We maintain "disclosure controls and procedures" within the meaning of Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the Exchange Act). Our
disclosure controls and procedures, or Disclosure Controls, are designed to ensure that information required to be disclosed by us in the reports we file under the Exchange Act, such as this
Quarterly Report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission's rules and forms. Our
Disclosure Controls are also designed to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and Principal Financial
Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our Disclosure Controls, management recognized that any controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment
in evaluating and implementing possible controls and procedures.
Evaluation of Disclosure Controls and Procedures.
As of September 30, 2018, we evaluated the effectiveness of the design and operation of the
Company's disclosure controls and procedures, which was done under the supervision and with the participation of our management, including our Chief Executive Officer and our Principal
Financial Officer. Immediately following the Signatures section of this Quarterly Report on Form 10-Q are certifications of our Chief Executive Officer and Principal Financial Officer, which are
required in accordance with Rule 13a-14 of the Exchange Act. This Controls and Procedures section includes the information concerning the controls evaluation referred to in the certifications
and it should be read in conjunction with the certifications for a more complete understanding of the topics presented. Based on the controls evaluation, our Chief Executive Officer and
Principal Financial Officer concluded that as of the date of their evaluation, our disclosure controls and procedures were effective to provide reasonable assurance that (a) the information
required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules
and forms, and (b) such information is accumulated and communicated to our management, including our Chief Executive Officer and Principal Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure.
Change in Internal Control over Financial Reporting
. There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f)
and Rule 15d-15(f) under the Exchange Act) during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
Information regarding legal proceedings is incorporated by reference herein from
Legal Proceedings
under Note 13,
Commitments and Contingencies
, to
our unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2018 and 2017 contained in Part I, Item 1 of this Quarterly Report on Form 10-Q.
ITEM 1A. RISK FACTORS
The risk factors below supplement the risk factors contained in Part I, Item 1A. of our Annual Report on Form 10-K for the year ended December 31, 2017, filed
with the SEC on March 8, 2018; Part II, Item 1A. of our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2018, filed with the SEC on May 10, 2018; and Part II, Item 1A.
of our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2018, filed with the SEC on August 9, 2018. The occurrence of any one or more of these risks could materially
harm our business, operating results, financial condition and prospects. These risks and uncertainties could also cause actual results to differ materially and adversely from those expressed or
implied by forward-looking statements that we make from time to time. Please see "Note Regarding Forward-Looking Statements" appearing at the beginning of this Quarterly Report on Form 10-Q.
Risks Related to our Business
Our board of directors has authorized us to explore alternatives to refinance or restructure our existing debt.
If we fail to successfully complete a restructuring or
refinancing of all of our existing debt, we may initiate Chapter 11 proceedings to implement a restructuring of our obligations.
We are in the process of analyzing various alternatives to address our liquidity and capital structure, including strategic and refinancing alternatives. We believe the consummation
of a successful refinancing or restructuring of our existing debt is critical to our continued viability. If we fail to successfully complete a restructuring or refinancing of all of our existing debt, all or
certain of our indebtedness may be accelerated and we may not be able to otherwise source adequate liquidity to fund our operations, meet our obligations (including our debt payment
obligations) and continue as a going concern. There can be no assurance that these efforts will result in any such agreement, that any refinancing or restructuring that we pursue will be
successful, or what the terms thereof would be.
Any refinancing or restructuring will likely be subject to a number of conditions, many of which will be outside of our control. We can make no assurances that any refinancing or
restructuring that we pursue will be successful, or what the terms thereof would be or what, if anything, our existing debt and equity holders would receive in any resulting transaction, which will
depend on our enterprise value, although we believe that any refinancing or restructuring would be highly dilutive to our existing equity holders and certain debt holders. In addition, we can
make no assurances with respect to what the value of our debt and equity will be following the consummation of any refinancing or restructuring. The issuance and sale of substantial amounts
of common stock or the announcement that such issuances and sales may occur could adversely affect the market price of our common stock.
54
If an agreement is reached and we pursue a restructuring, it may be necessary for us to file a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in order to
implement this agreement through the confirmation and consummation of a plan of reorganization and/or one or more sale transactions approved by the bankruptcy court in the bankruptcy
proceedings. We may also conclude that it is necessary to initiate Chapter 11 proceedings to implement a restructuring of our obligations even if we are unable to reach an agreement with our
creditors and other relevant parties regarding the terms of a restructuring. If a plan of reorganization is implemented in a bankruptcy proceeding, it is likely that holders of claims and interests
with respect to, or rights to acquire our equity securities, would likely be entitled to little or no recovery, and those claims and interests would likely be canceled for little or no consideration. If
that were to occur, we anticipate that all, or substantially all, of the value of all investments in our common stock will be lost and that our equity holders would lose all or substantially all of their
investment. It is also likely that our other stakeholders, including our secured and unsecured creditors, will receive substantially less than the amount of their claims. We have a significant
amount of secured indebtedness that is senior to our unsecured indebtedness and a significant amount of total indebtedness that is senior to our existing common stock in our capital structure.
As a result, we believe that seeking Bankruptcy Court protection under a Chapter 11 proceeding could result in a limited recovery for unsecured noteholders and debtholders and place equity
holders at significant risk of losing all of their interests in us. The commencement of bankruptcy proceedings would also result in an event of default under the terms of our Treximet Secured
Notes, the 4.25% Convertible Notes, the Exchangeable Notes, the Term Facility and the ABL Facility, thereby resulting in such indebtedness becoming immediately due and payable.
Our business operations and financial position could be adversely affected as a result of our substantial indebtedness and other payment obligations.
As of September 30, 2018, we had approximately $323.1 million aggregate principal amount of debt outstanding, consisting of:
-
approximately $36.1 million aggregate principal amount of our Exchangeable Notes, issued pursuant to an indenture, as amended by that certain first supplemental
indenture, dated July 27, 2018, under which PIP DAC, (formerly known as Pernix Ireland Pain Ltd. (PIPL), is the issuer and we and our other subsidiaries are the guarantors with Wilmington
Trust, National Association, as trustee;
-
approximately $78.2 million aggregate principal amount of our Convertible Notes;
-
approximately $154.5 million aggregate principal amount of our Treximet Secured Notes;
-
approximately $14.2 million outstanding under our ABL Facility; and
-
approximately $40.1 million aggregate principal amount outstanding under the Term Credit Agreement.
In addition, we have the ability to borrow up to an additional $5.8 million under the Term Credit Agreement for certain specified purposes, including future acquisitions,
working capital or other general corporate purposes, subject to conditions set forth in the Term Credit Agreement
and up to an additional approximately $18.3 million under the ABL Facility, subject to borrowing base capacity and the conditions set forth in the ABL Facility. In addition,
the Term Credit Agreement includes an incremental feature that allows us, with the consent of the requisite lenders under the Term Credit Agreement, to obtain up to an additional $20.0 million
in term loan commitments from new or existing lenders under the Term Credit Agreement that agree to provide such commitments. Our significant indebtedness and other payment obligations
could have important consequences. For example, it could:
-
make it difficult for us to satisfy our obligations under our outstanding notes and our other indebtedness and contractual and commercial commitments;
-
require us to seek Chapter 11 bankruptcy protection;
-
limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
-
require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to
fund working capital, capital expenditures and other general corporate purposes;
-
restrict us from making strategic acquisitions, entering new markets or exploiting business opportunities;
-
place us at a competitive disadvantage compared to our competitors that have proportionally less debt;
-
limit our ability to borrow additional funds and/or leverage our cost of borrowing; and
-
decrease our ability to compete effectively or operate successfully under adverse economic and industry conditions.
55
In the event our capital resources are otherwise insufficient to meet future capital requirements and operating expenses, we may seek to finance our cash needs through
public or private equity or debt financings, strategic relationships, including the divestiture of non-core assets, assigning receivables, milestone payments or royalty rights, or other
arrangements. Securing additional financing will require a substantial amount of time and attention from our management and may divert a disproportionate amount of its attention away from
our day-to-day activities, which may adversely affect our management's ability to conduct our day-to-day operations. 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:
-
sell our business or all or substantially all of our assets to one or more third parties;
-
significantly scale back or discontinue certain of our commercial activities;
-
seek Chapter 11 bankruptcy protection;
-
significantly delay, scale back or discontinue the development or commercialization of our products and product candidates;
-
seek collaborators for one or more of our current or future products or product candidates at an earlier stage than otherwise would be desirable or on terms that are
less favorable than might otherwise be available; or
-
relinquish or license on unfavorable terms, our rights to technologies or product candidates that we otherwise would seek to develop or commercialize
ourselves.
Additional equity or debt financing, or corporate collaboration and licensing arrangements, may not be permissible under the indentures governing our outstanding notes
or the covenants in the Credit Facilities, or otherwise available on acceptable terms, if at all. Additional equity financing will be dilutive to stockholders, and debt financing, if available, may
involve additional restrictive covenants. In addition, if we raise additional funds through collaborations or other strategic transactions, it may be necessary to relinquish potentially valuable rights
to our potential products or proprietary technologies, or grant licenses on terms that are not favorable to us.
Potential restructuring transactions may impact our business, financial condition and operations.
In connection with our exploration of alternatives to refinance or restructure our existing debt, we expect to incur expenses associated with identifying and
evaluating our alternatives. The process of exploring refinancing or restructuring alternatives may be disruptive to our business operations. The inability to effectively manage the process and
any resulting agreement or transaction could materially and adversely affect our business, financial condition or results of operations.
If we undertake a Chapter 11 proceeding, our senior management would be required to spend a significant amount of time and effort focusing on such proceedings. This
diversion of attention from other matters may materially adversely affect the conduct of our business, and, as a result, our financial condition and results of operations, particularly if the Chapter
11 proceedings are protracted. Bankruptcy Court protection also might make it more difficult to retain management and other key personnel necessary to the success and growth of our
business. In addition, the longer a proceeding related to a Chapter 11 proceeding continues, the more likely it is that our customers and suppliers would lose confidence in our ability to
reorganize our businesses successfully and would seek to establish alternative commercial relationships.
56
If we are unable to regain compliance with the listing requirements of The Nasdaq Global Market, our common stock
may be delisted from The Nasdaq Global Market which could have a material adverse effect on our financial condition and could make it more difficult for you to sell your shares.
Our common stock is listed on the Nasdaq Global Market, and we are therefore subject to its continued
listing requirements, including requirements with respect to the market value of publicly-held shares, market value of listed shares, minimum bid price per share, and minimum stockholder's
equity, among others, and requirements relating to board and committee independence. If we fail to satisfy one or more of the requirements, we may be delisted from the Nasdaq Global
Market.
On October 17, 2018, we received notice, or the Minimum Market Value of Publicly Held Shares Notice,
from Nasdaq that we are not currently in compliance with the $15 million minimum market value of publicly held shares requirement of Nasdaq Listing Rule 5450(b)(3)(C). The Minimum Market
Value of Publicly Held Shares Notice indicated that, consistent with Nasdaq Listing Rule 5810(c)(3)(D), we have until April 15, 2019 to regain compliance with the minimum market value of
publicly held shares requirement by having the closing market value of publicly held shares, calculated by multiplying the closing bid price of our common stock by our total shares outstanding
(less any shares held by officers, directors or beneficial owners of 10% or more of the total shares outstanding ), meet or exceed $15 million for at least ten consecutive business days. The
Minimum Market Value of Publicly Held Shares Notice had no immediate effect on the listing of our common stock and our common stock will continue to trade on the Nasdaq Global Market
under the symbol "PTX" at this time.
On October 19, 2018, we received notice, or the Minimum Bid Price Notice, from Nasdaq that we are not currently in compliance with the $1.00 minimum closing bid
price requirement of Nasdaq Listing Rule 5450(a)(1). The Minimum Bid Price Notice indicated that, consistent with Nasdaq Listing Rule 5810(c)(3)(A), we have until April 17, 2019 to regain
compliance with the minimum bid price requirement by having the closing bid price of our common stock meet or exceed $1.00 per share for at least ten consecutive business days. If we do not
regain compliance with the minimum bid price requirement by April 17, 2019, we may be eligible to transfer the listing of our common stock from the Nasdaq Global Market to the Nasdaq
Capital Market if, at the time of such transfer, we meet the initial listing requirement for market value of publicly held shares ($1 million) and all other initial listing standards for the Nasdaq
Capital Market (except for the minimum bid price requirement) and provide Nasdaq with written notice of our intention to cure the minimum bid price requirement deficiency. In response,
Nasdaq may provide us an additional 180 day period to satisfy the minimum bid price requirement. However, if it appears to the Nasdaq staff that we will not be able to cure the deficiency, or if
we are not eligible, Nasdaq will provide notice to us that our common stock will be subject to delisting as described below. The Minimum Bid Price Notice had no immediate effect on the listing
of our common stock and our common stock will continue to trade on the Nasdaq Global Market under the symbol "PTX" at this time.
If we fail to regain compliance with either the minimum market value of publicly held shares requirement or
the minimum bid price requirement during the applicable compliance periods, we will receive notification from Nasdaq that our common stock is subject to delisting. At that time we may then
appeal the delisting determination to a Hearings Panel. Such notification will have no immediate effect on our listing on the Nasdaq Global Market, nor will it have an immediate effect on the
trading of our common stock pending such hearing. There can be no assurance, however, that we will be able to regain compliance with each of Nasdaq's minimum market value of publicly
held shares requirement and Nasdaq's minimum bid price requirement. If we regain compliance with the Nasdaq's minimum market value of publicly held shares requirement and Nasdaq's
minimum bid price requirement, there can be no assurance that we will be able to maintain compliance with the continued listing requirements for the Nasdaq Global Market, or that our
common stock will not be delisted from the Nasdaq Global Market in the future. In addition, we may be unable to meet other applicable listing requirements of the Nasdaq Global Market, in
which case our common stock could be delisted notwithstanding our ability to demonstrate compliance with the minimum market value of publicly held shares and the minimum bid price
requirements.
57
Delisting from the Nasdaq Global Market may adversely affect our ability to raise additional financing
through the public or private sale of equity securities, may significantly affect the ability of investors to trade our securities and may negatively affect the value and liquidity of our common stock.
Delisting also could have other negative results, including the potential loss of employee confidence, the loss of institutional investors or interest in business development opportunities.
Moreover, a delisting of our common stock could result in an Event of Default under our outstanding debt securities.
If we are delisted from the Nasdaq Global Market and we are not able to list our common stock on another
exchange, our Common Stock could be quoted on the OTC Bulletin Board or in the "pink sheets." As a result, we could face significant adverse consequences including, among
others:
-
a limited availability of market quotations for our securities;
-
a determination that our common stock is a "penny stock" which will require brokers trading in our common stock to adhere to more stringent rules and
possibly result in a reduced level of trading activity in the secondary trading market for our securities;
-
a limited amount of news and little or no analyst coverage for us;
-
we would no longer qualify for exemptions from state securities registration requirements, which may require us to comply with applicable state securities laws; and
-
a decreased ability to issue additional securities (including pursuant to short-form registration statements on Form S-3) or obtain additional financing in the future.
In addition, if the Common Stock is delisted from the Nasdaq Global Market, the holders of the Convertible Notes and the Exchangeable Notes would have the right to
require the Company (in the case of the Convertible Notes) or PIP DAC (in the case of the Exchangeable Notes) to repurchase all of the Convertible Notes and Exchangeable Notes owned by
such holders at a price equal to 100% of the principal amount thereof, plus any accrued and unpaid interest thereon, within 35 business days following the Company or PIP DAC giving notice
to such holders of the delisting. The Company's or PIP DAC's failure to pay such amounts when due would result in a default under the indentures governing the Convertible Notes or the
Exchangeable Notes, as the case may be, which would ripen into an event of default immediately under the indenture governing the Convertible Notes, and within five days of becoming due
under the indenture governing the Exchangeable Notes. Further, an event of default under either of these indentures would result in a cross-default under the Delayed Draw Term Loan as well
as the ABL Facility, which could result in indebtedness outstanding under those instruments to become immediately due and payable. In addition, any acceleration of the debt under the
Convertible Notes, the Exchangeable Notes, the Delayed Draw Term Loan or the ABL Facility would trigger an event of default under the indenture governing the Treximet Secured Notes,
which could result in such indebtedness becoming immediately due and payable.
If our common stock becomes subject to the penny stock rules, it would become more difficult to trade our shares.
The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks are generally equity securities
with a price of less than $5.00, other than securities registered on certain national securities exchanges or authorized for quotation on certain automated quotation systems, provided that
current price and volume information with respect to transactions in such securities is provided by the exchange or system. If we do not retain a listing on the Nasdaq Global Market and if the
price of our common stock is less than $5.00, our common stock will be deemed a penny stock. The penny stock rules require a broker-dealer, before a transaction in a penny stock not
otherwise exempt from those rules, to deliver a standardized risk disclosure document containing specified information. In addition, the penny stock rules require that before effecting any
transaction in a penny stock not otherwise exempt from those rules, a broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser
and receive (i) the purchaser's written acknowledgment of the receipt of a risk disclosure statement; (ii) a written agreement to transactions involving penny stocks; and (iii) a signed and dated
copy of a written suitability statement. These disclosure requirements may have the effect of reducing the trading activity in the secondary market for our common stock, and therefore
stockholders may have difficulty selling their shares.
58
We may not be able to grow through acquisitions of businesses and assets, the formation of
collaborations or other strategic alliances or the in-licensing of products or product candidates.
We have sought growth largely through acquisitions, including the acquisitions of the Zohydro ER product line in 2015, the rights to Treximet intellectual
property in 2014, Pernix Sleep in 2013 and Cypress in 2012. As part of our strategy, we plan to pursue acquisitions of assets, businesses or strategic alliances and collaborations (including the
in-licensing of products or product-candidates), to expand our existing technologies and operations, such as the July 2018 services agreement with Nalpropion pursuant to which we manage
Nalpropion and exclusively distribute Contrave in the United States. However, the indentures governing the Exchangeable Notes, the Convertible Notes and the Treximet Secured Notes, and
the Credit Facilities contain restrictive covenants, which include, among other things, restrictions on the incurrence of indebtedness, as well as certain consolidations, acquisitions, mergers,
purchases or sales of assets and capital expenditures, subject to certain exceptions and permissions limited in scope and dollar value, among other things. For additional information, see the
notes to our audited consolidated financial statements for the years ended December 31, 2017 and 2016 contained in Part II, Item 8 of our Annual Report on Form 10-K for the fiscal year
ended December 31, 2017. Moreover, it cannot be assured that acquisitions will be available on terms attractive to us or that such acquisitions will be permissible under the indentures
governing our outstanding notes and the covenants in the Credit Facilities or that we will be able to arrange financing on terms acceptable to us or to obtain timely federal and state
governmental approvals on terms acceptable to us, or at all.
We may be unable to successfully integrate newly acquired businesses or assets and realize the anticipated benefits of these acquisitions or other collaborations
or strategic alliances.
Management has in the past devoted, and will in the future devote, significant attention and resources to integrating newly acquired businesses and assets
and/or establishing functioning collaborations that leverage our capabilities in pursuit of developing and commercializing our products and product candidates. Potential integration process
difficulties that we have encountered or may encounter in the future include the following:
-
the inability to successfully combine our businesses with any newly acquired business, to integrate any newly acquired assets into our existing product portfolio, and
to meet our capital requirements following such acquisition, in a manner that permits us to achieve the cost savings or revenue enhancements anticipated to result from these acquisitions,
which would result in the anticipated benefits of the acquisitions not being realized in the time frame currently anticipated or at all;
-
lost sales and customers as a result of certain of our customers deciding not to do business with us following the acquisition of a business or asset;
-
the additional complexities of integrating newly acquired businesses and assets with different core products and markets;
-
potential unknown liabilities and unforeseen increased expenses associated with an acquisition of a business or asset;
-
performance shortfalls as a result of the diversion of management's attention caused by integrating the operations of a newly acquired business or a newly acquired
asset into the existing product portfolio;
-
our collaborative partners may not commit adequate resources to the development, marketing and distribution of any collaboration products, limiting our potential
revenues from these products;
-
our collaborative partners may experience financial difficulties and may therefore be unable to meet their commitments to us;
-
our collaborative partners may pursue a competing product candidate developed either independently or in collaboration with others, including our competitors; and
-
our collaborative partners may terminate our relationship.
59
With respect to potential collaborations or strategic alliances, our ability to reach a definitive agreement for any collaboration will depend, among other things, upon our
assessment of the collaborator's resources and expertise, the terms and conditions of the proposed collaboration and the proposed collaborator's evaluation of a number of factors. If we are
unable to reach agreements with suitable collaborators on a timely basis, on acceptable terms, or at all, we may have to reduce or delay our development or commercialization programs or
initiatives.
For all these reasons, you should be aware that it is possible that integrating a newly acquired business or asset and/or the establishment of collaborations or other
strategic alliances could result in the distraction of our management, the disruption of our ongoing business or inconsistencies in our products, standards, controls, procedures and policies, any
of which could adversely affect our ability to maintain relationships with customers, vendors and employees or to achieve the anticipated benefits of the acquisitions, or could otherwise
adversely affect our business and financial results.
Despite our significant level of indebtedness, we and our subsidiaries may still be able to incur substantially more debt, which could exacerbate the risks
associated with our substantial leverage.
We may be able to incur substantial additional indebtedness in the future. Although certain of our agreements, including the Credit Facilities and the indentures
governing the Exchangeable Notes, the Convertible Notes and the Treximet Secured Notes, limit our ability and the ability of our subsidiaries to incur additional indebtedness, these restrictions
are subject to waiver and a number of qualifications and exceptions and, under certain circumstances, debt incurred following receipt of a waiver or in compliance with these restrictions could
be substantial. Among other things, we have the ability to borrow up to an additional $5.8 million under the Term Credit Agreement for certain specified purposes, including future acquisitions,
working capital or other general corporate purposes, subject to certain conditions set forth in the Term Credit Agreement, and approximately $18.3 million of additional funds under the ABL
Facility, subject to borrowing base capacity and certain conditions set forth in the ABL Facility. In addition, the Term Credit Agreement includes an incremental feature that allows us, with the
consent of the requisite lenders under the Term Credit Agreement, to obtain up to an additional $20 million in term loan commitments from new or existing lenders under the Term Credit
Agreement that agree to provide such commitments. To the extent that we incur additional indebtedness, the risks associated with our substantial leverage described herein, including our
possible inability to service our debt, would increase.
Our debt service obligations may adversely affect our cash flow.
A high level of indebtedness increases the risk that we may default on our debt obligations. We may not be able to generate sufficient cash flow to pay the
interest on our debt, and future working capital, borrowings or equity financing may not be available to pay or refinance such debt. If we are unable to generate sufficient cash flow to pay the
interest on our debt, we may have to delay or curtail our operations.
Our ability to generate cash flows from operations and to make scheduled payments on our indebtedness will depend on our future financial performance. Our future
financial performance will be affected by a range of economic, competitive and business factors that we cannot control, such as those risks described in this section and in our other filings with
the SEC. A significant reduction in operating cash flows resulting from changes in economic conditions, increased competition or other events beyond our control could increase the need for
additional or alternative sources of liquidity and could have a material adverse effect on our business, financial condition, results of operations, prospects and our ability to service our debt and
other obligations. If we are unable to service our indebtedness we will be forced to adopt an alternative strategy that may include actions such as reducing capital expenditures, selling assets,
restructuring or refinancing our indebtedness or seeking additional equity capital, or seeking Chapter 11 Bankruptcy Court protection.
These alternative strategies may not be affected on satisfactory terms, if at all, and they may not yield sufficient funds to make required payments on our
indebtedness.
If for any reason we are unable to meet our debt service and repayment obligations, we would be in default under the terms of the agreements governing our debt,
which may allow our creditors at that time to declare outstanding indebtedness to be due and payable, which would in turn trigger cross-acceleration or cross-default rights between the relevant
agreements.
60
In addition, the borrowings under our credit facilities bear interest at variable rates and other debt we incur could likewise be variable-rate debt. If interest rates increase,
our debt service obligations on the variable rate indebtedness would increase even though the amount borrowed thereunder remains the same, and our net income and cash flows, including
cash available for servicing our indebtedness, would correspondingly decrease.
The indentures governing the Exchangeable Notes, the Convertible Notes and the Treximet Secured Notes and the covenants in the Credit Facilities and the
articles supplementary authorizing the issuance of the Convertible Preferred Stock impose significant operating and/or financial restrictions on us and our subsidiaries that may prevent us from
pursuing certain business opportunities and restrict our ability to operate our business.
The indentures governing the Exchangeable Notes, the Convertible Notes and the Treximet Secured Notes and the Credit Facilities contain covenants that
restrict our and our subsidiaries' ability to take various actions, such as:
-
incur additional debt;
-
pay dividends and make distributions on, or redeem or repurchase, our capital stock;
-
make certain investments, purchase certain assets or other restricted payments;
-
sell assets, including in connection with sale-leaseback transactions;
-
create liens;
-
enter into transactions with affiliates;
-
make lease payments that exceed a specified amount; and
-
merge, consolidate or transfer all or substantially all of their assets.
In addition, the articles supplementary authorizing the issuance of
our
Convertible Preferred Stock prohibit us from authorizing,
declaring or paying regular or special dividends or other distributions (whether in the form of cash, shares, indebtedness or any other property or asset, but excluding any purchase, redemption
or other acquisition of shares) on the shares of our
Common Stock
, unless simultaneously with the authorization, declaration or payment, we authorize,
declare or pay, as applicable, dividends or other distributions on the Convertible Preferred Stock.
In addition, the terms of the Treximet Secured Notes require us to maintain a minimum liquidity of $8.0 million at all times and the terms of the ABL Facility require us to
maintain unrestricted minimum liquidity of $7.5 million at all times. In order to maintain minimum liquidity, we must maintain cash or the availability to borrow cash under the ABL Facility in a
combined amount of no less than the minimum liquidity set forth in the Treximet Secured Notes indenture and the ABL Facility.
Upon the occurrence of a fundamental change, as described in the indenture governing the
4.25%
Convertible Notes, holders of the
4.25%
Convertible Notes may require us to repurchase for cash all or part of their
4.25%
Convertible Notes at a
repurchase price equal to 100% of the principal amount of the
4.25%
Convertible Notes to be repurchased, plus accrued and unpaid interest. If a holder
elects to convert its
4.25%
Convertible Notes for shares in excess of the conversion cap, as described in the indenture governing the
4.25%
Convertible Notes, we will be obligated to deliver cash in lieu of any share that was not delivered on account of such limitation. However, we may not
have enough available cash or be able to obtain financing at the time we are required to make repurchases of the
4.25%
Convertible Notes surrendered
therefor in connection with a fundamental change or payments of cash on
4.25%
Convertible Notes converted in excess of the conversion cap. In addition,
our ability to repurchase the
4.25%
Convertible Notes or to pay cash upon conversions of the
4.25%
Convertible Notes
may be limited by law, by regulatory authority or by agreements governing our indebtedness. Our failure to repurchase the
4.25%
Convertible Notes at a time
when the repurchase is required by the indenture or to pay any cash payable on future conversions of the
4.25%
Convertible Notes as required by the
indenture would constitute a default under the indenture. A default under the indenture could also lead to a default under agreements governing our other outstanding indebtedness. If the
repayment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and repurchase the
4.25%
Convertible Notes or make cash payments upon conversions as required by the indenture.
61
Upon the occurrence of a fundamental change, as described in the indenture governing the Exchangeable Notes, holders of the Exchangeable Notes may require us to
repurchase for cash all or part of Exchangeable Notes at a repurchase price equal to 100% of the capitalized principal amount of the Exchangeable Notes to be repurchased, plus accrued and
unpaid interest. However, we may not have enough available cash or be able to obtain financing at the time we are required to make repurchases of the Exchangeable Notes surrendered
therefor in connection with a fundamental change. In addition, our ability to repurchase the Exchangeable Notes or to pay cash upon conversions of the Exchangeable Notes may be limited by
law, by regulatory authority or by agreements governing our indebtedness. Our failure to repurchase the Exchangeable Notes at a time when the repurchase is required by the indenture or to
pay any cash payable on future conversions of the Exchangeable Notes as required by the indenture would constitute a default under the indenture. A default under the indenture could also
lead to a default under agreements governing our other outstanding indebtedness. If the repayment of the related indebtedness were to be accelerated after any applicable notice or grace
periods, we may not have sufficient funds to repay the indebtedness and repurchase the Exchangeable Notes or make cash payments upon conversions as required by the indenture.
Our ability to comply with these covenants will likely be affected by many factors, including events beyond our control, and we may not satisfy those requirements. Our
failure to comply with our debt-related obligations could result in an event of default under the particular debt instrument, which could permit acceleration of the indebtedness under that
instrument and, in some cases, the acceleration of our other indebtedness, in whole or in part.
These restrictions also limit our ability to plan for or react to market conditions, meet capital needs or otherwise restrict our activities or business plans and adversely
affect our ability to finance our operations, enter into acquisitions including transactions, collaborations or other commercial transactions or to engage in other business activities that would be
in our interest.
Our ability to borrow under the ABL Facility is limited by the amount of our borrowing base. Any negative impact on the elements of our borrowing base, such as
accounts receivable and inventory or an imposition of a reserve against our borrowing base, which Cantor Fitzgerald Securities has the authority to do in its sole discretion, could reduce our
borrowing capacity under the ABL Facility.
If we fail to attract and retain key personnel, we may be unable to successfully develop or commercialize our products.
Our success depends in part on our continued ability to attract, retain and motivate highly qualified managerial personnel. We are highly dependent upon our
executive management team. The loss of the services of any members of our executive management team or other key personnel could delay or prevent the successful completion of some of
our development and commercialization objectives.
Recruiting and retaining qualified sales and marketing personnel is critical to our success. We may not be able to attract and retain these personnel on acceptable terms
given the competition among numerous pharmaceutical and biotechnology companies for similar personnel. In addition, we rely on consultants and advisors, including scientific and clinical
advisors, to assist us in formulating our development and commercialization strategy. Our consultants and advisors may be employed by employers other than us and may have commitments
under consulting or advisory contracts with other entities that may limit their availability to us.
Our management devotes substantial time to comply with public company regulations.
As a public company, we incur significant legal, accounting and other expenses. In addition, the Sarbanes-Oxley Act, as well as rules subsequently
implemented by the SEC and the Nasdaq Global Market, imposes various requirements on public companies, including with respect to corporate governance practices. Moreover, these rules
and regulations increase legal and financial compliance costs and make some activities more time-consuming and costly.
In addition, the Sarbanes-Oxley Act requires, among other things, that our management maintain adequate disclosure controls and procedures and internal control over
financial reporting. In particular, we must perform system and process evaluation and testing of our internal control over financial reporting to allow management and, as applicable, our
independent registered public accounting firm to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Our
compliance with Section 404 requires us to incur
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substantial accounting and related expenses and expend significant management efforts. If we are not able to comply with the requirements of
Section 404 or if we or our independent registered public accounting firm identifies deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, our
financial reporting could be unreliable and misinformation could be disseminated to the public.
Any failure to develop or maintain effective internal control over financial reporting or difficulties encountered in implementing or improving our internal control over
financial reporting could harm our operating results and prevent us from meeting our reporting obligations. Ineffective internal controls also could cause our stockholders and potential investors
to lose confidence in our reported financial information, which would likely have a negative effect on the trading price of our Common Stock. In addition, investors relying upon this
misinformation could make an uninformed investment decision and we could be subject to sanctions or investigations by the SEC, Nasdaq Global Market or other regulatory authorities, or to
stockholder class action securities litigation.
Our July 2018 obtainment of the exclusive distribution rights in the United States to Contrave, the April 2015 acquisition of Zohydro ER and the August 2014
acquisition of the rights to Treximet intellectual property and our strategy of obtaining, through asset acquisitions and in-licenses, rights to other products and product candidates for our
development pipeline and to proprietary drug delivery and formulation technologies for our life cycle management of current products may not be successful.
We obtained the rights to the exclusive distribution in the United States of Contrave in July 2018, and acquired the rights to Zohydro ER in April 2015 and
Treximet intellectual property in August 2014 and from time to time we may seek to engage in additional strategic transactions with third parties to acquire rights to other pharmaceutical
products, pharmaceutical product candidates in the late stages of development and proprietary drug delivery and formulation technologies. Because we do not have discovery and research
capabilities, the growth of our business will depend in significant part on our ability to acquire or in-license additional products, product candidates or proprietary drug delivery and formulation
technologies that we believe have significant commercial potential and are consistent with our commercial objectives. However, we may be unable to license or acquire suitable products,
product candidates or technologies from third parties for a number of reasons.
The licensing and acquisition of pharmaceutical products, product candidates and related technologies is a competitive area. A number of more established companies
are also pursuing strategies to license or acquire products, product candidates or drug delivery and formulation technologies, which may mean fewer suitable acquisition opportunities for us as
well as higher acquisition prices. Many of our competitors have a competitive advantage over us due to their size, cash resources and greater clinical development and commercialization
capabilities.
Other factors that may prevent us from licensing or otherwise acquiring suitable products, product candidates or technologies include:
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we may be unable to license or acquire the relevant products, product candidates or technologies on terms that would allow us to make an appropriate return on investment;
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companies that perceive us as a competitor may be unwilling to license or sell their product rights or technologies to us;
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we may be unable to identify suitable products, product candidates or technologies within our areas of expertise;
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we may have inadequate cash resources or may be unable to obtain financing to acquire rights to suitable products, product candidates or technologies from third parties; and
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we may be restricted from licensing or otherwise acquiring suitable products due to restrictions contained in the indentures governing the Exchangeable Notes, the
4.25% Convertible Notes and the Treximet Secured Notes and the restrictions contained in the covenants in the Credit Facilities.
If we are unable to successfully identify and acquire rights to products, product candidates or proprietary drug delivery and formulation technologies and successfully
integrate them into our operations, we may not be able to increase our revenues in future periods, which could result in significant harm to our financial condition, results of operations and
development prospects.
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Our failure to adequately address the financial, operational or legal risks of any acquisitions or in-license arrangements could harm our business. Financial aspects of
these transactions that could alter our financial position, reported operating results or stock price include:
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use of cash resources;
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higher than anticipated acquisition costs and expenses;
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potentially dilutive issuances of equity securities;
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the incurrence of debt and contingent liabilities, impairment losses or restructuring charges;
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large write-offs and difficulties in assessing the relative percentages of in-process research and development expense that can be immediately written off as
compared to the amount that must be amortized over the appropriate life of the asset; and
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amortization expenses related to other intangible assets.
Operational risks that could harm our existing operations or prevent realization of anticipated benefits from these transactions include:
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challenges associated with managing an increasingly diversified business;
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disruption of our ongoing business;
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difficulty and expense in assimilating the operations, products, technology, information systems or personnel of the acquired company or in-licensed product;
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diversion of management's time and attention from other business concerns;
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entry into a geographic or business market in which we have little or no prior experience;
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inability to maintain uniform standards, controls, procedures and policies;
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the assumption of known and unknown liabilities of the acquired business or asset, including intellectual property claims; and
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subsequent loss of key personnel.
If we are unable to successfully manage our licensing or acquisitions, or distribution rights that we have obtained, our ability to develop and commercialize new products
and continue to expand our product pipeline may be limited.
If we are unable to effectively train and equip our sales force to sell newly acquired, in-licensed and existing products, our ability to successfully commercialize
our products will be harmed.
We have in the past made, and may in the future continue to make, acquisitions or in-licenses of pharmaceutical products. We have also experienced, and
expect to continue to experience, turnover of some of our sales representatives that we hired or will hire, requiring us to train new sales representatives. The members of our sales force may
have no prior experience promoting the pharmaceutical products that we own or may acquire or in-license in the future. As a result, we expend significant time and resources to
train our sales force to be credible and persuasive in convincing physicians to prescribe and pharmacists to dispense these pharmaceutical products. In addition, we must train our sales force
to ensure that a consistent and appropriate message about our products and the products that we distribute is being delivered to our potential customers. Our sales representatives may also
experience challenges promoting multiple products when they call on physicians and their office staff. In addition, prior to our obtaining the exclusive distribution rights in the United States to
Contrave in July 2018, all of our products or the products we distributed related to underserved segments, such as central nervous system (CNS) indications, including pain, neurology, and
psychiatry, as well as other specialty therapeutic areas. If we are unable to effectively train our sales force and equip them with effective materials relating to our pharmaceutical products,
including medical and sales literature to help them inform and educate potential customers about the benefits of such products and their proper administration and label indication, our efforts to
successfully market these pharmaceutical products could be put in jeopardy, which could have a material adverse effect on our financial condition, stock price and operations.
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Recent reductions in workforce associated with our realignment plan could disrupt the operation of our business, distract our management from focusing on
revenue-generating efforts, result in the erosion of employee morale, and impair our ability to respond rapidly to growth opportunities in the future.
We completed a realignment plan in January 2018 that resulted in a workforce reduction of approximately 22%, primarily through a reduction of sales and
commercial infrastructure positions. The employee reductions could result in an erosion of morale and affect the focus and productivity of our remaining employees, including those directly
responsible for revenue generation and the management and administration of our finances, which in turn may adversely affect our revenue in the future or cause other administrative
deficiencies. Additionally, employees directly affected by the reductions may seek future employment with our business partners, customers or competitors. We may face wrongful termination,
discrimination, or other claims from employees affected by the reduction related to their employment and termination. We could incur substantial costs in defending ourselves or our employees
against such claims, regardless of the merits of such actions. Furthermore, such matters could divert the attention of our employees, including management, away from our operations, harm
productivity, harm our reputation and increase our expenses. We cannot assure you that our realignment plan will be successful, and we may need to take additional realignment efforts,
including additional personnel reduction, in the future.
Risks Related to Commercialization
Treximet has become subject to competition from generic competitors, which will have a material adverse impact on our sales of Treximet and our results of operations.
We own, have applied for or hold licenses to patents. Our patent protection for our products extends for varying periods in accordance with the legal life of
patents. The protection afforded is limited by the applicable terms of our patents and the availability of legal remedies in the United States. Following expiration of patents covering our products,
other entities may be able to obtain approval to manufacture and market generic alternatives, which we expect would result in lower net revenue. For example, in August 2014, through our
wholly owned subsidiary Pernix Ireland Limited (PIL), we acquired the U.S. intellectual property rights to Treximet from GSK. Treximet is covered by five patents in the U.S. Including six months
of pediatric exclusivity, four of the patents expired on February 14, 2018, and one expires on April 2, 2026. Six companies filed Abbreviated New Drug Applications, or ANDAs, with the FDA,
seeking approval to market a generic version of Treximet. Three of the ANDA filers are enjoined from engaging in the commercial manufacture, use, offer to sell, or sale in or importation into
the United States of the proposed ANDA products prior to April 2, 2026. As of September 30, 2018, three competitors have entered the market. While we launched our own generic version of
Treximet on February 15, 2018, the entry of generics into the market has and will continue to have a material adverse impact on our sales of Treximet and our results of operations.
The commercial success of our currently marketed products, products that we distribute and any additional products that we successfully commercialize will
depend upon the degree of market acceptance by physicians, patients, healthcare payors and others in the medical community.
Any products that we bring to the market may not gain market acceptance by physicians, patients, healthcare payors and others in the medical community. If
our products do not achieve an adequate level of acceptance, we may not generate significant product revenue and may not be profitable. The degree of market acceptance of our products
depends on a number of factors, including:
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the prevalence and severity of any side effect;
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the efficacy and potential advantages over the alternative treatments;
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the ability to offer our branded products for sale at competitive prices, including in relation to any generic products;
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substitution of our branded products with generic equivalents at the pharmacy level;
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relative convenience and ease of administration;
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the willingness of the target patient population to try new therapies and of physicians to prescribe these therapies;
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the strength of marketing and distribution support; and
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sufficient third-party coverage or reimbursement.
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We face competition, which may result in others discovering, developing or commercializing products before or more successfully than us.
The industry in which we operate is highly competitive. Our competitors include large and small pharmaceutical companies, and other private and public
research organizations. We face significant competition for our currently marketed products and products that we distribute, including significant price competition from products for the same
therapeutic categories. Some of our currently marketed products and products that we distribute do not have patent protection and face or could face generic competition.
Some or all of our products may face competition from other branded and generic drugs approved for the same therapeutic indications, approved drugs used "off-label"
for such indications and novel drugs in clinical development. As a result, our commercial opportunities could be reduced or eliminated if competitors develop and commercialize products that
are more effective, safer, have fewer or less severe side effects, are more convenient or are less expensive than our products.
Our patent rights, or the patent rights held by certain of our commercial partners or licensors, may not adequately protect our products or product candidates if
competitors develop products that compete with us without legally infringing our or our commercial partners' or licensors' patent rights. Further, our or our commercial partners' or licensors'
patent rights may be subject to challenge by branded and generic competition.
The FDCA and FDA regulations and policies provide certain exclusivity incentives to manufacturers to develop generic versions of innovator products and 505(b)(2) New
Drug Applications. A generic manufacturer may only be required to show that its proposed generic product has the same active pharmaceutical ingredient, dosage form, strength, route of
administration and indication as, and is bioequivalent to, our brand-name product. The development costs for such generic products would be significantly less than those for our or our
commercial partners' or licensors' brand-name products and could lead to the emergence of multiple lower-priced competitor products, which would substantially limit our or our commercial
partners' or licensors' ability to obtain a return on the investments we have made in our brand-name products. Additionally, other branded competitors may obtain FDA or other regulatory
approval for their product candidates more rapidly than we may obtain approval for our product candidates, and they may obtain periods of exclusivity under applicable laws that may delay our
own product candidates' approval by the FDA.
Products in our portfolio that do not have patent protection are potentially at risk for generic competition. Additionally, products we sell through our distribution,
collaborative or co-promotion arrangements may also face competition in the marketplace. The availability of a large number of branded prescription products, including drugs that are
prescribed off-label, generic products and over-the-counter products could limit the demand for, and the revenue that we are able to generate from the sale of our products.
Some of our competitors have significantly greater financial, technical and human resources than we have and superior expertise in marketing and sales, research and
development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approvals and marketing approved products and thus may be better equipped than us to discover,
develop, manufacture and commercialize products. These competitors also compete with us in recruiting and retaining qualified management personnel and acquiring technologies. Many of
our competitors have collaborative arrangements in our target markets with leading companies and research institutions. In many cases, products that compete with our products have already
received regulatory approval or are in late-stage development, have well-known brand names, are distributed by large pharmaceutical companies with substantial resources and have achieved
widespread acceptance among physicians and patients. Smaller or early stage companies may also prove to be significant competitors, particularly through collaborative arrangements with
large and established companies.
We may face competition based on the safety and effectiveness of our products, the timing and scope of regulatory approvals, the availability and cost of supply,
marketing and sales capabilities, reimbursement coverage, price, patent position and other factors. Our competitors may develop or commercialize more effective, safer or more affordable
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products, or products with more effective patent protection, than our products. Accordingly, our competitors may commercialize products more rapidly or effectively than we are able to, which
would adversely affect our competitive position, our revenue and profit from existing products and anticipated revenue and profit from product candidates. If our products or product candidates
are rendered noncompetitive, we may not be able to recover the expenses of developing and commercializing those products or product candidates.
Negative publicity regarding any of our products or product candidates could delay or impair our ability to market any such product, delay or prevent approval of
any such product candidate and may require us to spend time and money to address these issues.
If any of our products or any similar products distributed by other companies prove to be, or are asserted to be, harmful to consumers and/or subject to FDA
enforcement action, our ability to successfully market and sell our products could be impaired. Because of our dependence on patient and physician perceptions, any adverse publicity
associated with illness or other adverse effects resulting from the use or misuse of our products or any similar products distributed by other companies could limit the commercial potential of
our products and expose us to potential liabilities.
If we are unable to attract, hire and retain qualified sales and management personnel and successfully manage our sales and marketing programs and
resources, or if our commercial partners do not adequately perform, the commercial opportunity for our products may be diminished.
We and any other commercialization partner we engage may not be able to attract, hire, train and retain qualified sales and sales management personnel in the
future. If we or they are not successful in maintaining an effective number of qualified sales personnel, our ability to effectively market and promote our products may be impaired. Even if we
are able to effectively maintain such sales personnel, their efforts may not be successful in commercializing our products.
In addition, a significant portion of the revenues that we might receive from sales of products that are the subject to commercial partnerships could largely depend upon
the efforts our partners. The efforts of partners, in many instances, could likely be outside our control. If we are unable to maintain commercial partnerships or to effectively establish alternative
arrangements for our products, our business could be adversely affected. In addition, despite arrangements with other partners, we still may not be able to cover all of the prescribing
physicians for our products at the same level of reach and frequency as our competitors, and we ultimately may need to further expand our selling efforts in order to effectively compete.
From time to time, we compliment the efforts of our sales force with on-line and other non-personal promotional initiatives that target both physicians and patients. We
also focus upon ensuring broad patient access to our products by negotiating agreements with leading commercial managed care organizations, or MCOs, and with government payors.
Although our goal is to achieve sales through the efficient execution of our sales and marketing plans and programs, we may not be able to effectively generate prescriptions and achieve broad
market acceptance for our products on a timely basis, or at all.
A failure to maintain optimal inventory levels to meet commercial demand for our products could harm our reputation and subject us to financial losses.
Our product, Zohydro ER, contains a controlled substance that is regulated by the DEA under the Controlled Substances Act. DEA quota requirements
applicable to Schedule I and II controlled substances limit the amount of controlled substance drug products a manufacturer can manufacture and the amount of API it can use to manufacture
those products. We may experience difficulties obtaining raw materials needed to manufacture such product as a result of DEA regulations or we may experience manufacturing challenges in
the future. If we are unsuccessful in obtaining quotas, unable to manufacture and release inventory on a timely and consistent basis, fail to maintain an adequate level of product inventory, or if
inventory is destroyed or damaged or reaches its expiration date, patients might not have access to our product, our reputation and our brands could be harmed and physicians may be less
likely to prescribe such product in the future, each of which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
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In addition, Nalpropion is the exclusive supplier of Contrave to us and we are the exclusive distributor of Contrave in the U.S. Nalpropion is currently party to an
agreement with Patheon Pharmaceuticals and Patheon Inc., (collectively, Patheon), pursuant to which Patheon has agreed to manufacture commercial quantities of Contrave tablet
products for Nalpropion. If Patheon, or any alternative manufacturer retained by Nalpropion, fails to deliver the required commercial quantities of Contrave on a timely basis, pursuant to
provided specifications and at commercially reasonable prices, Nalpropion may be unable to supply us with adequate inventory to meet distribution demand for Contrave in the United States,
which would negatively impact our ability to generate revenue.
We and our contract manufacturers may not be able to obtain the regulatory approvals or clearances that are necessary to manufacture pharmaceutical
products.
Before approving a new drug, the FDA requires that the facilities in which the product will be manufactured be in compliance with Good Manufacturing
Practices, or cGMP, requirements, which include, among other things, requirements relating to quality control and quality assurance, maintenance of records and documentation and utilization
of qualified raw materials. To be successful, our products must be manufactured in compliance with cGMP during development and, following approval, in commercial quantities and at
acceptable costs.
We and our contract manufacturers, and the contract manufacturers used by our commercial partners and licensors, must comply with these cGMP requirements. While
we believe that we and our and Nalpropion's contract manufacturers currently meet these requirements, we cannot assure that the manufacturing facilities used to manufacture and package
our products will continue to meet cGMP requirements or will be sufficient to manufacture all of our needs and/or the needs of our customers for commercial materials.
We and our and Nalpropion's contract manufacturers may also encounter problems with the following:
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production yields;
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possible facility contamination;
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quality control and quality assurance programs;
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shortages of qualified personnel;
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compliance with FDA or other regulatory authorities' regulations, including the demonstration of purity and potency;
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changes in FDA or other regulatory authorities' requirements;
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production costs; and/or
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development of advanced manufacturing techniques and process controls.
In addition, we and our and Nalpropion's contract manufacturers must register our and their manufacturing facilities with the FDA, and such manufacturing facilities are
subject to FDA inspections to confirm continuing compliance with cGMP and other regulations. If we or our or Nalpropion's contract manufacturers fail to maintain regulatory compliance, the
FDA may impose regulatory sanctions including, among other things, temporary or permanent refusal to permit us, Nalpropion or our or Nalpropion's contract manufacturers to continue
manufacturing approved products. As a result, our business, financial condition and results of operations may be materially harmed.
If
we or third-party manufacturers fail to comply with regulatory requirements for Zohydro ER, the DEA may take regulatory actions
detrimental to our business, resulting in temporary or permanent interruption of distribution, withdrawal of such product from the market or other penalties.
We, third-party manufacturers and our Zohydro with BeadTek product are subject to the Controlled Substances Act and DEA regulations thereunder.
Accordingly, we must adhere to a number of requirements, which can include registration, record-keeping and reporting requirements; labeling and packaging requirements; security controls,
procurement and manufacturing quotas; and certain restrictions on refills. Failure to maintain compliance with applicable requirements can result in enforcement action that could have a
material adverse effect on our business, financial condition, results of operations and cash flows. The DEA may seek civil penalties, refuse to renew necessary registrations or initiate
proceedings to revoke those registrations. In certain circumstances, violations could result in criminal proceedings.
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If the suppliers of Contrave fail to comply with stringent regulations applicable to pharmaceutical drug manufacturers, our partners may face delays in the
further development or commercialization of Contrave.
Although naltrexone itself is not addictive, synthesis of naltrexone is a multi-step process with a natural opiate starting material that has the potential for abuse
and is therefore regulated as a controlled substance under the federal Controlled Substances Act or applicable foreign equivalents. As such, manufacturers of naltrexone API must be
registered with the DEA or applicable foreign equivalents. Manufacturers making naltrexone also must obtain annual quotas from the DEA for the opiate starting material. Because of the DEA-related
requirements and modest current demand for naltrexone API, there currently exist a limited number of manufacturers of this API. Therefore, API costs for naltrexone are greater than for
the other constituents of our product. Demand for Contrave may require amounts of naltrexone greater than the currently available worldwide supply or our or our partners' current forecasts for
the supply to us of Contrave or its components. Any lack of sufficient quantities of naltrexone would limit our ability to continue to distribute Contrave in the United States and would limit our
partners' ability to commercialize Contrave outside the United States and Europe.
Changes in laws, regulations and policies applicable to the market for opioid products, litigation and government investigations may adversely affect our
business, financial condition and results of operations.
The manufacture, marketing, sale, promotion and distribution of Zohydro ER are subject to comprehensive government regulations. Changes in laws and
regulations applicable to the market for opioid products, including Zohydro ER with BeadTek, could potentially affect our business. For instance, federal, state and local governments have
recently given increased attention to the public health issue of opioid abuse.
At the federal level, the White House Office of National Drug Control Policy continues to coordinate efforts between the FDA, the DEA, and other agencies to address
this issue. In 2017, the FDA requested that Endo International plc, or Endo, withdraw Opana ® ER, one of its opioid pain medications, from the market due to the public health
consequences of abuse (even when taken at recommended doses) associated with the use of Endo's product. Endo voluntarily complied with the FDA's removal request. In publicly
announcing the request, the FDA noted that it would take similar regulatory action with regard to other opioid products if the risks for abuse outweighed the product's potential benefits. The
FDA also revised the "black-box" warnings required in the labeling of opioid paid medications, including Zohydro ER, that highlight the risk of misuse, abuse, addiction, overdose and death. The
DEA continues its efforts to hold manufacturers, distributors, prescribers and pharmacies accountable through various enforcement actions, as well as the implementation of compliance
practices for controlled substances. In addition, the Centers for Disease Control and Prevention (CDC), issued national, non-binding guidelines in 2016 relative to the prescribing of opioids.
These guidelines included recommended considerations for primary care provider use when prescribing opioids, including specific considerations and cautionary information about opioid
dosage increases and morphine milligram equivalents. Certain payors are, or are considering, adopting these CDC guidelines, as well as putting other restrictions on the prescribing of opioid
pain medications. Additionally, DEA has taken regulatory action to reduce the yearly quotas available in the United States for opioids.
Federal activity includes the issuance of a Presidential commission's final recommendations on combating opioid abuse; the federal Department of Health and Human
Services declaring the opioid crisis a national public health emergency; President Trump's establishing a commission to make recommendations regarding new laws and policies to combat
opioid addiction and abuse; Mallinckrodt's $35.0 million settlement with the Justice Department regarding alleged failures related to suspicious order monitoring obligations; and the FDA's
announced intention to extend to immediate-release opioids the Risk Evaluation and Mitigation Strategy, or REMS, currently imposed on extended-release opioids, such as Zohydro ER At the
state and local level, a number of states and major cities have brought separate lawsuits against various pharmaceutical companies marketing and selling opioid based pain medications,
alleging misleading or otherwise improper promotion of opioid drugs to physicians and consumers. In addition, the attorneys general from several states have announced the launch of a joint
investigation into the marketing and sales practices of drug companies that manufacture opioid pain medications.
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On October 24, 2018, the Support for Patients and Communities Act (the Support Act) was signed into law to address opioid misuse and addiction in the United States.
The Support Act amends several provisions of the Federal Food, Drug, and Cosmetic Act (FDCA) and the Controlled Substances Act (CSA) that have implications on manufacturers of opioids
and other controlled substances. Key changes include additional FDA authority to order the cessation of distribution of controlled substances and to impose requirements on packaging and
safe disposal systems. In addition, the Support Act includes CSA provisions relevant to suspicious order monitoring obligations that may impact the distribution of Zohydro.
These initiatives and other changes and potential changes in laws, regulations and policies, including those that have the effect of reducing the overall market for opioids
or reducing the prescribing of opioids, could adversely affect our business, financial condition and results of operations.
Our ceasing the distribution of our combination drug product IDA will impact our net revenues. In the future, FDA could also request that we no longer market and
distribute certain of our other DESI, OTC, medical foods and dietary supplement products.
Through our Macoven entity, Pernix distributed a combination product called IDA, which was originally approved by the FDA, in 1948 for safety only. The
product's efficacy as an adjunct treatment for peptic ulcer disease, as well as other medical conditions, such as migraine headaches, was reviewed under the FDA's Drug Efficacy Study
Implementation process, DESI notice 3265.
On October 20, 2017, we received a letter dated October 19, 2017 from the FDA asserting that IDA was subject to DESI 3265 and that any drug products identified in
DESI 3265, including IDA, require an approved NDA or ANDA in order for them to continue to be distributed. Since we have not obtained an NDA or ANDA for IDA, the FDA directed that we
should immediately cease distribution of IDA. While IDA has a long history of safe use, we complied with the FDA's request and confirmed with the FDA within the requested time frame that we
ceased distribution of the product. For the year ended December 31, 2017, our net revenues from the sale of IDA were $14.9 million. As we will not have further revenues from the product in
2018, the discontinuance of the product will impact net revenues for the fiscal year ending December 31, 2018.
Additionally, it is possible that the FDA could in the future request that we no longer distribute certain of our DESI, OTC, medical foods and dietary supplement products,
which could adversely affect our net revenues.
Product liability lawsuits against us could cause us to incur substantial liabilities and limit commercialization of any products that we may develop.
We face an inherent risk of product liability exposure related to the sale of our currently marketed products and any other products that we successfully develop,
commercialize or distribute. For example, at the state and local level, a number of states and major cities have brought separate lawsuits against various pharmaceutical companies marketing
and selling opioid based pain medications, alleging misleading or otherwise improper promotion of opioid drugs to physicians and consumers. In addition, the attorneys general from several
states have announced the launch of a joint investigation into the marketing and sales practices of drug companies that manufacture opioid pain medications. In May 2018, we were notified that
the Company was named in an ongoing lawsuit that has been brought by the State of Arkansas against various pharmaceutical companies that market and sell opioid based pain
medications. During the second quarter of 2018, we were also served with two additional lawsuits in which we were included as a defendant, both of which were filed in Philadelphia
County, PA. At this time, we are unaware of whether we will be named in any of the other lawsuits brought by other state and local governments or in the various investigations by
attorneys general from several states.
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If we cannot successfully defend ourselves against claims that our products, product candidates or products that we distribute caused injuries, we could incur substantial
liabilities. Regardless of merit or eventual outcome, liability claims may result in:
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decreased demand for our products, products that we distribute or any products that we may develop;
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injury to reputation;
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withdrawal of clinical trial participants;
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withdrawal of a product from the market;
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costs to defend the related litigation;
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substantial monetary awards to trial participants or patients;
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diversion of management time and attention;
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loss of revenue; and
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the inability to commercialize any products that we may develop.
Some of the insurance companies that presently insure and that have insured Pernix could legally assert that they are not liable to respond to or to cover a
claimed liability, including but not limited to the opioid litigation and further, may dispute whether their insurance contracts must legally respond to claimed liabilities against Pernix. Should any
of these contingencies occur and should Pernix be denied access to insurance coverage, this could have a material adverse effect on our business, financial condition and results of operations
and we may not have adequate funds available to cover such liabilities, as well as incurred legal defense costs.
On October 26, 2018, Navigators Insurance Company ("Navigators") initiated an insurance coverage declaratory judgment action against us
in the United States District Court for the Eastern District of Pennsylvania seeking a decision that it does not owe us coverage
under certain insurance policies for the defense and potential indemnity of us in three lawsuits pending against us: (1)
UFCW, Local 23 and Employers Health Fund v. Endo
Pharmaceuticals, Inc. et al.
, Case No. 180403485, filed in the Pennsylvania Court of Common Pleas, Philadelphia County ("UFCW Action"); (2)
Iron Workers District
Council of Philadelphia and Vicinity, Benefit Fund v. Abbott Laboratories, Inc. et al.
, Case No. 180502442, filed in the Pennsylvania Court of Common Pleas, Philadelphia County
("Iron Workers Action"); and (3)
State of Arkansas, ex. rel. Scott Ellington et al. v. Purdue Pharma, L.P. et al.
, Case No. CV-2018-268, filed in the Circuit Court of
Crittenden County, Arkansas ("Arkansas Action").
While we intend to vigorously contest these claims, and file a counterclaim that Navigators owes us a duty to defend all of the lawsuits in full, and that any
determination of the duty to indemnify at this point is premature, it is uncertain whether we will prevail. Further, it is possible that other insurers could adopt a similar position to that
taken by Navigators and/or assert other reasons for denying coverage relative to claims made against us, including the opioid litigation lawsuits. Further, there may be instances
where our existing insurance coverage will not respond to or cover a claimed liability or where our insurers may dispute whether their insurance contracts require them to legally respond to
such claimed liabilities. It is also possible that the amount of insurance that we currently hold may not be adequate to cover all liabilities that we might incur. Should any of these contingencies
occur and should we be denied access to insurance coverage, this could have a material adverse effect on our business, financial condition and results of operations and we may not have
adequate funds available to cover such liabilities, as well as incurred legal defense costs.
Finally, insurance coverage is increasingly expensive. We might not be able to maintain insurance coverage at a reasonable cost that will be adequate to satisfy any
liability that may arise. Further, we might not be able to obtain insurance coverage for certain products and/or potential liabilities, including but not limited to our opioid products.
Seasonality may cause fluctuations in our financial results.
We generally experience some effects of seasonality due to patients resetting their deductible amounts in the beginning of the calendar year and reaching their
deductible amounts during the year. Accordingly, sales of our products and associated revenue have generally decreased in the first quarter of each year and begin to increase during the
remainder of the year. This seasonality may cause fluctuations in our financial results. In addition, other seasonality trends may develop and the existing seasonality that we experience may
change.
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Risks Related to Our Dependence on Third Parties
We may face delays in the development and commercialization of, or be unable to meet demand for, our products and may lose potential revenues if the
manufacturers upon whom we rely fail to properly produce our products or in the volumes that we require on a timely basis, or to comply with stringent regulations applicable to pharmaceutical
drug manufacturers.
We do not manufacture our products, and we do not currently plan to develop any capacity to do so. We rely on third parties to manufacture our products. The
manufacture of pharmaceutical products requires significant expertise and capital investment, including the development of advanced manufacturing techniques and process controls.
Manufacturers of pharmaceutical products often encounter difficulties in production, particularly in scaling up and validating initial production. These problems include difficulties with production
costs and yields, quality control, including stability of the product and quality assurance testing, shortages of qualified personnel, as well as compliance with strictly enforced federal, state and
foreign regulations.
Manufacturers may not perform as agreed or may terminate their agreements. Additionally, manufacturers may experience manufacturing difficulties due to resource
constraints or as a result of labor disputes or unstable political environments. If manufacturers were to encounter any of these difficulties, or otherwise fail to comply with their contractual
obligations, our ability to sell our products or any other product candidate that we commercialize would be jeopardized. Any delay or interruption in our ability to meet commercial demand for
our products will result in the loss of potential revenues.
For example, due to a manufacturing issue with one of our suppliers, the 20 mg. strength of Zohydro ER was on back order until March 2018. During that time, we
marketed and distributed other strengths of Zohydro ER, including the 10 mg., 15 mg., 30 mg., 40 mg. and 50 mg. strengths. While utilization of the 10 mg., 15 mg. and 30 mg. strengths
increased in order to fulfill patient needs, the temporary stock-out of the 20 mg. strength impacted the overall prescription volume for Zohydro ER, which resulted in a loss of revenue. While the
manufacturer of the product, Recro Pharma, Inc. (Recro), was able to reinitiate supply of the 20 mg. strength of Zohydro to us, Recro has continued to be confronted with manufacturing
challenges with the 20 mg. strength. While Recro now believes that it has resolved its manufacturing issue, we will experience a temporary stock-out of the 20 mg. during the fourth
quarter of 2018. We do not believe that this temporary stock-out will have a material impact on the overall prescription volume for Zohydro ER in the fourth quarter. While, as noted,
Recro believes that the manufacturing issue relative to the 20 mg. strength is now resolved, it is possible that this issue is not fully resolved or that additional manufacturing issues might arise in
the future that could cause Recro to be unable to supply us with the 20 mg. strength of Zohydro on a short or long term basis, which could have a potentially material adverse impact on our
results of operations. Additionally, it is possible that Recro could encounter a manufacturing issue that could cause it to be unable to deliver requested quantities of the other dosage strengths
of Zohydro ER, which could have a potentially material adverse impact on our results of operations.
In addition, in connection with our acquisition of the rights to Treximet intellectual property in August 2014, we discovered short-term
supply constraints for the product. While we believe that we have addressed this issue by securing another manufacturer, our failure to obtain sufficient supply of Treximet to meet anticipated
demand in the future may result in a loss of revenue.
Prior to the closing of the acquisition of Orexigen's assets, Orexigen informed us that due to certain packaging defects caused by manufacturing services provided by its
third party manufacturer, Patheon, Orexigen elected to conduct a Class III recall at the retail level. We believe Nalpropion has adequate inventory of the product to prevent any product
shortages and the product manufacturer, Patheon, has been placed on legal notice of actual and potential claims, as well as any other damages that might be incurred. Nevertheless, future
manufacturing issues with Patheon could cause product shortages that would negatively impact our results of operations.
All manufacturers of pharmaceutical products must comply with the FDA's current cGMP requirements enforced by the FDA through its facilities inspection program. The
FDA is also likely to conduct inspections of our and our commercial partners' manufacturing facilities as part of their review of any NDAs we submit to the FDA. These cGMP requirements
include, among other things, quality control, quality assurance and the maintenance of records and documentation. Manufacturers of our products may be unable to comply with these cGMP
requirements and with other FDA, state and foreign regulatory requirements. Failure to comply with these requirements may result in fines and civil penalties, suspension of production,
suspension or delay in product approval, product seizure or recall, or withdrawal of product approval. If the safety, efficacy, or quantities of our products are compromised due to our or our
commercial partners' manufacturers' failure to adhere to applicable laws or for other reasons, we may not be able to obtain regulatory approval for or successfully commercialize our
products.
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Moreover, our or our commercial partners' manufacturers and suppliers may experience difficulties related to their overall businesses and financial stability, which could
result in delays or interruptions of our supply of our products. We do not have alternate manufacturing plans in place at this time. If we need to change to other manufacturers, the FDA must
approve these manufacturers' facilities and processes in advance, which would require new testing and compliance inspections. Moreover, new manufacturers may have to be trained in or
independently develop the processes necessary for production.
Any of these factors could adversely affect the commercial activities for our products and required approvals for any other product candidate that we develop, or entail
higher costs or result in our being unable to effectively commercialize our products. Furthermore, if our or our commercial partners' manufacturers failed to deliver the required commercial
quantities of raw materials, including bulk drug substance, or finished product on a timely basis and at commercially reasonable prices, we would likely be unable to meet demand for our
products and we would lose potential revenues.
The concentration of our product sales to only a few wholesale distributors increases the risk that we will not be able to effectively distribute our products if we
need to replace any of these customers, which would cause our sales to decline.
The majority of our sales are to a small number of pharmaceutical wholesale distributors, which in turn sell our products primarily to retail pharmacies, which
ultimately dispense our products to the end consumers. For the year ended December 31, 2017, McKesson Corporation, Cardinal Health and AmerisourceBergen Drug Corporation accounted
for 34%, 24% and 30%, respectively, of our total gross sales. For the year ended December 31, 2016, McKesson Corporation, Cardinal Health and AmerisourceBergen Drug
Corporation accounted for 36%, 26% and 31%, respectively, of our total gross sales.
If any of these customers cease doing business with us or materially reduce the amount of product they purchase from us and we cannot conclude agreements with
replacement wholesale distributors on commercially reasonable terms, we might not be able to effectively distribute our products through retail pharmacies. The possibility of this occurring is
exacerbated by the recent significant consolidation in the wholesale drug distribution industry, including through mergers and acquisitions among wholesale distributors and the growth of large
retail drugstore chains. As a result, a small number of large wholesale distributors control a significant share of the market.
Any collaboration arrangements that we enter into may not be successful, which could adversely affect our ability to develop and commercialize our product
candidates.
We enter into collaboration arrangements from time to time on a selective basis. Our collaborations may not be successful. In the future, we might market
certain branded and generic products in the U.S. pursuant to collaboration arrangements. The success of such collaboration arrangements may depend heavily on the efforts and activities of
our collaborators. Collaborators generally have significant discretion in determining the efforts and resources that they will apply to these collaborations.
Disagreements between parties to collaboration arrangements regarding clinical development and commercialization matters can lead to delays in the development
process or commercialization of applicable product candidates and, in some cases, termination of the collaboration arrangement. These disagreements can be difficult to resolve if neither of the
parties has final decision-making authority.
Our business could suffer as a result of a failure to manage and maintain our distribution network with our wholesale customers.
We depend on the distribution abilities of our wholesale customers to ensure that our products are effectively distributed through the supply chain. If there are
any interruptions in our customers' ability to distribute products through their distribution centers, our products may not be effectively distributed, which could cause confusion and frustration
among pharmacists and lead to product substitution.
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To the extent that we conduct clinical trials, we plan to rely on third parties to conduct these trials and such third parties may not perform satisfactorily, including
failing to meet established deadlines for the completion of such trials.
We do not plan to independently conduct clinical trials for product candidates that we might acquire in the future and, instead, would rely on third parties, such
as contract research organizations, clinical data management organizations, medical institutions and clinical investigators. Reliance on these third parties for clinical development activities
would reduce our control over these activities, although we would remain responsible for ensuring that clinical trials performed at our direction are conducted in accordance with approved
investigational plans and approved clinical trial protocols. Moreover, the FDA requires compliance with good clinical practices for conducting, recording, and reporting the results of clinical trials
to assure that data and reported results are credible and accurate and that the rights and confidentiality of trial participants are protected. Reliance on third parties does not relieve a sponsor of
these responsibilities and requirements. Furthermore, these third parties could also have relationships with other entities, some of which may be our competitors. If these third parties do not
successfully carry out their contractual duties, meet expected deadlines or conduct our clinical trials in accordance with regulatory requirements or our stated protocols, we might not be able to
obtain, or may be delayed in obtaining, regulatory approvals for future product candidates and may not be able to, or may be delayed in our efforts to, successfully commercialize such product
candidates.
We are subject to various legal proceedings and business disputes that could have a material adverse impact on our business, financial condition and results of
operations and could cause the market value of our Common Stock to decline.
We are subject to various legal proceedings and business disputes and additional claims may arise in the future. Current legal proceedings and disputes as well
as those that may arise in the future may be complex and extended and may occupy the resources of our management and employees. These proceedings may also be costly to prosecute and
defend and may involve substantial awards or damages payable by us if not found in our favor some or all of which may not be covered by our existing insurance coverage or might result in the
granting of certain rights on unfavorable terms in order to settle such proceedings. Defending against or settling such claims and any unfavorable legal decisions, settlements or orders could
have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our Common Stock to decline.
Risks Related to Intellectual Property
If we are unable to obtain and maintain protection for the intellectual property relating to our products, the value of our products will be adversely affected.
Our success will depend in part upon our ability, as well as our partners, to obtain and maintain protection for the intellectual property covering or incorporated
into the products that we market, distribute and/or sell. The patent situation in the field of pharmaceuticals is highly uncertain and involves complex legal and scientific questions.
We rely upon patents, trademarks, trade secrets and confidentiality agreements to protect the products that we market, distribute and/or sell.
We may not be able to obtain additional patent rights relating to our products and pending patent applications to which we have rights may not issue as patents or may
not issue in a form that will be advantageous to us. Further, our patents and the patents of our commercial partners could be challenged, narrowed, invalidated, or held to be
unenforceable, the cost of any type of patent proceeding could be substantial and the results of which could limit our ability to stop third party competitors from marketing competing
products. Moreover, some physicians may prescribe a competitive or similar product that is not approved by the FDA to treat patients with insomnia or weight-related problems in lieu of
prescribing Silenor or Contrave, respectively, and we cannot guarantee that our intellectual property or that the intellectual property of our partners, will prevent or deter such "off-label" use. Our
patent rights also may not afford us protection against all competitors.
Our collaborators and licensors may not adequately protect our intellectual property rights. Certain of these third parties may have the first right to maintain or
defend our intellectual property rights and, although we may have the right to assume the maintenance and defense of our intellectual property rights if these third parties do not, our ability to
maintain and defend our intellectual property rights may be compromised by the acts or omissions of these third parties.
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If we are unable to successfully appeal the district court's August 24, 2018 trial decision that the asserted claims of the Zohydro ER patents are invalid for
obviousness under 35 U.S.C. § 103 and for lacking adequate written description under 35 U.S.C. § 112, we will no longer be able to maintain protection for the intellectual property relating to
Zohydro ER with BeadTek, generic competitors will likely enter the U.S. marketplace in 2019 and the value of this product will be materially adversely affected.
Pernix Therapeutics, LLC (Pernix LLC) is the sole distributor of Zohydro ER in the United States. Pernix LLC and PIP DAC (collectively for the purpose of this
paragraph, Pernix) brought suit against Actavis and Alvogen in the District of Delaware on March 4, 2016, seeking declaratory judgment of infringement of the '760 Patent. Pernix filed
and served Second and Third Amended Complaints, against Alvogen and Actavis respectively, on October 12, 2016, adding additional allegations of infringement.
Pernix and Actavis entered into a settlement agreement on January 29, 2018. Under the terms of the agreement, Pernix will grant Actavis a license to begin
selling a generic version of Zohydro ER on March 1, 2029, or earlier under certain circumstances. Other details of the settlement are confidential. The launch of Actavis's generic
product is contingent upon Actavis receiving final approval from the FDA of its ANDA for a generic version of Zohydro ER. For the Alvogen case, trial testimony was heard from June 11-13, 2018,
post-trial briefing was completed on July 12, 2018, and the trial concluded with the parties' closing arguments on July 25, 2018. The district court's trial decision was rendered on
August 24, 2018, finding the asserted claims of the Zohydro ER Patents to be infringed by Alvogen's proposed generic Zohydro ER product and not to be invalid for anticipation under 35 U.S.C. § 102.
The district court also found the asserted claims to be invalid for obviousness under 35 U.S.C. § 103 and as lacking adequate written description under 35 U.S.C. § 112. Pernix filed a
Notice of Appeal on September 7, 2018, appealing the district court's decision that the asserted claims are invalid for obviousness and lacking adequate written description to the United States
Court of Appeals for the Federal Circuit. Pernix's opening appellate brief is due no later than November 13, 2018, Alvogen's answering brief is due no later December 24, 2018 and Pernix's
reply brief is due no later than January 7, 2019. Oral argument on the appeal is expected in the second quarter of 2019, with a written decision to follow thereafter.
Should our appeal be unsuccessful, and upon Alvogen receiving final approval from the FDA of its ANDA for a generic version of Zohydro ER, Alvogen may be in a
position to begin selling a generic version of Zohydro ER as early as October 1, 2019. Other generic competitors may enter the U.S. market thereafter. The entry of generic competitors will
likely have a materially adverse impact upon the value of this product and our gross revenues.
Trademark protection of our products may not provide us with a meaningful competitive advantage.
We use trademarks on our marketed, branded products and believe that having distinctive marks is an important factor in marketing those products and
maintaining good will. Distinctive marks may also be important for any additional products that we successfully develop and/or commercially market. However, even though we
register, maintain, monitor and defend our trademarks as necessary, we generally do not rely on our marks to provide a meaningful competitive advantage over other products. We
believe that efficacy, safety, convenience, price, the level of competition and the availability of reimbursement from government and other third-party payors are likely to continue to be more
important factors in the commercial success of our products.
If we fail to comply with the obligations included in our intellectual property licenses with third parties, we could lose license rights that are important to our
business.
We have acquired rights to products and product candidates under license and co-promotion agreements with third parties and expect to enter into additional
licenses and co-promotion agreements in the future. Our existing licenses impose, and we expect that future licenses will impose, various development and commercialization, purchase
commitment, royalty, sublicensing, patent protection and maintenance, insurance and other similar obligations on us.
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If we fail to comply with our obligations under a license agreement, the licensor may have the right to terminate the license in whole, terminate the exclusive nature of
the license or bring a claim against us for damages. Any such termination or claim could prevent or impede our ability to market any product that is covered by the license
agreement. Even if we contest any such termination or claim and are ultimately successful, our business could suffer. In addition, upon any termination of a license agreement,
our market position could be impacted if we were legally required to provide a licensor with a license to use any related intellectual property that we developed.
If we are unable to protect the confidentiality of our proprietary information and know-how, the value of our technology and products could be adversely
affected.
In addition to patents and trademarks, we rely upon trade secrets, technical know-how and continuing technological innovation to develop and maintain our
competitive position. We require our relevant persons, such as employees, consultants and other third parties, including vendors (when appropriate), to execute confidentiality and/or
assignment-of-inventions agreements with us.
These agreements may be breached, and in some instances, we may not have an appropriate remedy available for breach of the agreements. Furthermore, our
competitors may independently develop substantially equivalent proprietary information and techniques, reverse engineer our information and techniques, or otherwise gain access to our
proprietary technology. If we are unable to protect the confidentiality of our proprietary information and know-how, competitors may be able to use this information to develop products
that compete with our products, which could adversely impact our business.
If we infringe or are alleged to infringe intellectual property rights of third parties, it may adversely affect our business.
Our development and commercialization activities, as well as any product candidates or products resulting from these activities, may infringe or be claimed to
infringe one or more claims of an issued patent or pending patent application which we do not hold a license or other rights. Third parties may own or control these patents or patent
applications and could bring claims against us or our collaborators that would cause us to incur substantial expenses and, if successful against us, could cause us to pay substantial
damages. Further, if a patent infringement suit were brought against us or our collaborators, we or our collaborators could be forced to stop or delay development, manufacturing or
sales of the product or product candidate that is the subject of the suit.
If any relevant claims of third-party patents that we are alleged to infringe are upheld as valid and enforceable in any litigation or administrative proceeding, we or our
potential future collaborators could be prevented from commercializing a product, or maybe required to obtain licenses from the patent owners of each such patent, or to redesign our products,
and could be liable for damages. There can be no assurance that such licenses would be available or, if available, would be available on acceptable terms, or that we would be
successful in any attempt to redesign our products. Even if we or our collaborators were able to obtain a license, the rights may be nonexclusive, which could result in our competitors
gaining access to the same intellectual property. Ultimately, we could be prevented from commercializing a product, or be forced to cease some aspect of our business operations. An
adverse determination in a judicial or administrative proceeding, failure to redesign, or failure to obtain necessary licenses could prevent us or our future collaborators from manufacturing and
selling our products and would have a material adverse effect on our business.
There has been substantial litigation and other proceedings regarding patents and other intellectual property rights in the pharmaceutical and biotechnology
industries. The cost to us of any patent litigation or other proceedings, even if resolved in our favor, could be substantial. Some of our competitors may be able to sustain the
costs of such litigation or proceedings more effectively than we can because of their substantially greater financial resources. Uncertainties resulting from the initiation and continuation
of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace. Patent litigation and other proceedings may also absorb
significant management time.
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Risks Related to Our Financial Position
We may need substantial additional funding and may be unable to raise capital when needed, which would force us to delay, reduce or eliminate our product
development programs, commercialization efforts or acquisition strategy.
We make significant investments in our currently-marketed products for sales, marketing, and distribution. We have used, and expect to continue to use,
revenue from sales of our marketed products and products we distribute to fund acquisitions (at least partially), for development costs and to establish and expand our sales and marketing
infrastructure.
Our future capital requirements will depend on many factors, including:
-
our ability to restructure our existing debt;
-
our ability to successfully integrate the operations of newly acquired businesses and assets and/or in-licensed products or product candidates into our product portfolio;
-
our ability to successfully establish and maintain collaborations or other strategic alliances;
-
the level of product sales from our currently marketed or distributed products and any additional products that we may market or distribute in the future;
-
the extent to which we acquire or invest in products, businesses and technologies;
-
the scope, progress, results and costs of clinical development activities for our product candidates;
-
the costs, timing and outcome of regulatory review of our product candidates;
-
the number of, and development requirements for, additional product candidates that we pursue;
-
the costs of commercialization activities, including product marketing, sales and distribution;
-
the extent to which we choose to establish additional collaboration, co-promotion, distribution or other similar arrangements for our products and product candidates; and
-
the costs of preparing, filing and prosecuting patent applications and maintaining, enforcing and defending intellectual property related claims.
We intend to obtain any additional funding that we require through public or private equity or debt financings, strategic relationships, including the divestiture of non-core
assets, assigning receivables, milestone payments or royalty rights, or other arrangements. We cannot assure such funding will be available on reasonable terms, or at all. Additional equity
financing will be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants. In addition, if we raise additional funds through collaborations or other strategic
transactions, it may be necessary to relinquish potentially valuable rights to our potential products or proprietary technologies, or we may have to grant licenses on terms that are not favorable
to us.
If efforts to raise additional funds are unsuccessful, we may be required to delay, scale-back or eliminate plans or programs relating to our business, relinquish some or
all rights to our products or renegotiate less favorable terms with respect to such rights than we would otherwise agree to accept or we may have to cease operating as a going concern. In
addition, if we do not meet our payment obligations to third parties as they come due, we may be subject to litigation claims. Even if we were successful in defending against these potential
claims, litigation could result in substantial costs and be a distraction to management and might result in unfavorable results that could further adversely impact our financial condition
If we are unable to continue as a going concern, we may have to liquidate our assets and may receive less than the value at which those assets are carried on our
financial statements, and it is likely that investors will lose all or a part of their investments.
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If the estimates that we make, or the assumptions upon which we rely, in preparing our financial statements prove inaccurate, our future financial results may vary from expectations.
Our financial statements have been prepared in accordance with GAAP. The preparation of our financial statements requires us to make estimates and
judgments that affect the reported amounts of our assets, liabilities, stockholders' equity, revenues and expenses, the amounts of charges accrued by us and related disclosure of contingent
assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. For example, at the same
time we recognize revenues for product sales, we also record an adjustment, or decrease, to revenue for estimated charge backs, rebates, discounts, vouchers and returns, which management
determines on a product-by-product basis as its best estimate at the time of sale based on each product's historical experience adjusted to reflect known changes in the factors that impact such
reserves. For new products, these sales adjustments may be estimated based upon information available on any similar products in the marketplace or specific information provided by
business partners or if management is not able to derive a reasonable estimate for the adjustments, gross revenue can be deferred and recognized as the product is prescribed.
Actual sales allowances may vary from our estimates for a variety of reasons, including unanticipated competition, regulatory actions or changes in one or more of our
contractual relationships. We cannot assure you, therefore, that there may not be material fluctuations between our estimates and the actual results.
Our ability to utilize our net operating loss carryforwards and certain other tax attributes may be limited.
As of December 31, 2017, we had net operating losses (NOLs) of approximately $396.5 million for federal income tax purposes. Subject to applicable
limitations, these NOLs may be used to offset future taxable income, to the extent we generate any taxable income, and thereby reduce our future federal income taxes otherwise payable.
Under Section 382 of the Internal Revenue Code (the Code), if a corporation undergoes an "ownership change" as defined in that section, the corporation's ability to use
its pre-change NOLs and other pre-change tax attributes to offset its post-change income may become subject to significant limitations. In general terms, an ownership change occurs if there is
a greater than 50 percentage point increase in the amount of the corporation's stock owned by certain stockholders during a three year testing period. An ownership change may be triggered
by the purchase and sale, redemption, or new issuance of stock. $366.5 million of our NOLs are already subject to limitation under Section 382 of the Code. We may experience an ownership
change in the future as a result of shifts in our stock ownership, which may result from, among other things, issuances of Common Stock, including upon the exercise by the holders of our
existing convertible debt securities and any convertible debt securities we may offer in the future of the conversion rights under such instruments, and upon the exercise of stock options and
other equity compensation awards. If a future ownership change were to be triggered, our ability to use some or all of our remaining NOLs could be significantly limited. Further, depending on
the level of our taxable income, all or a portion of our NOLs may expire unutilized, which could prevent us from offsetting future taxable income by the entire amount of our current and future
NOLs.
Additionally, on December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the Tax Act). The
Tax Act contains significant changes to corporate taxation and modifies several existing laws around NOLs, including a limitation on the deduction for NOLs to 80 percent of current year
taxable income as well as an indefinite carryover period for NOLs. Both provisions are applicable for losses arising in tax years beginning after December 31, 2017. For these reasons, even if
we generate taxable income in the future, our ability to utilize our NOLs may be limited, potentially significantly so.
If we fail to meet all applicable continued listing requirements of the Nasdaq Global Market and it determines to delist our Common Stock, the market liquidity and
market price of our Common Stock could decline.
If we fail to meet all applicable listing requirements of the Nasdaq Global Market and it determines to delist our Common Stock, trading, if any, in our shares
may continue to be conducted on an over-the-counter market, such as the OTCQX, OTCQB or the OTC Pink. Delisting of our shares would result in limited release of the market price of those
shares and limited analyst coverage and could restrict investors' interest and confidence in our securities. Also, a delisting could have
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a material adverse effect on the trading market and prices
for our shares and our ability to issue additional securities or to secure additional financing. In addition, if our shares were not listed and the trading price of our shares was less than $5.00 per
share, our shares could be subject to Rule 15g-9 under the Exchange Act which, among other things, requires that broker/dealers satisfy special sales practice requirements, including making
individualized written suitability determinations and receiving a purchaser's written consent prior to any transaction. In such case, our securities could also be deemed to be a "penny stock"
under the Securities Enforcement and Penny Stock Reform Act of 1990, which would require additional disclosure in connection with trades in those shares, including the delivery of a
disclosure schedule explaining the nature and risks of the penny stock market. Such requirements could severely limit the liquidity of our securities and our ability to raise additional capital.
If significant business or product announcements by us or our competitors cause fluctuations in our stock price, an investment in our stock may suffer a decline in
value.
The market price of our
Common Stock
may be subject to substantial volatility as a result of announcements by us or other
companies in our industry, including our collaborators. Announcements that may subject the price of our
Common Stock
to substantial volatility include but
are not limited to announcements regarding:
-
our operating results, including the amount and timing of sales of our products and our ability to successfully integrate the operations of newly acquired businesses or products;
-
the availability and timely delivery of a sufficient supply of our products;
-
the safety and quality of our products or those of our competitors;
-
our licensing and collaboration agreements and the products or product candidates that are the subject of those agreements;
-
the results of discoveries, preclinical studies and clinical trials by us or our competitors;
-
the acquisition of technologies, product candidates or products by us or our competitors;
-
the development of new technologies, product candidates or products by us or our competitors;
-
regulatory actions with respect to our product candidates or products or those of our competitors; and
-
significant acquisitions, strategic partnerships, joint ventures or capital commitments by us or our competitors.
The holders of our debt obligations and preferred stock, if any, will have priority over our
Common Stock
with respect to
payment in the event of liquidation, dissolution or winding up and with respect to the payment of interest and dividends.
In any liquidation, dissolution or winding up of the Company, our
Common Stock
would rank below all claims of our note
holders and other creditors as well as the claims of the Convertible Preferred Stock and any preferred stock issued subsequent to the date hereof. As of August 1, 2018, we had approximately
$323.1million aggregate principal amount of debt outstanding, consisting of approximately (i) $36.1 million aggregate principal amount of our Exchangeable Notes, (ii) $78.2 million aggregate
principal amount of our
4.25%
Convertible Notes, (iii) $154.5 million aggregate principal amount of our Treximet Secured Notes, and (iv) approximately $54.3
million outstanding under our Credit Facilities. In addition, on August 1, 2018 we also issued 81,000 shares of the Convertible Preferred Stock and we are authorized, under our articles of
incorporation, to issue up to an additional 1,000,000 shares of our Series B Junior Participating Stock and up to 7,500,000 shares of preferred stock, with designations, rights and preferences
as they may determine. Accordingly, our Board has in the past and may in the future, without stockholder approval, issue shares of preferred stock with dividend, liquidation, conversion, voting
or other rights that could adversely affect the voting power or other rights of the holders of our
Common Stock
.
In the event of our liquidation, dissolution or winding up, holders of our
Common Stock
would not be entitled to receive any payment
or other distribution of assets upon our liquidation, dissolution or winding up until after all of our obligations to our note holders and other creditors were satisfied and holders of senior equity
securities, including holders of our Convertible Preferred Stock, had received any payment or distribution due to them.
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Because we do not anticipate paying any cash dividends on our capital stock in the foreseeable future, capital appreciation, if any, will be your sole source of gain.
We did not make any distributions for the years ended December 31, 2017 and 2016. We are currently investing in our promoted products lines and do not
anticipate paying dividends in the foreseeable future. We currently intend to retain all of our future earnings, if any, to finance the growth and development of our business. In addition, the terms
of the Credit Facilities, the indentures governing the Exchangeable Notes, the
4.25%
Convertible Notes and the Treximet Secured Notes and the articles
supplementary authorizing the issuance of the Convertible Preferred Stock prohibit us from paying dividends. As a result, capital appreciation, if any, of our
Common Stock
will be your sole source of gain for the foreseeable future.
Sales of a substantial number of shares of our
Common Stock
or equity-linked securities could cause our stock price to
fall.
Sales of a substantial number of shares of our
Common Stock
or equity-linked securities 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 or equity-linked securities. We are unable to predict the effect that sales may have on the prevailing market price of our
Common Stock
.
Exchange of the Exchangeable Notes and conversion of the Convertible Preferred Stock and the
4.25%
Convertible Notes
may dilute the ownership interest of existing stockholders and
could have an adverse impact upon the prevailing market price of our Common Stock.
Subject to certain contractual restrictions, holders of the Exchangeable Notes and the Convertibles Notes are entitled to exchange or convert, respectively, the
Exchangeable Notes or the
4.25%
Convertible Notes for shares of our
Common Stock
at their option at any time prior to
the close of business on the second scheduled trading day immediately preceding the maturity date of the Exchangeable Notes or the
4.25%
Convertible
Notes, respectively. In addition, holders of the Convertible Preferred Stock, subject to certain contractual restrictions, have the right to convert their shares of Convertible Preferred Stock for
shares of our
Common Stock
at their option. On October 3, 2018, holders of 13,100 shares of the Convertible Preferred Stock elected to convert such
Convertible Preferred Stock into 548,115 shares of our Common Stock. Further, the 2018 Exchange Agreement affords certain Exchange Holders the right to exchange up to an additional
$65.1 million aggregate principal amount of the Treximet Secured Notes plus accrued and unpaid interest, into additional Convertible Preferred Stock until February 1, 2020. We have the right,
at our option, to automatically convert all shares of the Convertible Preferred Stock into shares of Common Stock, subject to the satisfaction of certain specified conditions. The exchange of
some or all of the Exchangeable Notes or the conversion of some or all of the
4.25%
Convertible Notes or shares of the Convertible Preferred Stock will
dilute the ownership interests of existing stockholders. If holders of the Exchangeable Notes were to exchange all of the outstanding Exchangeable Notes (not taking into account the potential
for capitalization of interest or additional interest or changes to the exchange price), we would need to deliver approximately 6,571,746 shares of our
Common
Stock
to settle the exchange, which would result in significant dilution to existing stockholders. If holders of the
4.25%
Convertible Notes were to
exchange all of the outstanding
4.25%
Convertible Notes, we would need to deliver approximately 682,413 shares of our
Common Stock
to settle the conversion, which would result in additional dilution to existing stockholders. If holders of the Convertible Preferred Stock were to
convert all of the outstanding shares of Convertible Preferred Stock (assuming the Exchange Holders exercise their right to exchange the entire $65.1 million aggregate principal amount of the
Treximet Secured Notes plus accrued and unpaid interest as of September 30, 2018), and not giving effect to any applicable ownership limitations on such conversions, we would need to
deliver approximately 30,627,615 shares of our
Common Stock
to settle the conversions, which would result in additional dilution to existing stockholders.
Sales in the public market of shares of our
Common Stock
issued upon exchange or conversion could have an adverse impact upon the prevailing market
price of our
Common Stock
.
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Future issuances of preferred stock may adversely affect the market price for our
Common Stock
.
Additional issuances and sales of preferred stock, or the perception that such issuances and sales could occur, may cause prevailing market prices for our
Common Stock
to decline and may adversely affect our ability to raise additional capital in the financial markets at times and prices favorable to us.
Our operating results are likely to fluctuate from period to period.
We anticipate that there may be fluctuations in our future operating results. Potential causes of future fluctuations in our operating results may include:
-
period-to-period fluctuations in financial results due to seasonal demands for certain of our products;
-
unanticipated potential product liability or patent infringement claims;
-
new or increased competition from generics;
-
the introduction of technological innovations or new commercial products by competitors;
-
changes in the availability of reimbursement to the patient from third-party payers for our products;
-
the entry into, or termination of, key agreements, including key strategic alliance agreements;
-
the initiation of litigation to enforce or defend any of our intellectual property rights;
-
the loss of key employees;
-
the results of pre-clinical testing, IND application, and potential clinical trials of some product candidates;
-
regulatory changes;
-
the results and timing of regulatory reviews relating to the approval of product candidates;
-
the results of clinical trials conducted by others on products that would compete with our products and product candidates;
-
failure of any of our products or product candidates to achieve commercial success;
-
general and industry-specific economic conditions that may affect research and development expenditures;
-
future sales of our Common Stock; and
-
changes in the structure of health care payment systems resulting from proposed healthcare legislation or otherwise.
Our stock price is subject to fluctuation, which may cause an investment in our stock to suffer a decline in value.
The market price of our
Common Stock
may fluctuate significantly in response to factors that are beyond our control. The
stock market in general has recently experienced extreme price and volume fluctuations. The market prices of securities of pharmaceutical and biotechnology companies have been extremely
volatile and have experienced fluctuations that often have been unrelated or disproportionate to the operating performance of these companies. These broad market fluctuations could result in
extreme fluctuations in the price of our
Common Stock
, which could cause a decline in the value of our
Common
Stock
.
If we become subject to unsolicited public proposals from activist stockholders, we may experience significant uncertainty that would likely be disruptive to our
business and increase volatility in our stock price.
Public companies, particularly those in volatile industries such as the pharmaceutical industry, have been the target of unsolicited public proposals from activist
stockholders. The unsolicited and often hostile nature of these public proposals can result in significant uncertainty for current and potential licensors, suppliers, patients, physicians and other
constituents, and can cause these parties to change or terminate their business relationships with the targeted company. Companies targeted by these unsolicited proposals from activist
stockholders may not be able to attract and retain key personnel as a result of the related uncertainty. In addition, unsolicited proposals can result in stockholder class action lawsuits. The
review and consideration of an unsolicited proposal as well as any resulting lawsuits can be a significant distraction for management and employees, and may require the expenditure of
significant time, costs and other resources.
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If we were to receive unsolicited public proposals from activist stockholders, we may encounter all of these risks and, as a result, may be delayed in executing our core
strategy. We could be required to spend substantial resources on the evaluation of the proposal as well as the review of other opportunities that never come to fruition. If we were to receive any
of these unsolicited public proposals, the future trading price of our Common Stock is likely to be even more volatile than in the past, and could be subject to wide price fluctuations based on
many factors, including uncertainty associated with the proposals.
We may become involved in securities or other class action litigation that could divert management's attention and harm our business.
The stock market has from time to time experienced significant price and volume fluctuations that have affected the market prices for the
common stock
of pharmaceutical and biotechnology companies. These broad market fluctuations may cause the market price of our
common stock
to decline. In the past, following periods of volatility in the market price of a particular company's securities, securities class action litigation has
often been brought against that company. Any securities or other class action litigation asserted against us could have a material adverse effect on our business.
Risks Related to Regulatory Matters
If we are not able to obtain required regulatory approvals, we will not be able to commercialize our product candidates and our ability to generate increased revenue
will be materially impaired.
Product candidates and the activities associated with their development and commercialization, including their testing, manufacture, safety, efficacy, recordkeeping,
labeling, storage, approval, advertising, promotion, sale and distribution, are subject to comprehensive regulation by the FDA, the DEA and other regulatory agencies in the United States.
Should we acquire or develop a product candidate, the failure to obtain regulatory approval would prevent us from commercializing the product candidate. Securing FDA approval requires the
submission of extensive preclinical and clinical data and supporting information for each therapeutic indication to establish the product candidate's safety and efficacy. Securing FDA approval
also requires the submission of information about the product manufacturing process to, and inspection of manufacturing facilities by, the FDA. Additionally, it is possible that future product
candidates may not be effective, may be only moderately effective, or may have undesirable or unintended side effects, toxicities or other characteristics that may preclude our obtaining
regulatory approval or prevent or limit commercial use.
The process of obtaining regulatory approvals is expensive, often takes many years, if approval is obtained at all, and can vary substantially based upon a variety of
factors, including the type, complexity and novelty of the product candidates involved and the nature of the disease or condition to be treated. Changes in regulatory approval policies during the
development period, changes in or the enactment of additional statutes or regulations, or changes in the regulatory review process for a product application may cause delays in the approval
of, or rejection of, an application. The FDA has substantial discretion in the approval process and may refuse to accept any application or may decide that our data is insufficient for approval
and require additional preclinical, clinical or other studies. The FDA may decline to approve one or more of our product candidates for many reasons, including:
-
disagreement with the design or implementation of our clinical trials;
-
failure to demonstrate that a product candidate is safe and effective for its proposed indication;
-
failure of clinical trial results to meet the level of statistical significance required for approval;
-
failure to demonstrate that a product candidate's clinical and other benefits outweigh its safety risks;
-
disagreement with our interpretation of data from preclinical studies or clinical trials;
-
insufficiency of data collected from clinical trials of a product candidate to support the submission and filing of an NDA or other submission or to obtain regulatory approval;
-
disapproval of the manufacturing processes or facilities of third-party manufacturers with whom we contract for clinical and commercial supplies; and
-
changes in approval policies or regulations that render our preclinical and clinical data insufficient for approval.
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In addition, varying interpretations of the data obtained from preclinical and clinical testing could delay, limit or prevent regulatory approval of a product candidate. Any
regulatory approval ultimately obtained may be limited or subject to restrictions or post-approval commitments that render the approved product not commercially viable.
Any pharmaceutical product for which we currently have marketing approval could be subject to restrictions or withdrawal from the market and we may be subject
to penalties if we fail to comply with regulatory requirements or if we experience unanticipated problems with our products.
Any FDA approved products are subject to continued requirements of and review by the FDA. These requirements include submissions of safety and other
post-marketing information and reports, registration requirements, cGMP requirements relating to quality control, quality assurance and corresponding maintenance of records and documents,
requirements regarding the distribution of samples to physicians and recordkeeping. Even after a product receives FDA approval, that approval may be subject to limitations on the indicated
uses for which the product may be marketed, or to requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the product. Later discovery of previously
unknown problems with our products, manufacturers, or manufacturing processes or failure to comply with regulatory requirements may result in administrative and judicial actions such as:
-
withdrawal of the products from the market;
-
restrictions on the marketing or distribution of such products;
-
requirements to place additional warnings on the labels for such products;
-
requirements to develop a REMS for such products or, if a REMS is already in place, to incorporate additional requirements under the REMS;
-
requirements to conduct additional post-market studies;
-
restrictions on the manufacturers or manufacturing processes;
-
warning letters;
-
refusal to approve pending applications or supplements to approved applications that we submit;
-
recalls;
-
fines;
-
suspension or withdrawal of regulatory approvals;
-
refusal to permit the import or export of our products;
-
product seizure;
-
injunctions or the imposition of civil or criminal penalties; or
-
private lawsuits alleging harm caused to subjects or patients.
For example, even though U.S. regulatory approval has been obtained for Contrave, which we have the exclusive right to distribute in the United States from Nalpropion,
the FDA has imposed restrictions on its indicated uses and marketing and has imposed ongoing requirements for post-marketing studies and other activities. Nalpropion also is required to
conduct a number of post-marketing studies, including a series of studies in obese pediatric patients to evaluate the safety and efficacy of Contrave for weight management in pediatric
populations and a group of short-term trials, including a single-dose pharmacokinetic study in renal and hepatic impairment and a placebo-controlled cardiovascular outcomes clinical trial (the
"CVOT"). We cannot assure you that the CVOT proposal to be submitted by Nalpropion will satisfy the FDA's post-marketing requirements related to cardiovascular outcomes or
that the FDA will not require Nalpropion to conduct additional studies during or after the CVOT.
Any issues relating to these restrictions or post-marketing requirements (including any additional studies which the FDA may require or a delay in conducting the post-
marketing required studies) for our products, or for Contrave, could have an adverse impact on product market acceptance, as well as our ability to market, sell and/or distribute (as applicable)
such potentially impacted product in the United States and to generate revenue.
In addition, the FDA strictly regulates labeling, advertising and promotion of marketed products. A pharmaceutical product that receives FDA approval may only be
promoted for FDA-approved indications and in accordance with the FDA-approved labeling. We may be subject to enforcement and other liability if we inappropriately promote our
products.
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Our sales depend on payment and reimbursement from third-party payors, and a reduction in the payment rate or reimbursement could result in decreased use
or sales of our products.
Our sales of currently marketed products and products that we distribute and our ability to commercialize our products depends substantially on the availability
of sufficient coverage and reimbursement from third-party payors, including U.S. governmental payors such as the Medicare and Medicaid programs, MCOs and private insurers. All of Pernix's
promoted products are generally well covered by managed care and private insurance plans. Generally, the status or tier within managed care formularies, which are lists of approved products
developed by MCOs, varies but coverage is similar to other products within the same class of drugs. However, the position of any of our branded products that requires a higher patient
copayment may make it more difficult to expand the current market share for such product. In some cases, MCOs may require additional evidence that a patient had previously failed another
therapy, additional paperwork or prior authorization from the MCO before approving reimbursement for a branded product. Some Medicare Part D plans also cover some or all of our products,
but the amount and level of coverage varies from plan to plan. We also participate in the Medicaid Drug Rebate program with the Centers for Medicare & Medicaid Services (CMS) and
submit all of our covered products for inclusion in this program. Coverage of our products under individual state Medicaid plans varies from state to state.
Additionally, our covered products are made available under the 340B Drug Pricing Program, which is codified as Section 340B of the Public Health Service Act. The
340B program requires participating manufacturers to agree to charge statutorily defined covered entities no more than the 340B "ceiling price" for the manufacturer's covered outpatient drugs.
Details of the 340B program, our reliance on payment and reimbursement from third-party payors, and a reduction in the payment rate or reimbursement are discussed in the Business section
under the heading "
Pharmaceutical Pricing and Reimbursement
" in Part I, Item 1, of our most recent Annual Report on Form 10-K.
There have been, there are, and we expect there will continue to be federal and state legislative and administrative proposals that could limit the amount that
government health care programs will pay to reimburse the cost of pharmaceutical and biologic products. For example, the Medicare Prescription Drug Improvement and Modernization Act of
2003, or MMA, created a new Medicare benefit for prescription drugs. The Deficit Reduction Act of 2005 significantly reduced reimbursement for drugs under the Medicaid program. More
recently, there have been proposals to impose federal rebates on Medicare Part D drugs, requiring federally-mandated rebates on all drugs dispensed to Medicare Part D enrollees or on only
those drugs dispensed to certain groups of lower income beneficiaries. Legislative or administrative acts that reduce reimbursement or result in us owing additional rebates for our products
could adversely impact our business.
Details of changes under Health Care Reform, as well as current uncertainties arising as a result of Trump administration and Congressional initiatives, are discussed in
the Business section under the heading "
Effects of Legislation on the Pharmaceutical Industry
" in Part I, Item 1, of our most recent Annual Report on Form 10-K.
In addition, private insurers, such as MCOs, may adopt their own reimbursement reductions in response to federal or state legislation. Any reduction in reimbursement
for our products could materially harm our results of operations. In addition, we believe that the increasing emphasis on managed care in the United States has and will continue to put pressure
on the price and usage of our products, which may adversely impact our product sales. Furthermore, when a new product is approved, governmental and private coverage for that product and
the amount for which that product will be reimbursed are uncertain. We cannot predict the availability or amount of reimbursement for our product candidates, and current reimbursement
policies for marketed products and products that we distribute may change at any time.
The MMA established a voluntary prescription drug benefit, called Part D, which became effective in 2006 for all Medicare beneficiaries. We cannot be certain that our
currently marketed products and products that we distribute will continue to be, or any of our product candidates still in development will be, included in the Medicare prescription drug benefit.
Even if our products are included, the private health plans that administer the Medicare drug benefit can limit the number of prescription drugs that are covered on their formularies in each
therapeutic category and class. In addition, private managed care plans and other government agencies continue to seek price discounts. Because many of these same private health plans
administer the Medicare drug benefit, they have the ability to influence prescription decisions for a
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larger segment of the population. In addition, certain states have proposed or adopted various
programs under their Medicaid programs to control drug prices, including price constraints, restrictions on access to certain products and bulk purchasing of drugs.
With respect to Nalpropion, there is also continued uncertainty outside of the U.S., as to the extent that governmental authorities may establish favorable coverage and
reimbursement levels for Contrave. The ability of Nalpropion to secure favorable coverage and reimbursement levels outside of the U.S. is important to its revenue projections and thus its
ability to be successful could impact our results of operations.
If we acquire and market additional products to the market, these products may not be considered cost-effective and reimbursement to the patient may not be available
or sufficient to allow us to sell our product candidates on a competitive basis to a sufficient patient population. We may need to conduct expensive pharmacoeconomic trials in order to
demonstrate the cost-effectiveness of our products and product candidates.
If we fail to comply with our reporting and payment obligations under the Medicaid Drug Rebate program or other governmental pricing programs, we could be
subject to additional reimbursement requirements, penalties, sanctions and fines, which could have a material adverse effect on our business, financial condition, results of operations and
growth prospects.
We participate in and have certain price reporting obligations to the Medicaid Drug Rebate program and other governmental pricing programs.
Under the Medicaid Drug Rebate program, we are required to pay a rebate to each state Medicaid program for our covered outpatient drugs that are dispensed to
Medicaid beneficiaries and paid for by a state Medicaid program as a condition of having federal funds being made available to the states for our drugs under Medicaid and Medicare
Part B (we currently do not market any Part B drugs). Those rebates are based on pricing data reported by us on a monthly and quarterly basis to the CMS the federal agency that
administers the Medicaid Drug Rebate program. These data include the average manufacturer price and, in the case of innovator products, the best price for each drug which, in general,
represents the lowest price available from the manufacturer to any entity in the United States in any pricing structure, calculated to include all sales and associated rebates, discounts and other
price concessions.
Health Care Reform made significant changes to the Medicaid Drug Rebate program, such as expanding rebate liability from fee-for-service Medicaid utilization to
include the utilization of Medicaid MCOs as well and changing the definition of average manufacturer price. Health Care Reform also increased the minimum Medicaid rebate; changed the
calculation of the rebate for certain innovator products that qualify as line extensions of existing drugs; and capped the total rebate amount at 100% of the average manufacturer price. Finally,
Health Care Reform requires pharmaceutical manufacturers of branded prescription drugs to pay a branded prescription drug fee to the federal government.
On February 1, 2016, CMS issued final regulations to implement the changes to the Medicaid Drug Rebate program under Health Care Reform, which became
effective on April 1, 2016. The issuance of regulations and coverage expansion by various governmental agencies relating to the Medicaid Drug Rebate program has and will continue to
increase our costs and the complexity of compliance, has been and will be time-consuming to implement, and could have a material adverse effect on our results of operations, particularly if
CMS challenges the approach we take in our implementation of the final rule.
Federal law requires that any company that participates in the Medicaid Drug Rebate program also participate in the Public Health Service's 340B drug pricing program
in order for federal funds to be available for the manufacturer's drugs under Medicaid and Medicare Part B. The 340B program requires participating manufacturers to agree to charge no
more than the 340B "ceiling price" for the manufacturer's covered outpatient drugs to a variety of community health clinics and other entities that receive health services grants from the Public
Health Service, as well as hospitals that serve a disproportionate share of low-income patients. Health Care Reform expanded the list of covered entities to include certain free-standing cancer
hospitals, critical access hospitals, rural referral centers and sole community hospitals. The 340B ceiling price is calculated using a statutory formula based on the average manufacturer price
and rebate amount for the
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covered outpatient drug as calculated under the Medicaid Drug Rebate program. Changes to the definition of average manufacturer price and the Medicaid rebate
amount under Health Care Reform and CMS's final regulations implementing those changes also could affect our 340B ceiling price calculations and negatively impact our results of
operations.
Health Care Reform obligates the Secretary of HHS, to create regulations and processes to improve the integrity of the 340B program. On January 5, 2017, HRSA
issued a final regulation regarding the calculation of 340B ceiling price and the imposition of civil monetary penalties on manufacturers that knowingly and intentionally overcharge covered
entities. The effective date of the regulation has been delayed until July 1, 2018. Implementation of this final rule and the issuance of any other final regulations and guidance could affect our
obligations under the 340B program in ways we cannot anticipate. In addition, legislation may be introduced that, if passed, would further expand the 340B program to additional covered
entities or would require participating manufacturers to agree to provide 340B discounted pricing on drugs used in the inpatient setting.
Pricing and rebate calculations vary across products and programs, are complex, and are often subject to interpretation by us, governmental or regulatory agencies and
the courts. In the case of our Medicaid pricing data, if we become aware that our reporting for a prior quarter was incorrect, or has changed as a result of recalculation of the pricing data, we
are obligated to resubmit the corrected data for up to three years after those data originally were due. Such restatements and recalculations increase our costs for complying with the laws and
regulations governing the Medicaid Drug Rebate program and could result in an overage or underage in our rebate liability for past quarters. Price recalculations also may affect the ceiling price
at which we are required to offer our products under the 340B drug discount program.
We are liable for errors associated with our submission of pricing data. In addition to retroactive rebates and the potential for 340B program refunds, if we are found to
have knowingly submitted any false price information to the government, we may be liable for civil monetary penalties. Our failure to submit the required price data on a timely basis could also
result in a civil monetary penalty for each day the information is late beyond the due date. Such failure also could be grounds for CMS to terminate our Medicaid drug rebate agreement,
pursuant to which we participate in the Medicaid program. In the event that CMS terminates our rebate agreement, federal payments may not be available under Medicaid or Medicare
Part B for our covered outpatient drugs.
CMS and the Office of the Inspector General have pursued manufacturers that were alleged to have failed to report these data to the government in a timely manner.
Governmental agencies may also make changes in program interpretations, requirements or conditions of participation, some of which may have implications for amounts previously estimated
or paid. We cannot assure you that our submissions will not be found by CMS to be incomplete or incorrect.
Federal law requires that for a company to be eligible to have its products paid for with federal funds under the Medicaid and Medicare Part B programs as well as to be
purchased by certain federal agencies and grantees, it also must participate in the Department of Veterans Affairs, (VA), Federal Supply Schedule, (FSS), pricing program. To participate,
we are required to enter into an FSS contract with the VA, under which we must make our innovator "covered drugs" available to the "Big Four" federal agencies - the VA, the Department of
Defense, or DoD, the Public Health Service (PHS), and the Coast Guard - at pricing that is capped pursuant to a statutory federal ceiling price, (FCP), formula set forth in Section 603 of
the Veterans Health Care Act of 1992, or VHCA. The FCP is based on a weighted average non-federal average manufacturer price (Non-FAMP), which manufacturers are required to
report on a quarterly and annual basis to the VA. If a company misstates Non-FAMPs or FCPs it must restate these figures. In 2017, the civil monetary penalties for the knowing provision
of false information in connection with a Non-FAMP filing was $181,071 for each item of false information. This penalty amount has not yet been updated for 2018.
FSS contracts are federal procurement contracts that include standard government terms and conditions, separate pricing for each product, and extensive disclosure
and certification requirements. All items on FSS contracts are subject to a standard FSS contract clause that requires FSS contract price reductions under certain circumstances where
pricing is reduced to an agreed "tracking customer." Further, in addition to the "Big Four" agencies, all other federal agencies and some non-federal entities are authorized to access FSS
contracts. FSS contractors are permitted to charge FSS purchasers other than the Big Four agencies "negotiated pricing" for covered drugs that is not capped by the FCP; instead, such pricing
is negotiated based on a mandatory disclosure of the contractor's commercial "most favored customer" pricing. We offer the same price to the Big 4 and other government agencies on our FSS
contract.
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In addition, pursuant to regulations issued by the DoD TRICARE Management Activity, now the Defense Health Agency, to implement Section 703 of the National
Defense Authorization Act for Fiscal Year 2008, each of our covered drugs is listed on a Section 703 Agreement under which we have agreed to pay rebates on covered drug
prescriptions dispensed to TRICARE beneficiaries by TRICARE network retail pharmacies. Companies are required to list their innovator products on Section 703 Agreements in
order for those products to be eligible for DoD formulary inclusion. The formula for determining the rebate is established in the regulations and our Section 703 Agreement and is based
on the difference between the annual Non-FAMP and the FCP (as described above, these price points are required to be calculated by us under the VHCA).
Our relationships with customers and payors are subject to applicable fraud and abuse and other healthcare laws and regulations, which could expose us to
criminal sanctions, civil penalties, contractual damages, reputational harm, and diminished profits and future earnings.
Healthcare providers, payors and others play a primary role in the recommendation and prescription of our products. Our arrangements with third-party payors
and customers exposes us to broadly applicable fraud and abuse and other healthcare laws and regulation that may constrain the business or financial arrangements and relationships through
which we market, sell and distribute our products. Applicable federal and state healthcare laws and regulations, include but are not limited to, the following:
-
The federal healthcare anti-kickback statute prohibits, among other things, any person or entity from knowingly and willfully soliciting, offering, receiving or paying
remuneration, directly or indirectly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchase, lease, order or arranging for or recommendation of, any good or
service, for which payment may be made, in whole or in part, under federal healthcare programs such as Medicare and Medicaid. The term "remuneration" has been broadly interpreted to
include anything of value. The government can establish a violation of the anti-kickback statute without proving that a person or entity had actual knowledge of the statute or specific intent to
violate. Some courts, as well as certain governmental guidance, have interpreted the scope of the anti-kickback statute to cover any situation where one purpose of the remuneration is to
induce referrals of federal health care program business, even if there are other legitimate reasons for the remuneration. In addition, the government may assert that a claim including items or
services resulting from a violation of the anti-kickback statute constitutes a false or fraudulent claim for purposes of the False Claims Act. The anti-kickback statute has been applied by
government enforcement officials to a number of common business arrangements in the pharmaceutical industry. There are a number of statutory exceptions and regulatory safe harbors
protecting some common activities from prosecution. Those exceptions and safe harbors are drawn narrowly. Failure to meet all of the requirements of the exception or safe harbor does not
make the conduct
per se
illegal, but the legality of the arrangements will be evaluated based on the totality of the facts and circumstances. However, there are no safe harbors for many
common practices, such as educational and research grants or product support and patient assistance programs. We seek to comply with the available statutory exceptions and safe harbors
whenever possible, but our practices may not in all cases meet all of the criteria for safe harbor protection from anti-kickback liability.
-
The federal False Claims Act imposes civil penalties, and provides for whistleblower or qui tam actions, against individuals or entities for, among other things,
knowingly presenting, or causing to be presented claims for payment of government funds that are false or fraudulent or knowingly making, or using or causing to be made or used a false
record or statement material to a false or fraudulent claim to avoid, decrease, or conceal an obligation to pay money to the federal government. In recent years, several pharmaceutical and
other health care companies have faced enforcement actions under the False Claims Act for, among other things, allegedly submitting false or misleading pricing information to government
health care programs and providing free product to customers with the expectations that the customers will bill federal programs for the product. Federal enforcement agencies have also
showed increased interest in pharmaceutical companies' product and patient assistance programs, including reimbursement and co-pay support services. Other companies have faced
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enforcement actions for causing false claims to be submitted because of the company's marketing the product for unapproved uses. False Claims Act liability is potentially significant because
the statute provides for treble damages and mandatory penalties of $11,181 to $22,363 per false claim or statement. Because of the potential for large monetary damages and penalties,
pharmaceutical manufacturers often resolve allegations without admissions of liability for significant and material amounts. Companies may be required to enter into corporate integrity
agreements with the government to avoid exclusion from federal health care programs. Corporate integrity agreements impose substantial costs on companies to ensure compliance. There are
also federal criminal statutes that prohibit making or presenting a false or fictitious or fraudulent claim to the federal government.
-
The Foreign Corrupt Practices Act and similar anti-bribery laws in countries outside of the U.S., such as the U.K. Bribery Act of 2010, prohibit companies and their
intermediaries from making, or offering or promising to make, improper payments for the purpose of obtaining or retaining business or otherwise seeking favorable treatment.
-
The Health Insurance Portability and Accountability Act of 1996, or HIPAA, imposes criminal and civil liability for executing a scheme to defraud any healthcare
benefit program. HIPAA also prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement or
representation, or making or using any false writing or document knowing the same to contain any materially false, fictitious or fraudulent statement or entry in connection with the delivery of or
payment for healthcare benefits, items or services.
-
The Open Payments program imposes annual reporting requirements on manufacturers of drugs, devices, or biologics for which payment is available under
Medicare, Medicaid or the State Children's Health Insurance Program, of certain payments and other transfers of value to physicians and teaching hospitals made during the preceding
calendar year, and any ownership and investment interests held by physicians. Failure to submit required information may result in civil monetary penalties of up to an aggregate of $150,000
per year (and up to an aggregate of $1.0 million per year for "knowing failures") for all payments, transfers of value or ownership or investment interests not appropriately reported.
Manufacturers must submit reports by the 90
th
day of each calendar year.
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Analogous state laws and regulations, such as state anti-kickback and false claims laws, may apply to sales or marketing arrangements and claims involving
healthcare items or services reimbursed by non-governmental third party payors, including private insurers. Several states require pharmaceutical companies to report expenses relating to the
marketing and promotion of pharmaceutical products in those states and to report gifts and payments to individual health care providers in those states. Some states also prohibit certain
marketing-related activities, including providing gifts, meals or other items to certain health care providers. Some states restrict the ability of manufacturers to offer co-pay support to patients for
certain prescription drugs. Other states and cities require identification or licensing of state representatives. Some states require pharmaceutical manufacturers to implement compliance
programs or marketing codes that are consistent with the May 2003 Office of Inspector General Compliance Program Guidance for Pharmaceutical Manufacturers, and/or the voluntary PhRMA
Code.
We, as well as many other pharmaceutical companies, sponsor prescription drug coupons and other product support agreements to help ensure that financial need does
not limit a patient's access to our products. Co-pay coupon programs and other product and patient assistance programs have received negative publicity related to their use to promote
branded pharmaceutical products over less costly generics and as a strategy to increase drug prices by shielding patients from those price increases. In recent years, other pharmaceutical
manufacturers were named in class action lawsuits that challenged co-pay programs under a variety of federal and state laws. The Office of Inspector General for the HHS has issued
additional guidance related to co-pay and patient assistance programs, and other government enforcement agencies have initiated investigations into and pursued enforcement actions related
to other manufacturers' product and patient support programs. We cannot be certain whether our product and patient support programs will be named in any future similar lawsuits or become
subject to government scrutiny.
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We attempt to ensure that our business arrangements with third parties comply with applicable healthcare laws and regulations, utilizing the expertise of outside experts.
However, it is possible that governmental authorities might conclude that our business practices do not comply with current or future statutes, regulations or case law involving applicable fraud
and abuse or other healthcare laws and regulations. If our past or present operations, including activities conducted by our sales team or agents, would be found to be in violation of any of
these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, imprisonment, fines, exclusion
from federal health care programs such as Medicare and Medicaid, and the curtailment or restructuring of our operations. If any of the physicians or other providers or entities with whom we do
business are found to be not in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government funded healthcare
programs.
Many aspects of these laws have not been definitively interpreted by the regulatory authorities or the courts and their provisions are open to a variety of subjective
interpretations and remain subject to change. This increases the risk of potential violations. Any action against us for violation of these laws, even if we successfully defend against it, could
cause us to incur significant legal expenses, divert our management's attention from the operation of our business and damage our reputation.
If we fail to comply with data protection laws and regulations, we could be subject to government enforcement actions (which could include civil or criminal
penalties), private litigation and/or adverse publicity, which could negatively affect our operating results and business.
We are subject to data protection laws and regulations (i.e., laws and regulations that address privacy and data security). In the United States, numerous
federal and state laws and regulations, including state data breach notification laws, state health information privacy laws, and federal and state consumer protection laws (e.g., Section 5
of the Federal Trade Commission Act), govern the collection, use, disclosure, and protection of health-related and other personal information. Failure to comply with data protection laws and
regulations could result in government enforcement actions and create liability for us (which could include civil and/or criminal penalties), private litigation and/or adverse publicity that could
negatively affect our operating results and business. In addition, we may obtain health information from third parties (e.g., healthcare providers who prescribe our products) that are subject to
privacy and security requirements under HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act. Although we are not directly subject to HIPAA-other
than potentially with respect to providing certain employee benefits - we could be subject to criminal penalties if we knowingly obtain or disclose individually identifiable health information
maintained by a HIPAA-covered entity in a manner that is not authorized or permitted by HIPAA. HIPAA generally requires that healthcare providers and other covered entities obtain written
authorizations from patients prior to disclosing protected health information of the patient (unless an exception to the authorization requirement applies). If authorization is required and the
patient fails to execute an authorization, or the authorization fails to contain all required provisions, then we may not be allowed access to and use of the patient's information and our research
efforts could be impaired or delayed. Furthermore, use of protected health information that is provided to us pursuant to a valid patient authorization is subject to the limits set forth in the
authorization (e.g., for use in research and in submissions to regulatory authorities for product approvals). In addition, HIPAA does not replace federal, state, international or other laws that may
grant individuals even greater privacy protections.
Also, the European Parliament has adopted the General Data Protection Regulation (GDPR), which became effective on May 25, 2018. This regulation replaces the
EU's 1995 data protection directive and is now the single EU standard across all member states. The GDPR takes a broad view of the types of information that are deemed covered as
personal identification information and contains provisions that require businesses to protect such personal data and the privacy of EU citizens for transactions that occur within EU member
states. The GDPR also regulates the exportation of personal data outside of the EU. Non-compliance with the GDPR could result in significant penalties. Many companies, including our
company, continue to assess the requirements of the GDPR against current business practices in order to maintain continuing compliance with this regulation.
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Risks Related to our Management of Nalpropion
We have limited experience managing companies for third parties and our management efforts may not be successful.
We, through our services agreement with Nalpropion, are responsible for distributing Contrave, a weight-
loss product, in the United States. We are also responsible, through this services agreement, for overseeing the operations of Nalpropion (including overseeing the legal function and financial
operations of Nalpropion), which operates in a therapeutic area that we have not previously serviced. We may be unable to adapt our current operations to appropriately service Nalpropion or
this market and we may ultimately be unable to realize the anticipated benefits of Nalpropion's acquisition of Contrave and our agreement with Nalpropion. If we are unable to comply with our
obligations under the services agreement with Nalpropion, Nalpropion may terminate the services agreement, which may have a material adverse effect on our business. In addition, we may
have not discovered during the due diligence process all known and unknown factors regarding Contrave that could produce unintended and unexpected consequences for Nalpropion and us.
Undiscovered factors could cause us to incur potentially material financial liabilities and prevent both Nalpropion and us from achieving the expected benefits from the transaction within our
desired time frames, if at all. Additionally, Nalpropion is subject to certain restrictive covenants under the agreement governing its credit facilities, which may limit or disrupt its ability to manage
or conduct its business.
The non-renewal or termination of our services agreement with Nalpropion would result in us losing rights to distribute Contrave and
may adversely affect our financial performance and business.
Under the terms of the service agreement with Nalpropion, we will derive income from providing services
to Nalpropion for a management fee and a percentage of the revenue generated by Nalpropion. As a result, we will incorporate into our annual financial guidance certain revenue expectations
premised upon Nalpropion using a certain level of our services and generating a certain level of revenue. The initial term of our services agreement with Nalpropion is two years, subject to
automatic renewals of consecutive one-year terms unless Nalpropion elects not to renew the services agreement at least 90 days prior to the end of the then current term. In addition, either
party may terminate the services agreement for material breach after an opportunity to cure and Nalpropion may terminate the services agreement (i) at any time by providing at least 120 days
prior written notice or (ii) no earlier than 120 days after the date on which we replace certain members of our management team without appointing replacements satisfactory to Nalpropion.
Pursuant to the terms of the stockholders agreement among us, Nalpropion and the other stockholders named therein, we have the option to acquire up to 49.9% and 100% of the outstanding
capital stock of Nalpropion at specified time periods and purchase prices, provided, however, both such purchase options terminate in connection with the non-renewal or termination of our
services agreement with Nalpropion.
In the event Nalpropion exercised its non-renewal or termination rights under the services agreement, we would no longer be entitled to the exclusive U.S. distributor
rights for Contrave (subject to a non-exclusive right to sell any inventory of Contrave we held at the time of such non-renewal or termination for a period not to exceed six months) and would
also lose the option to exercise our option to purchase the capital stock of Nalpropion. Such non-renewal or early termination of the services agreement and the loss of our exclusive
distributorship rights to Contrave and our option to purchase, respectively, could adversely affect our financial performance and we may be unable to recoup the transaction or business
expenses we have incurred or expect to incur in connection with our transaction with Nalpropion. In addition, early termination of the services agreement may harm our business and results of
operations as we may have failed to pursue other beneficial opportunities due to the focus of management on the management of Nalpropion prior to realizing all of the anticipated benefits of
our transaction with Nalpropion.