.
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It is difficult and costly to protect our proprietary rights, and we may not be able to ensure their
protection.
The patent positions of pharmaceutical companies can be highly uncertain and involve complex legal and factual questions
for which important legal principles remain unresolved. No consistent policy regarding the breadth of claims allowed in pharmaceutical patents has emerged to date in the United States. The pharmaceutical patent situation outside the United States is
even more uncertain. Changes in either the patent laws or in interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property. On September 16, 2011, the Leahy-Smith America Invents
Act, or the Leahy-Smith Act, was signed into law. The Leahy-Smith Act includes a number of significant changes to United States patent law. These include provisions that affect the way patent applications will be prosecuted and may also
affect patent litigation. Many of the substantive changes to patent law associated with the Leahy-Smith Act will not become effective until March 16, 2013. Accordingly, it is not yet clear what, if any, impact the Leahy-Smith Act will have
on the operation of our business. However, the Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of
which could have a material adverse effect on our business and financial condition.
Accordingly, we cannot predict the breadth of claims that
may be allowed or enforced in the patents that may be issued from the applications we currently or may in the future own or license from third parties. Further, if any patents license we obtain is deemed invalid and/or unenforceable, it could impact
our ability to commercialize or partner our technology.
Competitors or third parties may infringe our patents. We may be required to file
patent infringement claims, which can be expensive and time-consuming. In addition, in an infringement proceeding, a court may decide that a patent of ours is not valid or is unenforceable, or that the third partys technology does not in fact
infringe upon our patents. An adverse determination of any litigation or defense proceedings could put one or more of our patents at risk of being invalidated or interpreted narrowly and could put our related pending patent applications at risk of
not issuing. Litigation may fail and, even if successful, may result in substantial costs and be a distraction to our management. We may not be able to prevent misappropriation of our proprietary rights, particularly in countries outside the United
States where patent rights may be more difficult to enforce. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential or sensitive
information could be compromised by disclosure in the event of litigation. In addition, during the course of litigation there could be public announcements of the results of hearings, motions or other interim proceedings or developments. If
securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock.
The degree of future protection for our proprietary rights is uncertain, and we cannot ensure that:
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we were the first to make the inventions covered by each of our pending patent applications;
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we were the first to file patent applications for these inventions;
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others will not independently develop similar or alternative technologies or duplicate any of our technologies;
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any patents issued to us or our collaborators will provide a basis for commercially viable products, will provide us with any competitive advantages or
will not be challenged by third parties; or
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the patents of others will not have an adverse effect on our business.
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If we do not adequately protect our proprietary rights, competitors may be able to use our technologies and erode or negate any competitive advantage we may have, which could materially harm our business,
negatively affect our position in the marketplace, limit our ability to commercialize our product candidates and delay or render impossible our achievement of profitability.
We may be unable to adequately prevent disclosure of trade secrets and other proprietary information.
We rely on trade secrets to protect our proprietary know-how and technological advances, especially where we do not believe patent protection is appropriate or obtainable. However, trade secrets are
difficult to protect. We rely in part on confidentiality agreements with our employees, consultants, outside scientific collaborators, sponsored researchers and other advisors to protect our trade secrets and other proprietary information. These
agreements may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, others may independently discover our trade
secrets and proprietary information. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights. Failure to obtain or maintain trade secret protection could enable competitors to use our
proprietary information to develop products that compete with our products or cause additional, material adverse effects upon our competitive business position.
Periodic maintenance fees, renewal fees, annuity fees and various other governmental fees on patents and/or applications will be due to be paid to the United States Patent and Trademark Office and
various foreign governmental patent agencies in several stages over the lifetime of the patents and/or applications.
We have systems
in place, including use of third party vendors, to manage payment of periodic maintenance fees, renewal fees, annuity fees and various other patent and application fees. The United States Patent and Trademark Office, or the USPTO, and various
foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. There are situations in which noncompliance can result in abandonment
or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. If this occurs, our competitors might be able to enter the market, which would have a material adverse effect on our
business.
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We may not be able to enforce our intellectual property rights throughout the world.
The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States.
Many companies have encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. The legal systems of some countries, particularly developing countries, do not favor the enforcement of
patents and other intellectual property protection, especially those relating to life sciences. This could make it difficult for us to stop the infringement of our patents or the misappropriation of our other intellectual property rights. For
example, many foreign countries have compulsory licensing laws under which a patent owner must grant licenses to third parties. In addition, many countries limit the enforceability of patents against third parties, including government agencies or
government contractors. In these countries, patents may provide limited or no benefit.
Proceedings to enforce our patent rights in foreign
jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business. Accordingly, our efforts to protect our intellectual property rights in such countries may be inadequate. In addition, changes
in the law and legal decisions by courts in the United States and foreign countries may affect our ability to obtain adequate protection for our technology and the enforcement of intellectual property.
We have not yet registered our trademarks in all of our potential markets, and failure to secure those registrations could adversely affect our
business.
We have registered our ACELRX mark the United States, Canada, the European Union and India. We have also registered our
NANOTAB mark in the United States, Hong Kong and Singapore, and our ACCELERATE, INNOVATE, ALLEVIATE, mark in the United States. Although we are not currently aware of any oppositions to or cancellations of our registered trademarks or
pending applications, it is possible that one or more of the applications could be subject to opposition or cancellation after the marks are registered. The registrations will be subject to use and maintenance requirements. It is also possible that
we have not yet registered all of our trademarks in all of our potential markets, and that there are names or symbols other than ACELRX that may be protectable marks for which we have not sought registration, and failure to secure those
registrations could adversely affect our business. Opposition or cancellation proceedings may be filed against our trademarks and our trademarks may not survive such proceedings.
Risks Related to Ownership of Our Common Stock
The market price of our common stock
may be highly volatile.
Prior to our initial public offering, or IPO, in February 2011, there was no public market for our common
stock. An active public trading market may not develop or, if developed, may not be sustained. Moreover, the trading price of our common stock is likely to be volatile. Our stock price could be subject to wide fluctuations in response to a variety
of factors, including the following:
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adverse results or delays in clinical trials;
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inability to obtain additional funding, including funding necessary to submit an NDA;
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any delay in submitting an NDA for any of our product candidates, including ARX-01, and any adverse development or perceived adverse development with
respect to the FDAs filing or review of that NDA;
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failure to successfully develop and commercialize our product candidates;
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changes in laws or regulations applicable to our products;
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inability to obtain adequate product supply for our product candidates, or the inability to do so at acceptable prices;
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adverse regulatory decisions;
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introduction of new products, services or technologies by our competitors;
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failure to meet or exceed financial projections we provide to the public;
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failure to meet or exceed the estimates and projections of the investment community;
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the perception of the pharmaceutical industry by the public, legislatures, regulators and the investment community;
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announcements of significant acquisitions, strategic partnerships, joint ventures or capital commitments by us or our competitors;
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disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for
our technologies;
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additions or departures of key scientific or management personnel;
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significant lawsuits, including patent or stockholder litigation;
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changes in the market valuations of similar companies;
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sales of our common stock by us or our stockholders in the future; and
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trading volume of our common stock.
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In addition, the stock market in general, and the NASDAQ Global Market in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the
operating performance of these companies. Broad market and industry factors may negatively affect the market price of our common stock, regardless of our actual operating performance.
Our common stock is thinly traded and in the future, may continue to be thinly traded, and our stockholders may be unable to sell at or near ask prices or at all if they need to sell their shares to
raise money or otherwise desire to liquidate such shares.
To date, we have a low volume of daily trades in our common stock on the
NASDAQ Global Market. For example, the average daily trading volume in our common stock on the NASDAQ Global Market during the third quarter of 2012 was approximately 37,000 shares per day. Our stockholders may be unable to sell their common
stock at or above their respective purchase prices if at all, which may result in substantial losses to our stockholders.
The market for our
common shares may be characterized by significant price volatility when compared to seasoned issuers, and we expect that our share price will be more volatile than a seasoned issuer for the indefinite future. As noted above, our common shares may be
sporadically and/or thinly traded. As a consequence of this lack of liquidity, the trading of relatively small quantities of shares by our stockholders may disproportionately influence the price of those shares in either direction. The price for our
shares could, for example, decline significantly in the event that a large number of our common shares are sold on the market without commensurate demand, as compared to a seasoned issuer that could better absorb those sales without adverse impact
on its share price.
Our principal stockholders and management own a significant percentage of our stock and are able to exert
significant control over matters subject to stockholder approval.
Our executive officers and directors, together with the
stockholders with whom our executive officers and directors are affiliated or associated, beneficially owned approximately 75% of our outstanding voting stock as of October 1, 2012. Therefore, these stockholders have the ability to influence us
through this ownership position. These stockholders are able to determine all matters requiring stockholder approval. For example, these stockholders, acting together, are able to control elections of directors, amendments of our organizational
documents, or approval of any merger, sale of assets, or other major corporate transaction. This may prevent or discourage unsolicited acquisition proposals or offers for our common stock that you may believe are in your best interest as one of our
stockholders.
We incur significant increased costs as a result of operating as a public company, and our management is required to
devote substantial time to new compliance initiatives.
As a public company, we incur significant legal, accounting and other
expenses. In addition, the Sarbanes-Oxley Act of 2002, as amended, or the Sarbanes-Oxley Act, as well as rules subsequently implemented by the SEC and the NASDAQ Stock Market have imposed various requirements on public companies. Our management and
other personnel need to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations increase our legal and financial compliance costs and make some activities more time-consuming and costly. For
example, these rules and regulations make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to incur substantial costs to maintain our current levels of such coverage.
As a public company, we are subject to the requirements of Section 404 of the Sarbanes-Oxley Act. If we are unable to comply with Section 404
in a timely manner, it may affect the reliability of our internal control over financial reporting. Assessing our staffing and training procedures to improve our internal control over financial reporting is an ongoing process.
We plan to continue to assess our internal controls and procedures and intend to take further action as necessary or appropriate to address any other
matters we identify. However, our independent registered public accounting firm is not currently required to deliver an attestation report on the effectiveness of our internal control over financial reporting as we qualify for an exemption as a
non-accelerated filer under the applicable SEC rules and regulations.
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We have been and will continue to be involved in a substantial effort to implement appropriate processes,
document the system of internal control over key processes, assess their design, remediate any deficiencies identified and test their operation. We cannot be certain at this time whether our measures to improve internal controls will be successful,
that we will be able to successfully complete the procedures, certification and attestation requirements of Section 404 or that we or our independent registered public accounting firm will not identify material weaknesses in our internal
control over financial reporting. If we fail to comply with the requirements of Section 404, it may affect the reliability of our internal control over financial reporting and negatively impact the quality of disclosure to our stockholders. If
we or our independent registered public accounting firm identify and report a material weakness, it could adversely affect our stock price.
Sales of a substantial number of shares of our common stock in the public market by our existing stockholders could cause our stock price to
fall.*
Sales of a substantial number of shares of our common stock in the public market or the perception that these sales might
occur, could depress the market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities. We are unable to predict the effect that sales may have on the prevailing market price of our
common stock. As of September 30, 2012, we had 22.6 million shares of common stock outstanding, all of which are eligible for sale in the public market, subject in some cases to the volume limitations and manner of sale requirements of
Rule 144 under the Securities Act. Sales of stock by our stockholders could have a material adverse effect on the trading price of our common stock.
Certain holders of our securities are entitled to rights with respect to the registration of their shares under the Securities Act. Registration of these shares under the Securities Act would result in
the shares becoming freely tradable without restriction under the Securities Act. Any sales of securities by these stockholders could have a material adverse effect on the trading price of our common stock.
Future sales and issuances of our common stock or rights to purchase common stock, including pursuant to our equity incentive plans, could result
in additional dilution of the percentage ownership of our stockholders and could cause our stock price to fall.
We expect that
significant additional capital will be needed in the future to continue our planned operations. To the extent we raise additional capital by issuing equity securities, including pursuant to our Sales Agreement with MLV, our stockholders may
experience substantial dilution. We may sell common stock, convertible securities or other equity securities in one or more transactions at prices and in a manner we determine from time to time. If we sell common stock, convertible securities or
other equity securities in more than one transaction, investors may be materially diluted by subsequent sales. These sales may also result in material dilution to our existing stockholders, and new investors could gain rights superior to our
existing stockholders.
Pursuant to our 2011 Equity Incentive Plan, or the 2011 Incentive Plan, our management is authorized to grant stock
options and other equity-based awards to our employees, directors and consultants. The number of shares available for future grant under our 2011 Incentive Plan will automatically increase each year by 4% of all shares of our capital stock
outstanding as of December 31 of the prior calendar year, subject to the ability of our board of directors to take action to reduce the size of the increase in any given year. Currently, we plan to register the increased number of shares
available for issuance under our 2011 Incentive Plan each year. If our board of directors elects to increase the number of shares available for future grant by the maximum amount each year, our stockholders may experience additional dilution, which
could cause our stock price to fall.
We are at risk of securities class action litigation.
In the past, securities class action litigation has often been brought against a company following a decline in the market price of its securities. This
risk is especially relevant for us because pharmaceutical companies have experienced significant stock price volatility in recent years. If we face such litigation, it could result in substantial costs and a diversion of managements attention
and resources, which could harm our business.
Our ability to use our net operating loss carryforwards and certain other tax attributes
may 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 corporations 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 income may be limited. We may experience ownership changes in the future as a result of
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subsequent shifts in our stock ownership. As a result, if we earn net taxable income, our ability to use our pre-change net operating loss carryforwards to offset United States federal taxable
income may be subject to limitations, which could potentially result in increased future tax liability to us.
We do not intend to pay
dividends on our common stock so any returns will be limited to the value of our stock.
We have never declared or paid any cash
dividend on our common stock. We currently anticipate that we will retain future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. Any
return to stockholders will therefore be limited to the appreciation of their stock.
Provisions in our amended and restated certificate
of incorporation and bylaws, as well as provisions of Delaware law, could make it more difficult for a third party to acquire us or increase the cost of acquiring us, even if doing so would benefit our stockholders or remove our current management.
Some provisions of our charter documents and Delaware law may have anti-takeover effects that could discourage an acquisition of us
by others, even if an acquisition would be beneficial to our stockholders and may prevent attempts by our stockholders to replace or remove our current management. These provisions include:
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authorizing the issuance of blank check preferred stock, the terms of which may be established and shares of which may be issued without
stockholder approval;
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limiting the removal of directors by the stockholders;
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creating a staggered board of directors;
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prohibiting stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of our stockholders;
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eliminating the ability of stockholders to call a special meeting of stockholders; 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 upon at
stockholder meetings.
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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 members of our board of directors, which is responsible for appointing the members of our management. In addition, we are subject to Section 203 of the Delaware General
Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with an interested stockholder for a period of three years following the date on which the stockholder became an
interested stockholder, unless such transactions are approved by our board of directors. This provision could have the effect of delaying or preventing a change of control, whether or not it is desired by or beneficial to our stockholders. Further,
other provisions of Delaware law may also discourage, delay or prevent someone from acquiring us or merging with us.