BACKGROUND
We are a pharmaceutical company focused on the research, development and commercialization of novel proprietary products for the acute treatment of central nervous system conditions. The Staccato
®
system, our proprietary technology, is the foundation for our first approved product, ADASUVE
®
(
Staccato
loxapine), and all of our product candidates. The
Staccato
system vaporizes excipient-free
drugs to form a condensation aerosol that, when inhaled, allows for rapid systemic drug delivery. Because of the particle size of the aerosol, the drug is quickly absorbed through the deep lung into the bloodstream, providing speed of therapeutic
onset that is comparable to intravenous, or IV, administration but with greater ease, patient comfort and convenience.
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ADASUVE has been developed for the treatment of agitation associated with schizophrenia or
bipolar disorder and has been approved for marketing in the United States by the U.S. Food and Drug Administration, or FDA, and in the European Union, or EU, by the European Commission, or EC. In the United States and the EU, ADASUVE is approved for
similar indications. It is approved with a different number of dose strengths and has different risk mitigation and management plans in the United States and the EU. ADASUVE is our only approved product.
We have one product candidate in active development, AZ-002
(Staccato
alprazolam), which is being developed for the treatment of
acute repetitive seizures, sometimes called cluster seizures or ARS. We expect to initiate a Phase 2a proof-of-concept study in patients with ARS in the second quarter of 2014.
We have retained all rights to the
Staccato
system and to our product candidates other than ADASUVE and AZ-104 (
Staccato
loxapine, low-dose). For the U.S. market, we have licensed the
exclusive rights to commercialize ADASUVE to Teva Pharmaceuticals USA, Inc., or Teva. For Europe, Latin America, Russia and the other Commonwealth of Independent States countries, or the Ferrer Territories, we have licensed the exclusive rights to
commercialize ADASUVE to Grupo Ferrer Internacional S.A., or Ferrer. We intend to develop certain product candidates internally and to identify external resources or collaborators to develop and commercialize other product candidates.
We believe that, based on our cash, cash equivalents and marketable securities balance at December 31, 2013, remaining proceeds
available under the Convertible Promissory Note and Agreement to Lend, dated as of May 7, 2013, between us and Teva, or the Teva Note, estimated product revenues and milestone payments associated with the sale of ADASUVE, the proceeds from our
March 2014 royalty securitization financing, and our current expected cash usage, we have sufficient capital resources to meet our anticipated cash needs for at least the next twelve months. Changing circumstances may cause us to consume capital
significantly faster or slower than we currently anticipate, or to alter our operations.
AGITATION ADASUVE
Background
Episodes of agitation afflict many people suffering from major psychiatric disorders, including schizophrenia and bipolar disorder. In the United States, approximately 2.4 million adults have
schizophrenia and approximately 5.7 million adults have bipolar disorder. Of these patients, approximately 900,000 adult patients with schizophrenia and 5 million adult patients with bipolar disorder are currently receiving pharmaceutical
treatment and are the target patient population for ADASUVE. Agitation in these patients generally escalates over time, with patients initially feeling uncomfortable, tense and restless, and as the agitation intensifies, their behavior appears more
noticeable to others. From the healthcare professionals perspective, agitation, if not treated quickly and effectively, may escalate unpredictably and poses a serious safety risk to staff and the patients themselves. More than 90% of patients
with schizophrenia and bipolar disorder will experience agitation in their lifetimes. Based on our market research with caregivers of patients with schizophrenia or bipolar disorder, we believe that patients with schizophrenia or bipolar disorder
experience an average of 11 to 12 agitation episodes each year.
While patients seek treatment at different points along the
agitation continuum, once they present at a medical setting they generally need treatment urgently. Our primary market research indicates that approximately 50% of treated acute agitation episodes are treated in a hospital setting. In the hospital
setting, patients are routinely treated in medical emergency departments, psychiatric emergency services and inpatient psychiatric units, which are the settings where ADASUVE may be used if such facilities are enrolled in the ADASUVE REMS program.
Based on our market research, we estimate that between 10% and 30% of the treated patients receive an intramuscular injection
to treat their agitation. Although there are no approved oral medications to treat agitation, current treatment guidelines recommend the use of oral medications over IM injections. Oral medications are non-coercive to the extent that patients
cooperate to take the medication. Our market research data also indicate that: (i) over 95% of psychiatrists surveyed believe that there is a need and approximately 40-45% believe that there is a significant need for a
novel therapy to treat agitation episodes in the medical setting that can be
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administered non-invasively with a fast onset, (ii) approximately 75% of psychiatrists surveyed would be likely or very likely to use a fast-acting, non-invasive
product if available in a hospital setting and (iii) as many as 73% of patients surveyed could use and would use a fast-acting product.
Commercialization Strategy Overview
Our global commercialization
strategy for ADASUVE is to use strategic collaborations to commercialize ADASUVE, while maintaining control and primary responsibility for commercial manufacturing. We currently have two commercialization collaborations, one with Teva and one with
Ferrer. We are continuing to seek additional commercialization collaborations to commercialize ADASUVE in territories outside the United States and the Ferrer Territories.
In December 2012, the FDA approved our New Drug Application, or NDA, for
Staccato
loxapine, as ADASUVE (loxapine) Inhalation Powder 10 mg for the acute treatment of agitation associated with
schizophrenia or bipolar I disorder in adults. We transferred the ADASUVE NDA and related regulatory documents to Teva in June 2013, together with responsibility for post-approval commitments and conditions related to the U.S. ADASUVE approval. In
March 2014, Teva announced the U.S. launch of ADASUVE.
In February 2013, the EC granted marketing authorization for ADASUVE in
the EU. ADASUVE, 4.5 mg and 9.1 mg inhalation powder loxapine, pre-dispensed, is authorized in the EU for the rapid control of mild-to-moderate agitation in adult patients with schizophrenia or bipolar disorder. The ADASUVE marketing authorization
requires that patients receive regular treatment immediately after control of acute agitation symptoms, and that ADASUVE is administered only in a hospital setting under the supervision of a healthcare professional. The ADASUVE marketing
authorization also states that a short-acting beta-agonist bronchodilator treatment should be available for treatment of possible severe respiratory side-effects, such as bronchospasm. The EC granted the marketing authorization for ADASUVE on the
basis of the positive opinion issued by the European Medicines Agency, or EMA, in December 2012 and is valid in all 28 EU Member States, plus Iceland, Liechtenstein and Norway.
We have primary responsibility for certain post-approval commitments related to the EU ADASUVE approval. Two of the commitments related to the EU approval have been completed.
We are, and expect to continue to be, responsible for the commercial manufacturing of ADASUVE in our facility in Mountain View, California
for commercialization in the United States, the Ferrer Territories and in any potential future territories. This facility has been inspected by the U.S. and EU authorities and operates under applicable U.S. and EU regulations.
We began manufacturing commercial quantities of ADASUVE in the second quarter of 2013 and will continue to manufacture commercial product
for Ferrer and Teva. Shipments for 2013 consisted of the following:
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Q2 2013
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Q3 2013
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Q4 2013
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Total
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EU Units
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13,370
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14,405
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11,863
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39,638
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U.S. Units
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9,307
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9,307
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Total Units
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13,370
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14,405
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21,170
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48,945
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Because our current license and supply agreements provide our collaborators with an acceptance period
during which they may reject any product that does not conform to agreed-upon specifications, revenue for units shipped may be recognized in a period subsequent to the period in which the units are shipped.
Commercialization Strategy and Post-Approval Commitments United States
In May 2013, we entered into a License and Supply Agreement with Teva, or the Teva Agreement, which provides Teva with an exclusive
license to develop and commercialize ADASUVE in the United States. Under the terms of the Teva Agreement, Teva is responsible for all U.S. development, regulatory and commercialization activities for ADASUVE, including the U.S. post-approval
clinical studies. Teva also has rights to conduct additional clinical trials of ADASUVE for potential new indications.
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We are responsible for manufacturing and supplying ADASUVE to Teva for clinical trials and
commercial sales. Teva has the exclusive rights to commercialize ADASUVE in the United States and the co-exclusive rights, with us and our affiliates, to manufacture the product.
As a condition of the approval of ADASUVE in the United States, a Risk Evaluation and Mitigation Strategy, or REMS, program including
elements to assure safe use, is required to be implemented and periodically assessed. Among other requirements in the REMS, ADASUVE is only available in healthcare facilities and hospitals enrolled in the ADASUVE REMS program. As an
additional condition of U.S. approval, ADASUVE is subject to a post-marketing commitment and a number of post-marketing studies, including a 10,000 patient Phase 4 observational clinical study designed to gather patient safety data based on the
real-world use of ADASUVE in the hospital setting and a clinical program designed to evaluate the safety and efficacy of ADASUVE in agitated adolescent patients. The data derived from any post-marketing study or trial could result in
additional restrictions on the commercialization of ADASUVE through changes to the approved ADASUVE label, changes to the approved REMS, the imposition of additional post-marketing studies or trials, or even the withdrawal of the approval of ADASUVE
from the market.
ADASUVE is being marketed by the Teva Select Brands team, or TSB, of Tevas U.S. Specialty
Pharmaceuticals business, which is a subsidiary of Teva Pharmaceutical Industries, Ltd. In March 2014, TSB announced the U.S. launch of ADASUVE, with dedicated sales and medical science liaison teams focusing on hospitals in the United States that
treat a high volume of patients with agitation. Teva has set the per-dose price of ADASUVE and has received a C-Code from the Centers for Medicare and Medicaid Services, or CMS, to aid in reimbursement for use of ADASUVE in the hospital through the
Outpatient Prospective Payment System, or OPPS. Teva has also launched the website for the ADASUVE REMS program (www.adasuverems.com) to provide information about the program and to allow healthcare facilities to complete the enrollment in the REMS
program in order to purchase ADASUVE from specialty wholesalers. In March 2014, we completed a royalty securitization financing, in which we transferred our rights to U.S. royalty and milestone payments under the Teva Agreement to a wholly-owned
subsidiary. The subsidiary then sold $45.0 million in notes backed by the royalty and milestone payments in a private placement to institutional accredited investors. The notes have no other recourse to us, and we did not guarantee the notes.
Commercialization Strategy and Post-Approval Commitments European Union and additional Ferrer Territory
Countries
In October 2011, we entered into a commercial collaboration with Ferrer pursuant to a Collaboration, License
and Supply Agreement, or the Ferrer Agreement, to commercialize ADASUVE in the Ferrer Territories. We supply ADASUVE to Ferrer for all of its commercial sales and receive a specified per-unit transfer price. We were responsible for gaining initial
EU marketing authorization for ADASUVE and are responsible for specific EU post-marketing commitments required by the marketing authorization for ADASUVE. Ferrer is responsible for satisfying all other regulatory, pricing and reimbursement
requirements to market and sell ADASUVE in the EU Member States and the non-EU countries of the Ferrer Territories.
The Ferrer
Territories include the EU Member States and countries outside of the EU. In the EU, Ferrer has initiated a launch plan based on estimated market opportunity, timing of pricing and projected reimbursement, and coordination with distribution
collaborators. ADASUVE is now available in Germany, Austria, Spain and Romania. Ferrer anticipates additional EU Member State launches in 2014 and 2015. In the non-EU Ferrer Territories, Ferrer is interacting with various regulatory agencies and
working on the required independent regulatory submissions.
In countries where Ferrer does not have a direct commercial
presence, it is seeking to establish distribution agreements with companies that it believes have sales capabilities in the hospital and/or psychiatry markets. As of March 2014, Ferrer had established ADASUVE distribution agreements with AOP Orphan
Pharmaceuticals AG, Galenica SA and Medivir AB to serve such countries.
As a part of its education, market conditioning and
commercialization strategy, Ferrer is building awareness about agitation and ADASUVE at national and regional medical conferences, hosting medical symposia and regional educational events, and exhibiting at medical meetings with a branded ADASUVE
booth in applicable
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territories. Also, in each country in the Ferrer Territory, we expect Ferrer to use a combination of medical science liaisons and sales representatives, as appropriate, to target hospitals and
medical settings that Ferrer believes treat a high volume of patients with agitation, and to call on physicians and clinicians to educate them about agitation and promote ADASUVE.
As a condition of the ADASUVE marketing authorization in the EU, we are responsible for the conduct and funding of post-authorization
studies, including (i) a benzodiazepine interaction study, which has been completed, (ii) a controlled study to determine ADASUVEs effect on cardiac rhythms, or a thorough QTc study, with two doses of ADASUVE, which has been
completed, (iii) a clinical program designed to evaluate the safety and efficacy of ADASUVE in agitated adolescent patients, (iv) an observational clinical trial, and (v) a drug utilization clinical trial. Results of the
benzodiazepine interaction study and the thorough QTc study have been submitted to the EMA.
The benzodiazepine interaction
study was a drug-drug interaction study with ADASUVE and lorazepam. The objective of this study was to compare the safety and pharmacodynamic profiles of concurrent administration of single doses of ADASUVE and intramuscular lorazepam compared to
that of each drug administered alone. The study enrolled 22 subjects.
The primary endpoints of the study were the maximum
effect and area under the concentration-time curve from baseline to two hours post-treatment value, in respirations per minute and pulse oximetry among the treatment groups. The three treatment groups were (a) ADASUVE and lorazepam,
(b) ADASUVE alone and (c) lorazepam alone. There were no statistically significant differences observed among the three treatment groups on the two primary endpoints.
Secondary endpoints of the study included sitting blood pressure, heart rate, sedation, and psychomotor measures of attention, information processing speed, reaction time, and coordination. With the
exception of sedation and psychomotor measures, there were no statistically significant differences observed on these secondary measures.
The controlled study to determine ADASUVEs effect on cardiac rhythms, or a thorough QTc study, was a QT/QTc study of two doses. A pre-authorization clinical study indicated that clinically relevant
QT prolongation does not appear to be associated with a single dose of ADASUVE. The potential risk of QTc prolongation following repeat dosing was unknown. The objective of this study was to assess the potential effects on the QT interval of two
consecutive doses of ADASUVE administered two hours apart, in relation to placebo and an active control in healthy volunteers. The study enrolled 60 subjects and 48 subjects completed the study.
ADASUVE given as two 10 mg doses, two hours apart, did not cause significant electrocardiogram changes. Results for formulas used to
analyze the QT interval were confirmatory, as were findings for absolute values and change from baseline values. Heart rate and other standard measures were also unaffected. Assay sensitivity was confirmed with significant effects observed for
moxyfloxicin, the active control in the study. We believe that ADASUVE is not associated with clinically relevant QT prolongation under the dosing conditions studied.
Commercialization Strategy Other Countries
We continue to
seek additional strategic collaborators to commercialize ADASUVE in countries outside of the United States and the Ferrer Territories.
Competition
ADASUVE competes with various injectable formulations
of other antipsychotic and benzodiazepine drugs and oral, orally disintegrating tablet and liquid formulations of other antipsychotic drugs and benzodiazepine drugs. Only the injectable antipsychotics are approved for the treatment of agitation.
STACCATO SYSTEM
Background
Acute and intermittent medical conditions are
characterized by a rapid onset of symptoms that are temporary and severe, and that occur at irregular intervals, unlike the symptoms of chronic medical conditions
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that continue at a relatively constant level over time. Approved drugs for the treatment of many acute and intermittent conditions, such as antipsychotics to treat agitation, triptans to treat
migraine headaches and benzodiazepines to treat anxiety or epilepsy, are typically delivered either in tablets, by injections or by other formulations. Traditional oral inhalation technologies are also being developed to treat these conditions.
These delivery methods have the following advantages and disadvantages:
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Oral Tablets.
Oral tablets or capsules are convenient and cost effective, but they generally do not provide rapid onset
of action. Oral tablets may require at least one to four hours to achieve peak plasma levels. Also, some drugs, if administered as a tablet or capsule, do not achieve adequate or consistent bioavailability due to the degradation of the drug by the
stomach or liver or inability to be absorbed into the bloodstream. Orally-disintegrating technology is often incorporated into oral tablets to enhance the dissolution characteristics of a formulation, and most orally disintegrating tablets are
bioequivalent to conventional oral dosage forms of the original drug.
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Injections.
Intravenous, or IV, or intramuscular, or IM, injections provide a more rapid onset of action than oral
tablets and can sometimes be used to titrate potent drugs with very rapid changes in effect. Titration refers to the ability to administer an initial dose of medication to determine if that dose is effective and, if not, to administer additional
doses until the medication has had an adequate effect. However, with a few exceptions, injections generally are administered by trained medical personnel in a medical care setting. Other forms of injections result in an onset of action that is
generally substantially slower than IV injection, although often faster than oral administration. All forms of injections are invasive, can be painful to some patients and are often expensive. In addition, many drugs are not water soluble and
can be difficult to formulate in an injectable form.
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Traditional Oral Inhalation.
Traditional dry powder and aerosolized inhalation delivery systems have been designed and
used primarily for local delivery of drugs to the airways, not to the deep lung for rapid systemic drug delivery. Certain recent variants of these systems, however, can provide systemic delivery of drugs, either for the purpose of rapid onset of
action or to enable noninvasive delivery of drugs that are not orally bioavailable. Nevertheless, many of these systems have difficulty in generating appropriate drug particle sizes or consistent emitted doses for deep lung delivery. To achieve
appropriate drug particle sizes and consistent emitted doses, most traditional inhalation systems require the use of excipients and additives such as detergents, stabilizers and solvents, which may cause toxicity or allergic reactions. Many
traditional inhalation devices require patient coordination to deliver the correct drug dose, leading to potentially wide variations in the drug delivered to a patient.
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As a result of these limitations, we believe there is a significant unmet medical and patient need for products for the treatment of acute
and intermittent conditions that can be delivered in precise amounts, provide rapid therapeutic onset, and are noninvasive and easy to use.
Our Solution:
Staccato
System
Our
Staccato
system rapidly vaporizes an excipient-free drug compound to form a proprietary condensation aerosol that is inhaled and rapidly achieves systemic blood circulation via deep lung
absorption. The
Staccato
system consistently creates aerosol particles averaging one to three and one-half microns in size, which is the most appropriate size for deep lung inhalation and absorption into the bloodstream for systemic effect.
We believe our
Staccato
system matches delivery characteristics and product attributes to clinical and patient needs
for acute and intermittent conditions, with the following advantages:
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Rapid Onset.
The aerosol produced with the
Staccato
system is designed to be rapidly absorbed through the deep
lung with a speed of therapeutic onset comparable to an IV injection, generally achieving peak plasma levels of drug in two to five minutes.
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Ease of Use.
The
Staccato
system is breath actuated, and a patient simply inhales to administer the drug dose.
Unlike injections, the
Staccato
system is noninvasive and may not require caregiver assistance. The aerosol produced with the
Staccato
system is relatively insensitive to patient inhalation rates. Unlike many other inhalation
technologies, the patient does not need to learn a special breathing pattern. In addition, the
Staccato
device is small and easily portable.
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Consistent Particle Size and Dose.
The
Staccato
system uses rapid heating of the drug film to create consistent
and appropriate particle sizes for deep lung inhalation and absorption into the bloodstream. The
Staccato
system also produces a consistent high emitted dose, regardless of the patients breathing pattern.
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Potential for Broad Applicability.
The
Staccato
system can deliver both water-soluble and water-insoluble drugs
and eliminates the need for excipients and additives such as detergents, stabilizers and solvents, avoiding the side effects that may be associated with the excipients or additives.
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Design Flexibility.
The
Staccato
system can incorporate multiple features, including, for example, a lockout
system to potentially enhance safety, the convenience of patient titration, and a variety of dose administration regimens.
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Drug Candidates Based on the Staccato System
We combine small
molecule drugs with our
Staccato
system to create proprietary products and product candidates. We believe that the drugs we are currently using or studying are no longer eligible for patent protection as chemical entities or have their patent
protection expiring in the next several years. These drugs have been widely used, and we believe their biological activity and safety are well understood and characterized. We have received composition of matter patent protection on the
Staccato
aerosolized forms of these drugs. We also intend to collaborate with pharmaceutical companies to develop new chemical entities, including compounds that might otherwise not be suitable for development because of limitations of traditional
delivery methods.
Since our inception, we have screened more than 400 drug compounds, identifying approximately 200 drug
compounds that demonstrate initial vaporization feasibility for delivery with our technology. We believe that a number of these drug compounds, when delivered by the
Staccato
system, would have a desirable therapeutic profile for the
treatment of various acute and intermittent conditions. We are initially focusing on developing proprietary products by combining our
Staccato
system with small molecule drugs that have been in use for many years and are well-characterized to
create
Staccato
-based aerosolized forms of these drugs.
Since 2004, we have filed six Investigational New Drug
Applications, or INDs, and have received a U.S. NDA approval and EU marketing authorization for ADASUVE, based on the
Staccato
technology. In addition to ADASUVE, our only product approved for marketing, and AZ-002, our only product candidate
in active development, we have in the past allocated resources to the development of the following product candidates, none of which are currently in active development: (i) AZ-007 (
Staccato
zaleplon) for the treatment of insomnia in
patients who have difficulties falling asleep, including patients who awake in the middle of the night and have difficulty falling back asleep, (ii) AZ-104 (
Staccato
loxapine, low-dose) for the treatment of patients suffering from acute
migraine headaches, (iii) AZ-003 (
Staccato
fentanyl) for the treatment of patients with acute pain, including patients with breakthrough cancer pain and postoperative patients with acute pain episodes and (iv)
Staccato
nicotine which is designed to help smokers quit by addressing both the chemical and behavioral components of nicotine addiction by delivering nicotine replacement via inhalation. During 2014, we are assessing our
Staccato
-based pipeline and
other possible product candidates, with the goal of identifying an additional product candidate for active development in 2014.
Staccato System
We invented the
Staccato
system. Our product candidates employing the
Staccato
system consist of three core components: (1) a heat source that includes an inert metal substrate;
(2) a thin film of an excipient-free drug compound, also known as an active pharmaceutical ingredient, or API, coated on the substrate; and (3) an airway through which the patient inhales. The left panel of the illustration below depicts
these core components prior to patient inhalation.
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The right panel of the illustration below depicts the
Staccato
system during patient
inhalation: (1) the heated substrate has reached peak temperature in less than one half second after the start of patient inhalation; (2) the thin drug film has been vaporized; and (3) the drug vapor has subsequently cooled and
condensed into excipient-free drug aerosol particles that are being drawn into the patients lungs. The entire
Staccato
system actuation occurs in less than one second.
ADASUVE, AZ-002 and AZ-104 use the same disposable, single-dose delivery device. The single dose
delivery device consists of a metal substrate that is chemically heated through a battery-initiated reaction of energetic materials. The device is portable and easy to carry. A diagram of the single dose delivery device is shown below:
We control final assembly of the
Staccato
technology-based products in an effort to maintain
quality, to reduce the risk for supply interruptions and to allow for potentially more cost-effective manufacturing. We continue to undertake engineering and development efforts to improve the commercial manufacturability of our single dose device.
AZ-003, AZ-007 and
Staccato
nicotine use our multiple dose delivery technology, with a device consisting of a reusable
controller and a disposable dose cartridge. We have designed the multiple dose delivery platform to meet the specific needs of each product candidate. The AZ-003 dose cartridge currently contains 25 separate metal substrates, each coated with the
API, which rapidly heat upon application of electric current from the controller. In the current design for AZ-003, 25 micrograms of drug compound are coated on each metal substrate. The device is portable and easy to carry, with dimensions of
approximately five inches in length, two and one-half inches in width and one inch in thickness. The controller weighs approximately four ounces, and the
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dose cartridge weighs approximately one ounce. AZ-007 and
Staccato
nicotine dose cartridge and reusable controller designs are still in development, but contemplate a similar concept of a
disposable dose cartridge and a reusable controller.
ACTIVE DEVELOPMENT PROGRAM
Acute Repetitive Seizures Program AZ-002 (Staccato
alprazolam)
We are developing AZ-002 (
Staccato
alprazolam) for the treatment of acute repetitive seizures, or ARS, which are clusters of
epileptic seizures that occur over a short period of time. The API of AZ-002 is alprazolam, a generic benzodiazepine drug. Alprazolam is currently approved in oral formulations in the United States for use in the management of anxiety disorder, for
the short term relief of symptoms of anxiety, for anxiety associated with depression, and for the treatment of panic disorder with or without agoraphobia, or an abnormal fear of being in public places.
Market Opportunity
Epilepsy, a disorder of recurrent seizures, affects approximately 2.5 million Americans, which means it is the third most common neurological disorder in the United States. ARS refers to seizures
that are serial, clustered, or crescendo, and distinct from the patients usual seizure pattern despite treatment from anti-epileptic drugs. ARS occurs in a small subset of patients with epilepsy who regularly experience breakthrough seizures
in flurries or clusters, despite treatment with a regimen of anti-epileptic drugs. The socioeconomic effects of seizure clustering include missed school and work, as well as greater use of health care resources.
Among the implications of ARS are concerns for patient safety. Prolonged or recurrent seizure activity persisting for 30 minutes or more
may result in serious injury, health impacts and death that correlate directly with seizure duration. ARS, if left untreated, has been reported to evolve into a state of persistent seizure, or status epilepticus, which has a 3% mortality rate in
children and 26% in adults.
Our market research among neurologists and caregivers of ARS patients indicates that patients may
experience clusters of seizures that vary from weekly to several months between clusters of seizures. Seizures can be preceded by a sense of perceptual disturbance and can last from one to two seconds to a couple of minutes. Patients typically
experience three or four seizures per cluster, and the interval between seizures can vary from half an hour to two hours. In the intervals between seizures, the majority of patients are able to follow simple instructions and participate in a
conversation.
Benzodiazepines are considered to be medications of first choice for the treatment of acute seizures. Clinical
advantages of benzodiazepines include relatively rapid onset of action, high efficacy and minimal toxicity. The rapidity by which a medication can be delivered to the systemic circulation and then to the brain plays a significant role in reducing
the time needed to treat seizures and reducing the likelihood of damage to the central nervous system. Improvements in quality of life reported anecdotally by families of individuals treated with benzodiazepines for epileptic seizures include
reduced emergency room visits and hospitalizations, reduced disruption of daily activities, reduced time lost from work or school, and increased sense of control.
Current standard of care for ARS is the rectal gel formulation of diazepam, which must be administered by a caregiver or healthcare professional. In our market research, patients surveyed have commented
that they find that the rectal gel takes longer to work than they would like and that the route of administration is sub-optimal and cannot be used in public. Intravenous benzodiazepines are rapidly acting, but must be administered by a healthcare
professional in a medical facility.
The ability to treat quickly is clinically imperative to prevent an epileptic event from
evolving into status epilepticus or causing other serious complications. A product that can be administered easily in the home setting to effectively treat ARS may result in avoiding a trip to the hospital for treatment or diminishing the need to
use the rectal formulation.
If approved, AZ-002 could replace use of IV or rectal benzodiazepines currently used in treating
patients who experience ARS. The potential benefits of AZ-002 as compared to IV or rectal delivery may include a faster delivery to the blood stream, compared to rectal delivery, and greater ease of use. AZ-002 could be administered
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after a first seizure in a cluster with the aim of preventing further seizures. The caregiver could provide dosing assistance between cluster seizures. We believe that alprazolams ability
to inhibit anxiety, or anxiolytic action, may provide additional therapeutic benefits to ARS patients.
We own full development
and commercial rights to AZ-002, and we believe AZ-002 could qualify for orphan drug status. Orphan drug designation is available for drugs intended to treat rare diseases or conditions (i.e., generally those that affect fewer than 200,000
individuals in the United States at the time designation is sought). Drugs that receive orphan designation may be eligible for certain research tax credits and exemptions from certain fees and, upon approval, may receive 7 years of non-patent market
exclusivity in the United States.
Development Status
Clinical Trials
We intend to initiate a Phase 2a proof-of-concept study with AZ-002 in the second quarter of 2014. The Phase 2a clinical trial will be an in-clinic, randomized, double-blind, proof-of-concept evaluation
of patients suffering from repetitive seizures. The primary aim of the clinical trial will be to assess the safety and efficacy of a single dose of AZ-002 at different dose strengths.
We have completed three clinical trials with AZ-002. In 2005, we completed a Phase 1 clinical trial of AZ-002 in healthy volunteers. The
purpose of this trial was to assess the safety, tolerability and pharmacokinetic properties of AZ-002. Using a dose escalation design, five doses (0.125 mg to 2.0 mg) of AZ-002 or placebo were studied in a total of 50 subjects. Results from the
trial showed that AZ-002 was generally well tolerated at all doses. There were no serious adverse events observed across all dose groups, and all of the side effects were rated as mild or moderate in severity. Reported side effects included
dizziness, sleepiness, fatigue and unpleasant taste. Across all doses, the pharmacokinetic analyses revealed that dose proportional plasma concentration of alprazolam and peak plasma levels were generally reached within the first few minutes after
dosing.
In 2008, we released the preliminary results from our Phase 2a clinical trial with AZ-002 in patients with panic
disorder. The study did not meet its two primary endpoints, which were the effect of AZ-002 on the incidence of a doxapram-induced panic attack and the effect of AZ-002 on the duration of a doxapram-induced panic attack, both as compared with
placebo. There were no serious adverse events in the clinical trial, and AZ-002 was well tolerated in the study patient population. As a result of these studies, we made the decision to stop development of AZ-002 for the possible treatment of panic
attacks in patients with panic disorder.
In 2009, we completed an abuse liability study with AZ-002. The objective of this
clinical study was to compare the potential abuse liability of AZ-002, as compared to that of oral immediate-release alprazolam and
Staccato
placebo. This study was a Phase 1, single-center, randomized, double-blind, placebo-controlled,
crossover abuse liability study of three inhaled doses of AZ-002, 0.5 mg, 1 mg, and 2 mg, three oral doses of immediate-release alprazolam (1 mg, 2 mg, and 4 mg), and
Staccato
placebo. The subjects participated in the study as
outpatients. After completion of the screening/training session, two qualifying sessions evaluated effects of oral alprazolam 2 mg and oral placebo, and subjects who demonstrated a preference for alprazolam were identified. This phase of the study
was double-blind. Only those subjects whose abuse liability measures indicated greater preference for oral alprazolam versus oral placebo were continued in the study. The subsequent phase of the study followed a crossover schedule planned according
to a seven-treatment, seven-period Latin Square design. This phase of the study employed a double-blind, double-dummy design and included seven experimental sessions during which the effects of three doses of oral immediate-release alprazolam,
three doses of AZ-002, and
Staccato
placebo were evaluated. A total of 14 subjects completed the study. The primary outcome measure was the categorical response to the question: Rate the degree to which you would like to take the drug
again. Secondary outcome measures included questions from other questionnaires and rating scales.
Study validity (active
controls statistically different from placebo) was confirmed for the primary outcome endpoint and was supported by the secondary outcome endpoint results.
Results of this study demonstrated that the abuse potential of 2 mg AZ-002 is generally similar to that of 4 mg oral alprazolam, but greater than that of 1 mg and 2 mg oral alprazolam; the abuse potential
of 1 mg AZ-002 is generally similar to that of 1 mg and 2 mg oral alprazolam, but less than that of 4 mg oral alprazolam; the
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abuse potential of 0.5 mg AZ-002 is generally similar to that of 1 mg oral alprazolam, but less than that of 2 mg and 4 mg oral alprazolam. Overall, there was no apparent increase in abuse
potential for AZ-002 compared with oral alprazolam, based on the results of the primary outcome endpoint. However, the FDA or other regulatory agencies may disagree with the results of this study, find the results inconclusive, or may require
additional studies to confirm the lack of abuse potential of AZ-002.
Preclinical Studies
Alprazolam has been approved for marketing in oral tablet form. There are publicly available safety pharmacology, systemic toxicology,
carcinogenicity and reproductive toxicology data that we believe we will be able to use for our regulatory filings. Therefore, our preclinical development plan was primarily focused on assessing the local tolerability of AZ-002. To date, our two
preclinical inhalation toxicology studies with AZ-002 have indicated that it is generally well tolerated.
OUR PRODUCT CANDIDATE
DEVELOPMENT AND COMMERCIAL STRATEGY
Key elements of our strategy include:
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Focus on Acute and Intermittent Conditions.
We focus our development efforts on product candidates based on our
Staccato
system that are intended to address important unmet medical and patient needs in the treatment of acute and intermittent conditions in which we believe the
Staccato
technology has the potential to change clinical practice or
provide value to patients and healthcare professionals, for example, by offering rapid onset, ease of use, noninvasive administration and, in some cases, patient titration of dosage.
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Establish Strategic Collaborations/Relationships.
When appropriate, we intend to strategically collaborate with
pharmaceutical and other companies for development funding or commercialization efforts. Collaborations, such as those with Ferrer and Teva, provide resources to address markets that may require greater sales or marketing resources than we are able
to provide, or specific expertise to maximize the value of some product candidates. We may also choose to commercialize a product on our own with or without the services of a contract sales organization. We may also enter into strategic
collaborations with other pharmaceutical companies to combine our
Staccato
system with their proprietary compounds.
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Retain and Control Product Manufacturing.
We own all manufacturing rights to our product candidates. We complete the
final manufacture and assembly of our product candidates and any future products internally, potentially enabling greater intellectual property protection and economic return from our future products. We believe controlling the final manufacture and
assembly has the potential to maintain the quality of
Staccato
technology-based products, reduce the risk of supply interruptions and allow for more cost-effective manufacturing through global supply of the finished product.
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Licensing Collaborations Product Candidates
Cypress Agreement
In August 2010 we entered into a license and development agreement, or the Cypress Agreement, with Cypress Bioscience, Inc., or Cypress, for
Staccato
nicotine. According to the terms of the Cypress
Agreement, Cypress paid us a non-refundable upfront payment of $5.0 million to acquire the worldwide license for the
Staccato
nicotine technology.
On December 31, 2013, the Cypress Agreement automatically terminated by the terms of the agreement, and all rights to the
Staccato
nicotine technology reverted back to us.
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Research and Development
Research and development expenditures made to advance our product candidates and develop our manufacturing capabilities and for general research efforts during the last three years ended December 31,
2013, were as follows (in thousands):
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Year Ended December 31,
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2013
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2012
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2011
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Product candidate expenses
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$
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12,432
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$
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18,216
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$
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25,686
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General research
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6,650
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3,633
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2,576
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Total research and development
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$
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19,082
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$
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21,849
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$
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28,262
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MANUFACTURING
We manufacture ADASUVE with components supplied by qualified vendors. We own all manufacturing rights to our product candidates and, subject to Tevas co-exclusive right with us and our affiliates,
to ADASUVE. The drug product manufacturing portion of the process is completed at our facility in Mountain View, California. We believe that manufacturing ADASUVE and any future products will potentially enable greater intellectual property
protection, economies of scale and decrease the risk of supply interruptions. We believe our manufacturing facility will have sufficient capacity to manufacture commercial scale batches of ADASUVE and to manufacture materials for toxicology studies
and clinical trials for any future studies of our product candidates for at least the next two years.
For our single dose
delivery platform utilized by ADASUVE, after inspection and release of incoming components, we assemble the components of the product and spray-coat the exterior of the heat package with a thin film of API (loxapine, in the case of ADASUVE). We then
assemble the plastic airway housings around the coated heat package and insert the completed product in a pharmaceutical-grade foil pouch.
We believe we have developed quality assurance, quality control systems and regulatory compliance appropriate to the design, manufacture, packaging, labeling and storage of ADASUVE and our product
candidates in compliance with applicable regulations and the appropriate level of current Good Manufacturing Practice, or cGMP. These systems include extensive requirements with respect to design, quality management, quality planning and
organization, product design, manufacturing facilities, equipment, purchase and handling of components, production and process controls, packaging and labeling controls, device evaluation, distribution and record keeping.
In 2007, we completed the construction of a cGMP compliant manufacturing facility located in Mountain View, California. In November 2007,
we received a pharmaceutical manufacturing license from the California State Food and Drug Branch for this facility. The license was renewed in January 2013 and is valid until January 31, 2015.
In August 2012, the Spanish authorities, on behalf of the EMA, determined that our facility complied with the principles and guidelines of
Good Manufacturing Practice set forth in Directive 2003/94/EC and issued an EU Certificate of Good Manufacturing Practices Compliance of a Manufacturer for our facility. This initial certificate is valid for three years, through May 15, 2015.
In November 2012, the FDA completed a Pre-Approval Inspection of our facility, as part of the review process for the ADASUVE NDA. All issues related to this and other previous inspections were satisfactorily resolved, and in December 2012, we
received FDA approval to market ADASUVE in the United States.
We outsource the production of the components of our single dose
delivery platform, including the printed circuit boards, the molded plastic airways and the heat packages. We currently use single source suppliers for these components, as well as for the API used in ADASUVE and AZ-002. We do not carry a
significant inventory of these components, and establishing additional or replacement suppliers for any of these components may not be accomplished quickly, or at all, and could cause significant additional expense. Any supply interruption from our
vendors would limit our ability to manufacture ADASUVE, including for our post-approval
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clinical trials, and/or could delay clinical trials for, and regulatory approval of our product candidates that are in development. In October 2013, Autoliv ASP, Inc., or Autoliv, notified us
that they were terminating, effective October 2016, the agreement pursuant to which Autoliv supplies heat packages to us. We are seeking new manufacturers for the heat packages.
The controller for our multiple dose delivery design includes the battery power source for heating the individual metal substrates, a
microprocessor that directs the electric current to the appropriate metal substrate at the appropriate time, and an icon-based liquid crystal display that shows pertinent information to the user, such as the number of doses remaining in the dose
cartridge and the controller status. We may need to develop modified versions of our devices for future product candidates.
Autoliv ASP,
Inc.
In November 2007, we entered into a manufacturing and supply agreement, or the Manufacture Agreement, with Autoliv,
relating to the commercial supply of chemical heat packages for our single dose
Staccato
device. Autoliv developed these chemical heat packages for us pursuant to a development agreement executed in October 2005.
Currently, Autoliv manufactures, assembles and tests the chemical heat packages solely for us in conformance with our specifications. We
pay Autoliv a specified purchase price, which varies based on annual quantities ordered by us, per chemical heat package delivered. The Manufacture Agreement provides that during the term of the Manufacture Agreement, Autoliv will be our exclusive
supplier of chemical heat packages. In addition, the Manufacture Agreement grants Autoliv the right to negotiate for the right to supply commercially any second generation chemical heat package, or a second generation product, and provides that we
will pay Autoliv certain royalty payments if we manufacture second generation products ourselves or if we obtain second generation products from a third party manufacturer. Upon the expiration or termination of the Manufacture Agreement we will also
be required, on an ongoing basis, to pay Autoliv certain royalty payments related to the manufacture of the chemical heat packages by us or third party manufacturers.
In June 2010 and February 2011, we entered into agreements to amend the terms of the Manufacture Agreement, or the Amendments. Under the terms of the first of the Amendments, we paid Autoliv
$4.0 million and issued Autoliv a $4.0 million unsecured promissory note in return for a production line for the commercial manufacture of chemical heat packages. Each production line is comprised of two identical and self-sustaining
cells, and the first such cell was completed, installed and qualified in connection with such Amendment. Under the terms of the second of the Amendments, the original $4.0 million note was cancelled and a new unsecured promissory
note with a reduced principal amount of $2.8 million, or the Second Note, was issued and production on the second cell ceased. In the event that we request completion of the second cell of the first production line for the commercial
manufacture of chemical heat packages, Autoliv will complete, install and fully qualify such second cell for a cost to us of $1.2 million and Autoliv will transfer ownership of such cell to us upon the payment in full of such $1.2 million
and the Second Note.
The provisions of the Amendments supersede (a) our obligation set forth in the Manufacture Agreement
to reimburse Autoliv for certain expenses related to the equipment and tooling used in production and testing of the chemical heat packages in an amount of up to $12.0 million upon the earliest of December 31, 2011, 60 days after the
termination of the Manufacture Agreement or 60 days after approval by the FDA of an NDA filed by us, and (b) the obligation of Autoliv to transfer possession of such equipment and tooling.
At our request, Autoliv will manufacture up to two additional production lines for the commercial manufacture of chemical heat packages at
a cost not to exceed $2.4 million for each additional line.
In October 2013, Autoliv notified us that they were
terminating, effective October 2016, the Manufacture Agreement. Upon termination of the Manufacture Agreement, we will retain full ownership of the production equipment for commercial manufacture of chemical heat packages developed for us by
Autoliv, and Autolivs obligations under the Manufacture Agreement will terminate in full. Prior to October 2016 we and Autoliv will remain fully obligated to perform pursuant to the terms of the Manufacture Agreement. We are analyzing
manufacturing options for the chemical heat packages subsequent to October 2016.
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GOVERNMENT REGULATION
FDA Product Approval Process
The testing, manufacturing, labeling,
advertising, promotion, distribution, export and marketing of our product candidates are subject to extensive regulation by governmental authorities in the United States and other countries. Our product candidates include drug compounds incorporated
into our delivery device and are considered combination products in the United States. We have agreed with the FDA that our product candidates will be reviewed by the FDAs Center for Drug Evaluation and Research. The FDA regulates
pharmaceutical products in the United States under the Federal Food, Drug and Cosmetic Act, or FDCA. The steps required before a drug may be approved for marketing in the United States generally include:
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preclinical laboratory studies and animal tests;
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the submission to the FDA of an IND for human clinical testing, which must become effective before human clinical trials commence;
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adequate and well-controlled human clinical trials to establish the safety and efficacy of the product;
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the submission to the FDA of an NDA;
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satisfactory completion of an FDA inspection of the manufacturing facilities at which the product is made to assess compliance with cGMP. In addition,
the FDA may inspect clinical trial sites that generated the data in support of the NDA; and
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FDA review and approval of the NDA.
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The testing and approval process requires substantial time, effort and financial resources, and the receipt and timing of any approval is uncertain. Preclinical studies include laboratory evaluations of
the product candidate, as well as animal studies to assess the potential safety and efficacy of the product candidate. The results of the preclinical studies, together with manufacturing information and analytical data, are submitted to the FDA as
part of the IND, which must become effective before clinical trials may commence. The IND will become effective automatically 30 days after receipt by the FDA, unless the FDA raises concerns or questions about the conduct of the trials as
outlined in the IND prior to that time. In that case, the IND sponsor and the FDA must resolve any outstanding concerns before clinical trials can proceed.
Clinical trials typically begin with the administration of the product candidates to healthy volunteers or patients under the supervision of a qualified principal investigator. Before a clinical trial may
begin, an independent institutional review board, or IRB, at or servicing each institution must review and approve each clinical trial. The IRB will consider, among other things, ethical factors, the safety of human subjects and the possible
liability of the institution.
Clinical trials typically are conducted in three sequential phases prior to approval, but the
phases may overlap. A fourth, or post-approval, phase may include additional clinical studies. These phases generally include the following:
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Phase 1.
Phase 1 clinical trials involve the initial introduction of the drug into human subjects, frequently healthy
volunteers. These studies are designed to determine the metabolism and pharmacologic actions of the drug in humans, the adverse effects associated with increasing doses and, if possible, to gain early evidence of effectiveness. In Phase 1 clinical
trials, the drug is usually tested for safety, including adverse effects, dosage tolerance, absorption, distribution, metabolism, excretion and pharmacodynamics.
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Phase 2.
Phase 2 clinical trials usually involve studies in a limited patient population to (1) evaluate the
efficacy of the drug for specific, targeted indications; (2) determine dosage tolerance and optimal dosage; and (3) identify possible adverse effects and safety risks. Although there are no statutory or regulatory definitions for Phase 2a
and Phase 2b, Phase 2a is commonly used to describe a Phase 2 clinical trial designed to evaluate efficacy, adverse effects and safety risks and Phase 2b is commonly used to describe a subsequent Phase 2 clinical trial that also evaluates dosage
tolerance and optimal dosage.
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Phase 3.
If a compound is found to be potentially effective and to have an acceptable safety profile in Phase 2 clinical
trials, the clinical trial program will be expanded to further demonstrate clinical efficacy, optimal dosage and safety within an expanded patient population at geographically dispersed clinical trial sites. Phase 3 clinical trials usually include
several hundred to several thousand patients.
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Phase 4.
Phase 4 clinical trials are studies required of, or agreed to by, a sponsor that are conducted after the FDA has
approved a product for marketing. These studies are used to gain additional information from the treatment of patients in the intended therapeutic indication and to verify a clinical benefit in the case of drugs approved under accelerated approval
regulations. If the FDA approves a product while a company has ongoing clinical trials that were not necessary for approval, a company may be able to use the data from these clinical trials to meet all or part of any Phase 4 clinical trial
requirement. These clinical trials are often referred to as Phase 3/4 post-approval clinical trials. Failure to promptly conduct Phase 4 clinical trials could result in withdrawal of approval for products approved under accelerated approval
regulations.
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In the case of products for the treatment of severe or life threatening diseases, the initial
clinical trials are sometimes conducted in patients rather than in healthy volunteers. Since these patients are already afflicted with the target disease, it is possible that such clinical trials may provide evidence of efficacy traditionally
obtained in Phase 2 clinical trials. These trials are referred to frequently as Phase 1/2 clinical trials. The FDA may suspend clinical trials at any time on various grounds, including a finding that the subjects or patients are being exposed to an
unacceptable health risk.
The results of preclinical studies and clinical trials, together with detailed information on the
manufacture and composition of the product, are submitted to the FDA in the form of an NDA requesting approval to market the product. Generally, regulatory approval of a new drug by the FDA may follow one of three routes. The most traditional of
these routes is the submission of a full NDA under Section 505(b)(1) of the FDCA. A second route, which is possible where an applicant chooses to rely in part on the FDAs conclusion about the safety and effectiveness of previously
approved drugs, is to submit a more limited NDA described in Section 505(b)(2) of the FDCA. The final route is the submission of an Abbreviated New Drug Application for products that are shown to be therapeutically equivalent to previously
approved drug products as permitted under Section 505(j) of the FDCA. We do not expect any of our product candidates to be submitted under Section 505(j). Both Section 505(b)(1) and Section 505(b)(2) applications are required by
the FDA to contain full reports of investigations of safety and effectiveness. However, in contrast to a traditional NDA submitted pursuant to Section 505(b)(1) in which the applicant submits all of the data demonstrating safety and
effectiveness, an application submitted pursuant to Section 505(b)(2) can rely upon findings by the FDA that the reference drug is safe and effective. As a consequence, the preclinical and clinical development programs leading to the submission
of an NDA under Section 505(b)(2) may be less expensive to carry out and may be concluded in a shorter period of time than programs required for a Section 505(b)(1) application. In its review of any NDA submissions, however, the FDA has
broad discretion to require an applicant to generate additional data related to safety and efficacy, and it is impossible to predict the number or nature of the studies that may be required before the FDA will grant approval. Notwithstanding the
approval of many products by the FDA pursuant to Section 505(b)(2), certain brand-name pharmaceutical companies and others have objected to the FDAs interpretation of Section 505(b)(2). If the FDA changes its interpretation of
Section 505(b)(2), this could delay or even prevent the FDA from approving any Section 505(b)(2) NDA that we submit.
To the extent that a Section 505(b)(2) applicant is relying on the FDAs findings for an already-approved reference product, the
applicant is required to certify to the FDA concerning any patents listed for the reference product in the FDAs publication,
Approved Drug Products with Therapeutic Equivalence Evaluations,
commonly known as the Orange Book. A
certification that the new product will not infringe the reference products Orange Book-listed patents or that such patents are invalid is called a paragraph IV certification, and could be challenged in court by the patent owner or holder
of the application of the reference product. This could delay the approval of any Section 505(b)(2) application we submit. In addition, any period of non-patent exclusivity applicable to the reference product might delay approval of any
Section 505(b)(2) application we submit. Any Section 505(b)(1) or Section 505(b)(2) application we submit for a drug product containing a previously approved API might be eligible for three years of marketing exclusivity, provided new
clinical
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investigations that were conducted or sponsored by us are deemed to be essential to the FDAs approval of the application. Five years of data exclusivity are granted if the FDA approves an
NDA for a new chemical entity. In addition, we are required to list in the Orange Book the patents that claim the approved drug product or drug substance, or that cover an approved method-of-use of the drug product. In order for a generic or
505(b)(2) applicant to rely on the FDAs approval of any NDA we submit, the generic or 505(b)(2) applicant must certify to any Orange Book listed patents and might be subject to any non-patent exclusivity covering our approved drug product.
For the ADASUVE NDA, we followed, and in future submissions for ADASUVE and our other product candidates we plan to follow the
development pathway permitted under the FDCA that we believe will maximize the commercial opportunities for these product candidates. We are currently pursuing the Section 505(b)(2) application route for our product candidates. As such, we have
engaged and intend to continue to engage in discussions with the FDA to determine which, if any, portions of our development program can be modified, based on previous FDA findings of a drugs safety and effectiveness.
Before approving an NDA, the FDA inspects the facilities at which the product is manufactured, whether ours or our third party
manufacturers, and will not approve the product unless the manufacturing facility complies with cGMP or, where applicable, the Quality System Regulation, or QSR. The FDA reviews all NDAs submitted before it accepts them for filing and
may request additional information rather than accept an NDA for filing. Once the NDA submission has been accepted for filing, the FDA begins an in-depth review of the NDA. Under the goals and policies agreed to by the FDA under the Prescription
Drug User Fee Act, or PDUFA, the FDA has 10 months in which to complete its initial review of a standard NDA and respond to the applicant, and six months for a priority NDA. Those time frames run from the date that FDA accepts an NDA for filing
if the NDA is for a New Molecular Entity, or NME, and from the date of NDA submission for a non-NME NDA. The FDA does not always meet the PDUFA goal dates for standard and priority NDAs. The review process is often significantly extended by FDA
requests for additional information or clarification. The FDA may delay approval of an NDA if applicable regulatory criteria are not satisfied, require additional testing or information and/or require post-marketing testing and surveillance to
monitor safety or efficacy of a product. Also, if regulatory approval of a product is granted, such approval may include limitations on the indicated uses for which such product may be marketed. Once approved, the FDA may withdraw the product
approval if compliance with regulatory requirements and conditions of approvals are not maintained or if safety problems occur after the product reaches the marketplace. In addition, the FDA may require testing, including Phase 4 studies or clinical
trials, and surveillance programs to monitor the approved products, and may limit further marketing of the product based on the results of these post-marketing programs.
Post-Marketing Regulations
ADASUVE and any other product candidates
that receive NDA approval will be limited to those diseases and conditions for which the product is effective, as demonstrated through clinical trials and as specified in the approved labeling. Even if that regulatory approval is obtained, a
marketed product, its manufacturer and its manufacturing facilities, and those who market and promote the product, are subject to continual review and periodic inspections by the FDA and, in our case, the State of California. Discovery of previously
unknown problems with a medicine, device, manufacturer or facility may result in restrictions on the marketing or manufacturing of an approved product, including costly recalls or withdrawal of the product from the market. The FDA has broad
post-market regulatory and enforcement powers, including the ability to suspend or delay issuance of approvals, withdraw approvals, and through the Department of Justice, to initiate court actions seeking to seize products, enjoin violations and
impose criminal penalties.
Other Governmental Regulations
In addition to regulation by the FDA and certain state regulatory agencies, the United States Drug Enforcement Administration, or DEA,
imposes various registration, recordkeeping and reporting requirements, procurement and manufacturing quotas, labeling and packaging requirements, security controls and a restriction on prescription refills on certain pharmaceutical products under
the Controlled Substances Act, or CSA. The DEA regulates drug substances as Schedule I, II, III, IV or V substances, with FDA approved drugs in Schedules II through V. A principal factor in determining the particular requirements, if any, applicable
to a substance
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under the CSA is its actual or potential abuse profile. Substances controlled in Schedule I and II have the highest potential for abuse and Schedule V substances the lowest
potential for abuse relative to the substances in other schedules. Alprazolam and zaleplon, the APIs in AZ-002 and AZ-007, respectively, are regulated as Schedule IV substances and fentanyl, the API in AZ-003, is regulated as a Schedule II
substance. Each of these product candidates is subject to DEA regulations relating to registration, security, recordkeeping, and distribution procedures, and, if approved, prescription restrictions and the DEA regulations may impact the availability
of the scheduled substance for clinical trials and commercial distribution. As a Schedule II substance, fentanyl is subject to additional controls, including quotas on the amount of product that can be manufactured and additional limitations on
prescription refills. We have received necessary registrations from the DEA for the manufacture of AZ-002, AZ-003 and AZ-007. The DEA periodically inspects facilities for compliance with its rules and regulations. Failure to comply with current and
future CSA requirements and regulations of the DEA could lead to a variety of sanctions, including revocation, or denial of renewal, of DEA registrations, injunctions, or civil or criminal penalties, and could harm our business and financial
condition.
The single dose design of our
Staccato
system uses what we refer to as energetic materials to
generate the rapid heating necessary for vaporizing the drug while avoiding degradation. Manufacture of products containing these types of materials is controlled by the Bureau of Alcohol, Tobacco, Firearms and Explosives, or ATF, under 18 United
States Code Chapter 40 and implementing regulations. Technically, the energetic materials used in our
Staccato
system are classified as low explosives, and we have been granted a license/permit by the ATF for their
manufacture.
Additionally, due to inclusion of the energetic materials in our
Staccato
system, shipments of the single
dose design of our
Staccato
system have been evaluated to determine if they are regulated by the Department of Transportation, or DOT, under Section 173.56, Title 49 of the United States Code of Federal Regulations. The single dose
version of our
Staccato
device has been granted Not Regulated as an Explosive status by the DOT.
We have
received funding for one or more research projects from a funding agency of the United States government, and inventions conceived or first actually reduced to practice in performance of the research project, or subject inventions, are subject to
the rights and limitations of certain federal statutes and various implementing regulations known generally and collectively as the Bayh-Dole Requirements. As a funding recipient, we are subject to certain reporting requirements for
subject inventions, and certain limitations are placed on assignment of the invention rights. In addition, the federal government retains a non-exclusive, irrevocable, paid-up license to practice any subject invention and, in exceptional cases, the
federal government may seek to take title to the invention.
We will be subject to a variety of foreign regulations governing
clinical trials and the marketing of any future products. The conduct of clinical trials in the EU is governed by Directive 2001/20/EC which imposes obligations and procedures that are similar to those provided in applicable U.S. laws. European
Union Good Clinical Practice rules and EU Good Laboratory Practice obligations must also be respected during conduct of the trials. The conduct of clinical trials must be approved by the competent regulatory authorities and the competent Ethics
Committees in the EU Member States in which clinical trials take place.
In the EU, in order to obtain marketing authorization
for a medicinal product, applicants are required to submit applications for marketing authorization based on the ICH Common Technical Document to the relevant competent authorities, and must demonstrate the quality, safety and efficacy of the
medicinal product. As part of the applications applicants must include a demonstration that studies have been conducted with the medicinal product in the pediatric population as provided by a Pediatric Investigation Plan approved by the Pediatric
Committee of the EMA. Alternatively, confirmation that the applicant has been granted a waiver or deferral for the conduct of these studies must be provided.
Similarly to the United States, marketing authorization holders and manufacturers of medicinal products in the EU are subject to comprehensive regulatory oversight by the EMA and the competent authorities
of the EU Member States. This oversight is conducted both before and after grant of manufacturing and marketing authorizations. It includes control of compliance with EU cGMP rules.
Failure to comply with EU and EU Member State laws governing the conduct of clinical trials, grant of marketing authorization for
medicinal products and the marketing of such products, both before and after grant of
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marketing authorization, could result in administrative, civil or criminal penalties. These penalties could include refusal to authorize the conduct of clinical trials, refusal to grant marketing
authorization, product withdrawals and recalls, product seizures, suspension or withdrawal of the marketing authorization, fines and criminal penalties.
Outside the United States and the EU, our ability to market a product depends upon receiving a marketing authorization from the appropriate regulatory authorities. The requirements governing the conduct
of clinical trials, marketing authorization, pricing and reimbursement vary widely from country to country. In any country, however, we will only be permitted to commercialize our products if the appropriate regulatory authority is satisfied that we
have presented adequate evidence of safety, quality and efficacy. Whether or not FDA approval or EC authorization has been obtained, approval of a product by the comparable regulatory authorities of foreign countries must be obtained prior to the
commencement of marketing of the product in those countries. The time needed to secure approval may be longer or shorter than that required for FDA approval. The regulatory approval and oversight process in other countries includes all of the risks
associated with the FDA process described above.
Federal Anti-Kickback, False Claims Act & Federal Physician
Payment Sunshine Act
In addition to FDA restrictions on marketing of pharmaceutical products, several other types of
U.S. state and federal laws are relevant to certain marketing practices in the pharmaceutical industry. These laws include the Federal Anti-Kickback Statute, false claims statutes, and the Federal Physician Payment Sunshine Act. We are subject to
these laws and they may affect our business. The Federal Anti-Kickback Statute prohibits, among other things, persons from knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in exchange for or to
induce either the referral of an individual for, or the purchase, lease, order or recommendation of, any good or service for which payment may be made under federal health care programs such as the Medicare and Medicaid programs. This statute has
been interpreted to apply to arrangements between pharmaceutical manufacturers on the one hand and prescribers, purchasers and formulary managers on the other. Violations of the Federal Anti-Kickback Statute are punishable by imprisonment, criminal
fines, civil monetary penalties and exclusion from participation in federal healthcare programs. The Federal Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 and subsequent
legislation, or collectively, the Healthcare Reform Act or PPACA, among other things, amends the intent requirement of the Federal Anti-Kickback Statute. A person or entity no longer needs to have actual knowledge of this statute or specific intent
to violate it. In addition, PPACA provides that the government may assert that a claim including items or services resulting from a violation of the Federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the false
claims statutes. There are a number of statutory exceptions and regulatory safe harbors protecting certain common activities from prosecution or other regulatory sanctions; however, the exceptions and safe harbors are drawn narrowly, and practices
that do not fit squarely within an exception or safe harbor may be subject to scrutiny.
The Federal False Claims Act
prohibits, among other things, any person from knowingly presenting, or causing to be presented, a false or fraudulent claim for payment, or knowingly making, or causing to be made, a false record or statement material to a false or fraudulent
claim. Several pharmaceutical and other healthcare companies have faced enforcement actions under these laws for allegedly inflating drug prices they report to pricing services, which in turn were used by the government to set Medicare and Medicaid
reimbursement rates, and for allegedly providing free product to customers with the expectation that the customers would bill federal programs for the product. Federal Anti-Kickback Statute violations and certain marketing practices, including
off-label promotion, also may implicate the Federal False Claims Act. Federal False Claims Act violations may result in imprisonment, criminal fines, civil monetary damages and penalties and exclusion from participation in federal healthcare
programs. The majority of U.S. states also have statutes or regulations similar to the Federal Anti-Kickback Statute and False Claims Act, which apply to items and services reimbursed under Medicaid and other state programs. A number of states have
Anti-Kickback Statutes that apply regardless of the payor.
In addition, the Federal Physician Payment Sunshine Act requires
extensive tracking of physician and teaching hospital payments, maintenance of a payments database, and public reporting of the payment data. The system for reporting is called Open Payments and applies to pharmaceutical companies. This is the first
year for
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reporting under the Open Payments system. CMS recently announced that, starting February 28, 2014, Open Payments registration and data submission for the Federal Physician Payment Sunshine
Act will open with a two-phased approach for reporting 2013 payments. Phase 1 (February 18, 2014 March 31, 2014) includes user registration in CMS Enterprise Portal and submission of corporate profile information and aggregate 2013
payment data. Phase 2 (begins in May and extends for at least 30 days) includes industry registration in the Open Payments system, submission of detailed 2013 payment data, and legal attestation to the accuracy of the data. Failure to comply with
the reporting obligations may result in civil monetary penalties.
Several states now 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 of these states also prohibit certain marketing related
activities including the provision of gifts, meals, or other items to certain health care providers. In addition, some states require pharmaceutical companies to implement compliance programs or marketing codes.
In the EU, the advertising and promotion of our products is also subject to EU and EU Member States laws concerning promotion of
medicinal products, interactions with physicians, misleading and comparative advertising and unfair commercial practices, as well as other EU Member State legislation that may apply to the advertising and promotion of medicinal products. These laws
require that promotional materials and advertising in relation to medicinal products comply with the products Summary of Product Characteristics (SmPC) as approved by the competent authorities. The SmPC is the document that provides
information to physicians concerning the safe and effective use of the medicinal product. It forms an intrinsic and integral part of the marketing authorization granted for the medicinal product. Promotion of a medicinal product that does not comply
with the SmPC is considered to constitute off-label promotion. The off-label promotion of medicinal products is prohibited in the EU. The applicable laws at EU level and in the individual EU Member States also prohibit the direct-to-consumer
advertising of prescription-only medicinal products. Violations of the rules governing the promotion of medicinal products in the EU could be penalized by administrative measures, fines and imprisonment. These laws may further limit or restrict
communications concerning the advertising and promotion of our products to the general public and may also impose limitations on our promotional activities with healthcare professionals.
Failure to comply with the EU Member State laws implementing the Community Code on medicinal products, EU rules governing the promotion of
medicinal products, interactions with physicians, misleading and comparative advertising and unfair commercial practices, with the EU Member State laws that apply to the promotion of medicinal products, statutory health insurance, bribery and
anti-corruption or with other applicable regulatory requirements can result in enforcement action by the EU Member State authorities, which may include any of the following: fines, imprisonment, orders forfeiting products or prohibiting or
suspending their supply to the market, or requiring the manufacturer to issue public warnings, or to conduct a product recall.
Interactions between pharmaceutical companies and physicians are also governed by strict laws, regulations, industry self-regulation codes
of conduct and physicians codes of professional conduct in the individual EU Member States. The provision of benefits or advantages to physicians to induce or encourage the prescription, recommendation, endorsement, purchase, supply, order or
use of medicinal products is prohibited in the EU. The provision of benefits or advantages to physicians is also governed by the national anti-bribery laws of the EU Member States. One example is the UK Bribery Act 2010. This Act applies to any
company incorporated in or carrying on business in the UK, irrespective of where in the world the alleged bribery activity occurs. This Act could have implications for our interactions with physicians in and outside the UK. Violation of
these laws could result in substantial fines and imprisonment.
Payments made to physicians in certain EU Member States must be
publically disclosed. Moreover, agreements with physicians must often be the subject of prior notification and approval by the physicians employer, his/her competent professional organization, and/or the competent authorities of the individual
EU Member States. These requirements are provided in the national laws, industry codes, or professional codes of conduct, applicable in the EU Member States. Failure to comply with these requirements could result in reputational risk, public
reprimands, administrative penalties, fines or imprisonment.
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United States Healthcare Reform
In March 2010, the Healthcare Reform Act, or PPACA, was adopted in the United States. This law substantially changes the way healthcare is
financed by both governmental and private insurers, and significantly impacts the pharmaceutical industry. The Healthcare Reform Act contains a number of provisions that are expected to impact our business and operations, in some cases in ways we
cannot currently predict. Changes that may affect our business include those governing enrollment in federal and private healthcare programs, new Medicare reimbursement methods and rates, increased rebates and taxes on pharmaceutical products, and
revised fraud and abuse and enforcement requirements. These changes will impact existing government healthcare programs and will result in the development of new programs, including Medicare payment for performance initiatives and improvements to
the physician quality reporting system and feedback program.
Additional provisions of the Healthcare Reform Act, some of which
became effective in 2011, may negatively affect our future revenues. For example, the Healthcare Reform Act makes changes to the Medicaid Drug Rebate Program, including increasing the minimum rebate from 15.1% to 23.1% of the average manufacturer
price, or AMP, for most innovator products and from 11% to 13% for non-innovator products changed the calculation of the rebate for certain innovator products that qualify as line extensions of existing drugs, and capped the total rebate amount for
innovator drugs at 100% of the average manufacturer price. We expect that the increased minimum rebate of 23.1% will apply to ADASUVE following its commercialization in the United States.
The Healthcare Reform Act also expanded the Public Health Services 340B drug pricing discount program, in which we expect to
participate. The 340B pricing program requires participating manufacturers to agree to charge statutorily-defined covered entities no more than the 340B ceiling price for the manufacturers covered outpatient drugs. The Healthcare
Reform Act expanded the 340B program to include additional types of covered entities: certain free-standing cancer hospitals, critical access hospitals, rural referral centers and sole community hospitals, each as defined by the Healthcare Reform
Act. The Healthcare Reform Act exempts orphan drugs those designated under section 526 of the FDCA from the ceiling price requirements for these newly-eligible entities. We believe our product candidate in active development, AZ-002
(
Staccato
alprazolam), could qualify for orphan drug status. However, we have not applied for, and
AZ-002
may not be granted, orphan drug status. The Health Resources and Services Administration, or
HRSA, which administers the 340B program, issued a final regulation to implement the orphan drug exception in July 2013. The final regulation interprets the orphan drug exception narrowly. It exempts orphan drugs from the ceiling price requirements
for the newly-eligible entities only when the orphan drug is used for its orphan indication. The newly-eligible entities are entitled to purchase orphan drugs at the ceiling price when the orphan drug is not used for its orphan indication. The final
regulation, which became effective October 1, 2013, is subject to a pending lawsuit that seeks to block its implementation. The narrow scope of the orphan drug exception in HRSAs final regulation will increase the complexity of
compliance, will make compliance more time-consuming, and could negatively impact our results of operations if we successfully commercialize AZ-002 (
Staccato
alprazolam) and AZ-002 qualifies for orphan drug status.
The Healthcare Reform Act also obligates the Secretary of the HHS to create regulations and processes to improve the integrity of the 340B
program and to update the agreement that manufacturers must sign to participate in the 340B program to obligate a manufacturer to offer the 340B price to covered entities if the manufacturer makes the drug available to any other purchaser at any
price and to report to the government the ceiling prices for its drugs. HRSA is expected to issue a comprehensive proposed regulation in 2014 that will address many aspects of the 340B program. When that regulation is finalized, it 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.
Many of the Healthcare Reform Acts most
significant reforms take effect in 2014 and thereafter, and the details will be shaped significantly as the various provisions become active, especially given the political nature of the law. In 2012, the Supreme Court of the United States heard
challenges to the constitutionality of the individual mandate and the viability of certain provisions of the Healthcare Reform Act. The Supreme Courts decision upheld most of the Healthcare Reform Act and determined that requiring individuals
to maintain
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minimum essential health insurance coverage or pay a penalty to the Internal Revenue Service was within Congresss constitutional taxing authority. However, the Supreme Court
struck down a provision in the Healthcare Reform Act that penalized states that choose not to expand their Medicaid programs through an increase in the Medicaid eligibility income limit from a states current eligibility levels to 133% of the
federal poverty limit. As a result of the Supreme Courts ruling, it is unclear whether states will expand their Medicaid programs by raising the income limit to 133% of the federal poverty level and whether there will be more uninsured
patients in 2014 than anticipated when Congress passed the Healthcare Reform Act. For each state that does not choose to expand its Medicaid program, there will be fewer insured patients overall. The reduction in the number of insured patients could
impact our sales, business and financial condition.
PHARMACEUTICAL PRICING AND REIMBURSEMENT
In both domestic and foreign markets, our ability to commercialize successfully and/or attract strategic collaborators for ADASUVE and our
other product candidates depends in significant part on the availability of adequate coverage and reimbursement from third-party payors, including, in the United States, governmental payors such as the Medicare and Medicaid programs, managed care
organizations, and private health insurers.
In the United States, the Medicare program is administered by the Centers for
Medicare & Medicaid Services, or CMS. Coverage and reimbursement for products and services under Medicare are determined in accordance with the Social Security Act and pursuant to regulations promulgated by CMS, as well as the agencys
subregulatory coverage and reimbursement determinations. Medicare Part B provides limited coverage of outpatient drugs and biologicals that are furnished incident to a physicians services. Generally, incident to
drugs and biologicals are covered only if they satisfy certain criteria, including that they are of the type that is not usually self-administered by the patient and they are reasonable and necessary for a medically accepted diagnosis or treatment.
CMS and Medicare contractors may limit coverage of ADASUVE for beneficiaries in accordance with the approved product labeling. In the past, state Medicaid programs were required to cover drugs and biologicals of manufacturers that entered into a
Medicaid Drug Rebate Agreement, although such drugs and biologicals were still subject to prior authorization or other utilization controls. On July 15, 2013, CMS issued its Final Rule addressing prescription drug coverage for the Medicaid
expansion population. The Final Rule dramatically restricts mandatory coverage of prescription drugs for the expansion Medicaid enrollees by essentially eliminating the requirement that states must cover each covered outpatient drug subject to a
national rebate agreement. Although drugs provided to the new Medicaid expansion population still are subject to manufacturer rebates, state Medicaid programs are no longer required to cover all drugs subject to the national rebate agreement.
Instead, states are required to cover a minimum of drugs consistent with the applicable benchmark plan in the state coverage for the Medicaid expansion population. Private payors have their own processes for determining whether or not a
drug or biological will be covered, often based on the available medical literature.
Medicare Part B pays providers that
administer covered Part B drugs and biologicals under a payment methodology using average sales price, or ASP, information. Manufacturers, including us when we or any collaborator commercialize one of our products, are required to provide ASP
information to CMS on a quarterly basis. This information is used to compute Medicare payment rates, updated quarterly based on this ASP information. Until enough ASP data are available to calculate a payment rate, reimbursement is wholesale
acquisition cost plus six percent. There also is a mechanism for comparison of the ASP for a product to the widely available market price and the Medicaid Average Manufacturer Price for the product, which could cause further decreases in Medicare
payment rates.
We anticipate that ADASUVE will be used only in hospital inpatient and hospital outpatient settings that are
enrolled in the ADASUVE REMS and that have immediate access on-site to equipment and personnel trained to manage acute bronchospasm, including advanced airway management (intubation and mechanical ventilation). The Medicare statute establishes the
payment rate for new drugs and biologicals administered in hospital outpatient departments that are granted pass-through status at the rate applicable in physicians offices (i.e., ASP plus six percent) for two to three years after
FDA approval. ADASUVE has pass-through status under OPPS starting January 1, 2014. CMS establishes the payment rates for drugs and biologicals that do not have
pass-through
status by regulation. For 2014,
these drugs are reimbursed at ASP plus six percent if they have an
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average cost per day exceeding $90; drugs with an average cost per day of less than $90 are not separately reimbursed in the hospital outpatient department setting. Drugs furnished in the
hospital inpatient setting generally are not separately reimbursed but are paid for as part of the payment for the inpatient stay. CMS granted a C-code for ADASUVE, which will provide for reimbursement for the product used in emergency departments
under a hospitals OPPS.
The statutory methodology under which CMS establishes reimbursement rates is subject to change,
particularly because of budgetary pressures facing the Medicare program and the federal government. As of April 1, 2013, Medicare payments for all items and services, including drugs and biologicals, were reduced by up to 2% under the
sequestration required by the Budget Control Act of 2011, Pub. L. No. 112-25 as amended by the American Taxpayer Relief Act of 2012, Pub. L. 112-240, unless Congress acts to prevent the cuts. Congress also could enact further cuts, and, in
fact, under the Bipartisan Budget Act of 2013, the cuts originally scheduled through 2021 were extended through 2023. The Medicare Modernization Act of 2003 made changes in reimbursement methodology that reduced the Medicare reimbursement rates for
many drugs. In the past, Congress has considered additional reductions in Medicare reimbursement for drugs as part of legislation to reduce the budget deficit. Similar legislation could be enacted in the future. The Medicare regulations and
interpretive determinations that determine how drugs and services are covered and reimbursed also are subject to change.
Third-party payors other than Medicare have a variety of methodologies for paying for drugs and biologicals. Payors also are increasingly
considering new metrics as the basis for reimbursement rates, ASP, AMP and Actual Acquisition Cost. The existing data for reimbursement based on these metrics is relatively limited, although certain states have begun to survey acquisition cost data
for the purpose of setting Medicaid reimbursement rates. CMS has made draft National Average Drug Acquisition Cost, or NADAC, and draft National Average Retail Price, or NARP, data publicly available on at least a monthly basis. In July 2013, CMS
suspended the publication of draft NARP data, pending funding decisions. In November 2013, CMS moved to publishing final rather than draft NADAC data and has since made updated NADAC data publicly available on a weekly basis. Therefore, it may be
difficult to project the impact of these evolving reimbursement mechanics on the willingness of payors to cover ADASUVE.
Third-party payors are increasingly challenging the prices charged for medical products and services and examining their cost
effectiveness, in addition to their safety and efficacy. We may need to conduct expensive pharmacoeconomic studies in order to demonstrate the cost effectiveness of any future product candidates. Even with studies, our product candidates may be
considered less safe, less effective or less cost effective than existing products, and third-party payors therefore may not provide coverage and reimbursement for our product candidates, in whole or in part. Teva is responsible for conducting any
cost-effectiveness studies for ADASUVE in the United States.
Political, economic and regulatory influences are subjecting the
healthcare industry in the United States to fundamental changes. There have been, and we expect there will continue to be, legislative and regulatory proposals and enactments to change the healthcare system in ways that could impact our ability to
sell our products profitably. We anticipate that the U.S. Congress, state legislatures and the private sector will continue to consider and may adopt healthcare policies intended to curb rising healthcare costs. These cost containment measures
include:
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controls on government funded reimbursement for medical products and services;
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new or increased requirements to pay prescription drug rebates to government health care programs;
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controls on healthcare providers;
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challenges to the pricing of medical products and services or limits or prohibitions on reimbursement for specific products and therapies through other
means;
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requirements that health care providers try less expensive products or generics before a more expensive branded product;
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changes in or reform of drug importation laws;
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expansion of use of managed care systems in which healthcare providers contract to provide comprehensive healthcare for a fixed cost per person; and
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public funding for cost effectiveness research, which may be used by government and private third party payors to make coverage and payment decisions.
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If we commercialize future product candidates ourselves, we expect to participate in the Medicaid Drug
Rebate program, established by the Omnibus Budget Reconciliation Act of 1990 and amended by the Veterans Health Care Act of 1992 as well as subsequent legislation. We would also expect to participate in and have certain price reporting obligations
to several state Medicaid supplemental rebate programs and other governmental pricing programs. Once we begin to participate in the Medicaid Drug Rebate program, we will be 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. Those rebates will be
based on pricing data that we will report on a monthly and quarterly basis to CMS, the federal agency that administers the Medicaid Drug Rebate program. These data will include the AMP and, in the case of innovator products, such as
Staccato
-technology based products, the best price, or BP, for each drug. We expect that a significant portion of Tevas revenue from sales of ADASUVE will be obtained through government payors, including Medicaid, and any failure to
qualify for reimbursement for ADASUVE under those programs would have a material adverse effect on future revenues from sales of ADASUVE.
Federal law also requires that a company that participates in the Medicaid rebate program report ASP information to CMS for certain categories of drugs that are paid under Part B of the Medicare program.
Manufacturers calculate ASP based on a statutorily defined formula and interpretations of the statute by CMS as to what should or should not be considered in computing ASP. An ASP for each National Drug Code for a product that is subject to the ASP
reporting requirement must be submitted to CMS no later than 30 days after the end of each calendar quarter. CMS uses these submissions to determine payment rates for drugs under Medicare Part B. Changes affecting the calculation of ASP could affect
the ASP calculations for our products and the resulting Medicare payment rate, and could negatively impact our results of operations, once we begin to participate in the Medicare program.
Once we or any collaborator begin to participate in government pricing programs, we or any collaborator will be liable for errors
associated with our submission of pricing data. If we or any collaborator are found to have knowingly submitted false AMP, ASP, or BP information to the government, we or any collaborator may be liable for civil monetary penalties in the amount of
$100,000 per item of false information. If a manufacturer is found to have made a misrepresentation in the reporting of ASP, the statute provides for civil monetary penalties of up to $10,000 for each misrepresentation for each day in which the
misrepresentation was applied. Failure to submit monthly/quarterly AMP, ASP, and BP data on a timely basis could result in a civil monetary penalty of $10,000 per day for each day the information is late beyond the due date. In the event that CMS
were to terminate our rebate agreement after we or any collaborator begin to participate in the Medicaid program, no federal payments would be available under Medicaid or Medicare Part B for our covered outpatient drugs.
Federal law requires that any company that participates in the Medicaid Drug Rebate Program also participate in the Public Health
Services 340B drug pricing discount program in order for federal funds to be available for the manufacturers drugs under Medicaid and Medicare Part B. The 340B pricing program requires participating manufacturers to agree to charge
statutorily-defined covered entities no more than the 340B ceiling price for the manufacturers covered outpatient drugs. These 340B covered entities include 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. The 340B ceiling price is calculated using a statutory formula, which is based on the AMP and rebate amount for
the covered outpatient drug as calculated under the Medicaid rebate program. Changes to the definition of AMP and the Medicaid rebate amount under PPACA and CMSs issuance of final regulations implementing those changes also could affect our
340B ceiling price calculations and negatively impact our results of operations once we begin to participate in the 340B program.
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As described above, the Healthcare Reform Act expanded the 340B program to include
additional types of covered entities but exempts orphan drugs those designated under section 526 of the FDCA from the ceiling price requirements for these newly-eligible entities. We believe our product candidate in active
development, AZ-002 (
Staccato
alprazolam), could qualify for orphan drug status. HRSA issued a final regulation to implement the orphan drug exception in July 2013. The final regulation interprets the orphan drug exception narrowly. It
exempts orphan drugs from the ceiling price requirements for the newly-eligible entities only when the orphan drug is used for its orphan indication. The newly-eligible entities are entitled to purchase orphan drugs at the ceiling price when the
orphan drug is not used for its orphan indication. The final regulation, which became effective October 1, 2013, is subject to a pending lawsuit that seeks to block its implementation. The narrow scope of the orphan drug exception in
HRSAs final regulation will increase the complexity of compliance, will make compliance more time-consuming, and could negatively impact our results of operations if we successfully commercialize AZ-002 (
Staccato
alprazolam) and AZ-002
qualifies for orphan drug status.
In order to be eligible to have our products paid for with federal funds under the Medicaid
and Medicare Part B programs and purchased by certain federal agencies and grantees, we anticipate that we will participate in the Department of Veterans Affairs, or VA, Federal Supply Schedule, or FSS, pricing program, established by
Section 603 of the Veterans Health Care Act of 1992. Under this program, we will be obligated to make our product available for procurement on an FSS contract and charge a price to four federal agencies VA, Department of Defense, Public
Health Service, and Coast Guard that is no higher than the statutory Federal Ceiling Price, or FCP. The FCP is based on the non-federal average manufacturer price, which we will be required to calculate and report to the VA on a quarterly and
annual basis.
We expect to experience pricing pressures in the United States in connection with the sale of ADASUVE due to the
trend toward managed healthcare, the increasing influence of health maintenance organizations and additional legislative proposals. We are unable to predict what additional legislation, regulations or policies, if any, relating to the healthcare
industry or third-party coverage and reimbursement may be enacted in the future or what effect such legislation, regulations or policies would have on our business. Any cost containment measures, including those listed above, or other healthcare
system reforms that are adopted could have a material adverse effect on our ability to operate profitably.
In the EU the sole
legal instrument at the EU level governing the pricing and reimbursement of medicinal products is Council Directive 89/105/EEC, or the Price Transparency Directive. The aim of this Directive is to ensure that pricing and reimbursement mechanisms
established in the EU Member States are transparent and objective, do not hinder the free movement and trade of medicinal products in the EU and do not hinder, prevent or distort competition on the market. The Price Transparency Directive does not
provide any guidance concerning the specific criteria on the basis of which pricing and reimbursement decisions are to be made in individual EU Member States. Neither does it have any direct consequence for pricing nor reimbursement levels in
individual EU Member States. The EU Member States are free to restrict the range of medicinal products for which their national health insurance systems provide reimbursement and to control the prices and/or reimbursement levels of medicinal
products for human use. An EU Member State may approve a specific price or level of reimbursement for the medicinal product, or alternatively adopt a system of direct or indirect controls on the profitability of the company responsible for placing
the medicinal product on the market, including volume-based arrangements and reference pricing mechanisms.
Health Technology
Assessment, or HTA, of medicinal products is becoming an increasingly common part of the pricing and reimbursement procedures in some EU Member States. These EU Member States include the United Kingdom, France, Germany and Sweden. The HTA process in
the EU Member States is governed by the national laws of these countries. HTA is the procedure according to which the assessment of the public health impact, therapeutic impact and the economic and societal impact of use of a given medicinal product
in the national healthcare systems of the individual country is conducted. HTA generally focuses on the clinical efficacy and effectiveness, safety, cost, and cost-effectiveness of individual medicinal products as well as their potential
implications for the healthcare system. Those elements of medicinal products are compared with other treatment options available on the market.
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The outcome of HTA regarding specific medicinal products will often influence the pricing
and reimbursement status granted to these medicinal products by the competent authorities of individual EU Member States. The extent to which pricing and reimbursement decisions are influenced by the HTA of the specific medicinal product vary among
EU Member States.
In 2011, Directive 2011/24/EU was adopted at EU level. This Directive concerns the application of
patients rights in cross-border healthcare. The Directive is intended to establish rules for facilitating access to safe and high-quality cross-border healthcare in the EU. It also provides for the establishment of a voluntary network of
national authorities or bodies responsible for HTA in the individual EU Member States. The purpose of the network is to facilitate and support the exchange of scientific information concerning HTAs. This could lead to harmonization among EU Member
States of the criteria taken into account in the conduct of HTA and their impact on pricing and reimbursement decisions.
Pricing for ADASUVE has already been granted in the individual countries in the EU in which it has been launched, namely Germany, Austria,
Spain and Romania.
PATENTS AND PROPRIETARY RIGHTS
We actively seek to patent the technologies, inventions and improvements we consider important to the development of our business. In addition, we rely on trade secrets and contractual arrangements to
protect our proprietary information. Some areas for which we seek patent protection include:
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the
Staccato
system and its components;
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methods of using the
Staccato
system;
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the aerosolized form of drug compounds produced by the
Staccato
system; and
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methods of making and using the drug containing aerosols, including methods of administering the aerosols to a patient.
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As of March 18, 2014, we held 195 issued and allowed U.S. and international patents. Most of our patents are directed to
compositions for delivery of an aerosol comprising drugs other than our primary product candidates described below, and cover the process for producing those aerosols using the
Staccato
system. As of February 4, 2014, we held 17
additional pending patent applications in the United States. As of February 4, 2014, we also held 8 pending corresponding foreign patent applications that will permit us to pursue additional patents outside of the United States. The claims in
these various patents and patent applications are directed to various aspects of our drug delivery devices and their components, methods of using our devices, drug containing aerosol compositions and methods of making and using such compositions.
ADASUVE (Staccato loxapine)
One of our issued U.S. patents covers compositions for delivery of a condensation aerosol comprising loxapine and covers the process for producing such condensation aerosol using the
Staccato
system technology. This patent expires in October 2021. An application for patent term extension has been applied for, which could extend the expiration for the patent to 2026. Counterparts to this patent are in force in a number of foreign
jurisdictions, including Europe. We also have four other U.S. patents directed to condensation aerosol compositions for delivery of loxapine, kits containing devices for forming such compositions and methods of administering such compositions.
In total, we reference 12 patents for ADASUVE in the Orange Book. The latest expiration date for the Orange Book listed patents is 2026.
AZ-002 (Staccato alprazolam)
One of our issued U.S. patents
covers compositions for delivery of a condensation aerosol comprising alprazolam and covers the process for producing such condensation aerosol using the
Staccato
system technology. This patent will not expire until 2022. Counterparts to this
patent are in force in a number of foreign jurisdictions, including Europe. We also have three other U.S. patents directed to condensation aerosol compositions for delivery of alprazolam, kits containing devices for forming such compositions,
and methods of administering such compositions.
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AZ-007 (Staccato zaleplon)
One of our issued U.S. patents covers compositions for delivery of a condensation aerosol comprising zaleplon and covers the process
for producing such condensation aerosol using the
Staccato
system technology. This patent will not expire until 2022. Counterparts to this patent are in force in a number of foreign jurisdictions, including Europe. We also have three other
U.S. patents directed to condensation aerosol compositions for delivery of zaleplon, kits containing devices for forming such compositions, and methods of administering such compositions.
AZ-003 (Staccato fentanyl)
One of our issued U.S. patents covers compositions for delivery of a condensation aerosol comprising fentanyl and covers the process for producing such condensation aerosol using the
Staccato
system technology. This patent will not expire until 2022. Counterparts to this patent are in force in a number of foreign jurisdictions, including Europe. We also have three other U.S. patents directed to condensation aerosol compositions
for delivery of fentanyl, kits containing devices for forming such compositions, and methods of administering such compositions.
Staccato nicotine
Two of our U.S. issued patents cover the
apparatus and methods for producing condensation aerosol. One of these patents will not expire until 2026. Two of our U.S. patent applications cover compositions for delivery of a condensation aerosol comprising nicotine and nicotine
formulations. One of our U.S. patent applications covers a method of treating nicotine craving by administering a condensation aerosol comprising nicotine.
COMPETITION
The pharmaceutical and biotechnology industries are intensely
competitive. Many pharmaceutical companies, biotechnology companies, public and private universities, government agencies and research organizations are actively engaged in research and development of products targeting the same markets as ADASUVE
and our other product candidates. Many of these organizations have substantially greater financial, research, drug development, manufacturing and marketing resources than we have. Large pharmaceutical companies in particular have extensive
experience in clinical testing, obtaining regulatory approvals for drugs, and commercial capabilities. Our ability to compete successfully will depend largely on our ability to:
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develop products that are superior to other products in the market;
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attract and retain qualified scientific, product development, manufacturing, quality and commercial personnel;
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obtain patent and/or other proprietary protection covering our future products and technologies;
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obtain required regulatory approvals;
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successfully collaborate with pharmaceutical and biotechnology companies in the development and commercialization of new products; and
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successfully commercialize or enter into agreements that result in third parties successfully commercializing our approved products.
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We expect ADASUVE and any future products we develop to compete on the basis of, among other things, product
efficacy, speed of onset and safety, time to market, price, extent of adverse side effects experienced and convenience of treatment procedures. One or more of our competitors may develop products based upon the principles underlying our proprietary
technologies earlier than we do, obtain approvals for such products from the FDA, the EC or third country authorities more rapidly than we do or develop alternative products or therapies that are safer, more effective and/or more cost effective than
ADASUVE or any future products developed by us. In addition, our ability to compete may be affected if insurers and other third-party payors encourage the use of generic or other products through other routes of administration. ADASUVE competes with
various injectable
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formulations of other antipsychotic and benzodiazepine drugs and oral, orally disintegrating tablet and liquid formulations of other antipsychotic drugs and benzodiazepine drugs. Only the
injectable antipsychotics are approved for the treatment of agitation.
Any future products developed by us would compete with
a number of alternative drugs and therapies, including the following:
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AZ-002 would compete with the oral tablet form of alprazolam and with other benzodiazepines in various formulations, including IV and rectal gel;
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AZ-007 would compete with non-benzodiazepine GABA-A receptor agonists;
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AZ-104 would compete with available anti-migraine treatments;
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AZ-003 would compete with injectable and other forms of fentanyl and various generic oxycodone, hydrocodone and morphine products; and
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Staccato
Nicotine would compete with other treatments for smoking cessation.
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Many of these existing drugs have substantial current sales and long histories of effective and safe use. As patent protection expires for
these drugs, we will also compete with their generic versions. In addition to currently marketed drugs and their generic versions, we believe there are a number of drug candidates in clinical trials that, if approved in the future, would compete
with ADASUVE or any future product candidates we may develop. In addition, after patent protection and non-patent exclusivity expire for our products, we may face direct generic competition, or competition from sponsors relying to some extent on our
approval by filing NDAs under section 505(b)(2) of the FDCA.
CORPORATE INFORMATION
We were incorporated in the state of Delaware on December 19, 2000 as FaxMed, Inc. In June 2001, we changed our name to Alexza
Corporation and in December 2001 we became Alexza Molecular Delivery Corporation. In July 2005, we changed our name to Alexza Pharmaceuticals, Inc.
Employees
As of February 13, 2014, we had 90 full time employees, 13
of whom held Ph.D. or M.D. degrees, 15 of whom were engaged in full time research and development activities and 51 of whom were engaged in commercial manufacturing, supply chain and quality functions and we had no part-time employees. None of our
employees are represented by a labor union, and we consider our employee relations to be good.
Available Information
Our website address is www.alexza.com; however, information found on, or that can be accessed through, our website is not incorporated by
reference into this Annual Report. We file electronically with the Securities and Exchange Commission, or SEC, our Annual Report, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. We make available free of charge on or through our website copies of these reports as soon as reasonably practicable after we electronically file such material
with, or furnish it to, the SEC. The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding our filings at www.sec.gov. You may also read and copy any of our materials filed with the
SEC at the SECs Public References Room at 100 F Street, NW, Washington, DC 20549. Information regarding the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330.
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RISK FACTORS
Investing in our common stock involves a high degree of
risk. You should carefully consider the risks described below, together with all of the other information included in this Annual Report, before deciding whether to invest in shares of our common stock. Additional risks and uncertainties not
presently known to us or that we currently deem immaterial also may impair our business operations. The occurrence of any of the following risks could harm our business, financial condition or results of operations. In such case, the trading price
of our common stock could decline, and you may lose all or part of your investment.
Risks Relating to Our Business
Our near-term prospects are dependent on ADASUVE. If we or our collaborators are unable to successfully commercialize ADASUVE
for the acute treatment of agitation in adults with schizophrenia or bipolar disease, our ability to generate significant revenue or achieve profitability will be adversely affected.
ADASUVE is our only product approved for marketing in the United States or the EU, and our ability to generate revenue in the near term is
entirely dependent upon sales of ADASUVE. We do not have any product approved for marketing outside of the United States or the EU. We or our collaborators may not be able to successfully commercialize ADASUVE for a number of reasons,
including:
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we or our collaborators may not be able to establish or demonstrate in the medical community the safety and efficacy of ADASUVE and any potential
advantages over existing therapeutics and products currently in clinical development;
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doctors may be hesitant to prescribe ADASUVE until results from our post-approval studies are available or other long term data regarding efficacy and
safety become available;
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results from our post-approval studies may fail to verify the clinical benefit of ADASUVE for the treatment of agitation in patients with bipolar
disorder and schizophrenia or may reveal unforeseen safety issues;
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our limited experience in marketing, selling and distributing ADASUVE;
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reimbursement and coverage policies of government and private payers such as Medicare, Medicaid, insurance companies, health maintenance organizations
and other plan administrators;
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the relative price of ADASUVE as compared to alternative treatment options;
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the reliability of our estimates, including the frequency of agitation in many patients with bipolar disorder and schizophrenia;
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we or our collaborators may not have adequate financial or other resources to successfully commercialize ADASUVE;
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we may be unable to secure an adequate replacement manufacturer for sufficient quantities of the chemical heat packages in ADASUVE by October 2016 or
the costs for such manufacturer to produce the chemical heat packages may be higher than the cost from Autoliv; and
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we may not be able to manufacture ADASUVE in commercial quantities or at acceptable costs.
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If we are unable to successfully commercialize ADASUVE for the treatment of agitation in adults with schizophrenia or bipolar disorder,
our ability to generate revenue from royalties and product sales and achieve profitability will be adversely affected and our stock price would likely decline.
We have a history of net losses. We expect to continue to incur substantial and increasing net losses for the foreseeable future, and we may never achieve or maintain profitability.
We are not profitable and have incurred significant net losses in each year since our inception, including net losses
of $39.7 million, $28.0 million, and $40.5 million for the years ended December 31, 2013, 2012, and 2011,
30
respectively. As of December 31, 2013, we had an accumulated deficit of $374.2 million and a stockholders deficit of $24.0 million. We expect to continue to incur substantial net
losses and negative operating cash flow through at least 2016. These losses and negative operating cash flows have had, and will continue to have, an adverse effect on our stockholders equity and working capital.
Because of the numerous risks and uncertainties associated with the commercialization of ADASUVE by Teva and Ferrer, our ability to
manufacture commercial quantities of ADASUVE and conduct pharmaceutical product development, we are unable to predict accurately the timing or amount of future revenues or expenses, or when, or if, we will be able to achieve or maintain
profitability. To date we have not generated any significant product or royalty revenue. We have financed our operations primarily through the sale of equity securities, equipment financing, debt financing, collaboration and licensing agreements,
and government grants. The size of our future net losses will depend, in part, on the rate of growth or contraction of our expenses and the level and rate of growth, if any, of our revenues. Revenues from strategic collaborations are uncertain
because we may not enter into any additional strategic collaborations. If we or our collaborators are unable to successfully commercialize ADASUVE or one or more of our product candidates or if sales revenue from ADASUVE or any product candidate
that receives marketing approval is insufficient, we will not achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability.
Our operating results are unpredictable and may fluctuate. If our operating results are below the expectations of securities
analysts or investors, the trading price of our stock could decline.
Our operating results are difficult to predict
and will likely fluctuate from quarter to quarter and year to year. Due to the recent approval of ADASUVE for the treatment of agitation associated with schizophrenia and bipolar disorder in adults in the United States and the EU and the lack of
historical sales data, ADASUVE sales will be difficult to predict from period to period. We believe that our quarterly and annual results of operations may be negatively affected by a variety of factors, including:
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a failure to achieve a sufficient level of demand by patients and healthcare providers for ADASUVE;
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the timing and level of investment in our or our collaborators sales and marketing efforts to support ADASUVE sales;
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the timing and level of investment in our or our collaborators research and development activities involving ADASUVE; and
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expenditures we may incur to acquire or develop additional products.
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In addition, we measure compensation cost for stock-based awards made to employees at the grant date of the award, based on the fair value
of the award, and recognize the cost as an expense over the employees requisite service period. As the variables that we use as a basis for valuing these awards change over time, including our underlying stock price, the magnitude of the
expense that we must recognize may vary significantly. Any such variance from one period to the next could cause a significant fluctuation in our operating results.
For these reasons, it is difficult for us to accurately forecast future profits or losses. As a result, it is possible that in some quarters our operating results could be below the expectations of
securities analysts or investors, which could cause the trading price of our common stock to decline, perhaps substantially.
We will need substantial additional capital in the future. If additional capital is not available, we will have to delay, reduce or
cease operations.
We will need to raise additional capital to fund our operations, to develop our product candidates
and to develop and expand our commercial manufacturing capabilities. Our future capital requirements will be substantial and will depend on many factors including:
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Tevas success in commercializing ADASUVE in the United States;
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Tevas executing the ADASUVE REMS program to the satisfaction of the FDA;
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Ferrers success in commercializing ADASUVE in the Ferrer Territories;
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the terms and success of any future licensing arrangement that we may enter into for the commercial rights for ADASUVE outside the United States and
the Ferrer Territories;
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the development costs for our other product candidates;
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the cost and timing of complying with our post-approval commitments;
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the cost and timing of complying with the process for renewal of marketing authorization in the EU;
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the scope, rate of progress, results and costs of our preclinical studies, clinical trials and other research and development activities;
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the scope, rate of progress, results and costs of our commercial manufacturing development and commercial manufacturing activities;
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payments received under our collaborations with Ferrer and Teva and any future strategic collaborations;
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the continuation of the Ferrer and Teva collaborations under their agreed terms;
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the filing, prosecution and enforcement of patent claims; and
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the costs associated with commercializing our other product candidates, if they receive regulatory approval.
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We believe that, based on our cash, cash equivalents and marketable securities balance at December 31, 2013, remaining proceeds
available under the Teva Note, estimated product revenues and milestone payments associated with the sale of ADASUVE, the proceeds from our March 2014 royalty securitization financing and our current expected cash usage, we have sufficient capital
resources to meet our anticipated cash needs for at least the next twelve months. Changing circumstances may cause us to consume capital significantly faster or slower than we currently anticipate, or to alter our operations. We have based these
estimates on assumptions that may prove to be wrong, and we could exhaust our available financial resources sooner than we currently expect. The key assumptions underlying these estimates include:
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continuation of our Teva and Ferrer collaborations;
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no unexpected costs related to the development of our commercial manufacturing capability; and
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no unbudgeted growth in the number of our employees during this period.
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We may never be able to generate a sufficient amount of product or royalty revenue to cover our expenses. We did not generate any product
revenues until the third quarter of 2013 and have not generated any royalty revenues through 2013. In addition, any royalty and milestone payments payable under the Teva Agreement will first be applied to repaying principal and interest on the $45.0
million of non-recourse notes that our wholly-owned subsidiary issued in our March 2014 royalty securitization financing before we receive as income any royalty or milestone payments under the Teva Agreement. Until we generate sufficient revenues to
cover expenses, we expect to finance our future cash needs through public or private equity offerings, debt financings, strategic collaborations or licensing arrangements. Any financing transaction may contain unfavorable terms. For example, the
terms of certain warrants we have issued in previous financings could require us to pay warrant holders a significant portion of the proceeds in a change of control transaction, potentially materially reducing the proceeds available to holders of
our common stock. If we raise additional funds by issuing equity securities our stockholders equity will be diluted and debt financing, if available, may involve restrictive covenants. If we raise additional funds through strategic
collaborations, we may be required to relinquish rights to ADASUVE, our product candidates or our technologies, or to grant licenses on terms that are not favorable to us. Complying with the terms of the foregoing rights and restrictions may make it
more difficult to complete certain types of transactions and result in delays to our fundraising efforts.
We do not
have sales and marketing capabilities, and consequently must rely on commercial collaborations to sell our products, and we and our collaborators may be unable to generate significant product revenue.
In December 2012, the FDA granted marketing approval for ADASUVE in the United States for the acute treatment of agitation associated with
schizophrenia or bipolar I disorder in adults. The approval of ADASUVE
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is our first regulatory approval. We do not have a sales and marketing organization and as a company, we do not have significant experience in the sales and distribution of pharmaceutical
products.
We have exclusively licensed the ADASUVE U.S. commercialization rights to Teva, which we believe will have a
significant impact on the ultimate success of ADASUVE in the United States. Teva announced the U.S. launch of ADASUVE in March 2014. If Teva is unable to commercialize ADASUVE successfully in the United States or Teva is unable to fulfill the
post-marketing obligations that were required by the FDA as part of the ADASUVE NDA approval, our revenue will suffer and our stock price may decline. Tevas commercialization efforts could also have an effect on investors perception of
potential sales of ADASUVE outside the United States, which could also cause a decline in our stock price and may make it more difficult for us to enter into additional strategic collaborations.
There are risks involved with utilizing Teva to sell our product. By licensing the U.S. commercialization rights to Teva, we may generate
fewer revenues from the royalties and milestone payments under the Teva Agreement than if we commercialized ADASUVE on our own. Additionally, Teva may not fulfill its obligations or carry out selling and marketing activities as diligently as we
would like. We could also become involved in disputes with Teva, which could lead to delays in or termination of commercialization programs and time-consuming and expensive litigation or arbitration. If Teva terminates or breaches its agreement, or
otherwise fails to complete its obligations in a timely manner, the chances of successfully selling or marketing ADASUVE would be materially and adversely affected. After May 7, 2014, Teva has the right to terminate the Teva Agreement with or
without cause, upon 120 days notice. If Teva exercises this right, our business and operations and stock price may be negatively affected.
In February 2013, the EC granted a marketing authorization for ADASUVE, as ADASUVE (
Staccato
loxapine) 4.5 mg or 9.1 mg, inhalation powder, pre-dispensed. In October 2011, we entered into a
commercial collaboration with Ferrer pursuant to the Ferrer Agreement, to commercialize ADASUVE in the Ferrer Territories. In July 2013, Ferrer launched ADASUVE in the EU, with the first commercial sale in Germany, and currently sells ADASUVE in
Germany, Austria, Spain and Romania. We expect Ferrer to launch ADASUVE in additional EU Member States in 2014 and 2015. If Ferrer is unable to commercialize ADASUVE successfully in the various Ferrer Territories or we are unable to fulfill the
post-marketing authorization commitments that were required as part of the marketing authorization granted for ADASUVE in the EU, our revenue will suffer and our stock price may decline.
We also intend to seek international distribution collaborators in addition to Ferrer for ADASUVE and our product candidates. If we are
unable to enter into an international distribution collaboration, we will be unable to generate revenues from countries outside the United States and the Ferrer Territories.
If we enter into additional strategic collaborations, we may be required to relinquish important rights to and control over the development of ADASUVE or our product candidates or otherwise be
subject to terms unfavorable to us.
Our relationships with Teva and Ferrer are, and any other strategic collaborations
with pharmaceutical or biotechnology companies we may establish will be, subject to a number of risks including:
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business combinations or significant changes in a strategic collaborators business strategy may adversely affect a strategic collaborators
willingness or ability to complete its obligations under any arrangement;
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we may not be able to control the amount and timing of resources that our strategic collaborators devote to the development or commercialization of
ADASUVE or our product candidates;
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strategic collaborators may delay clinical trials, provide insufficient funding, terminate a clinical trial or abandon a product candidate, repeat or
conduct new clinical trials or require a new version of a product candidate for clinical testing;
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strategic collaborators may not pursue further development and commercialization of products resulting from the strategic collaboration arrangement or
may elect to discontinue research and development programs;
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strategic collaborators may not commit adequate resources to the marketing and distribution of any future products, limiting our potential revenues
from these products;
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disputes may arise between us and our strategic collaborators that result in the delay or termination of the research, development or commercialization
of ADASUVE or our product candidates or that result in costly litigation or arbitration that diverts managements attention and consumes resources;
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strategic collaborators may experience financial difficulties;
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strategic collaborators may not properly maintain or defend our intellectual property rights or may use our proprietary information in a manner that
could jeopardize or invalidate our proprietary information or expose us to potential litigation;
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strategic collaborators could independently move forward with a competing product candidate developed either independently or in collaboration with
others, including our competitors; and
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strategic collaborators, including Teva or Ferrer, could terminate the arrangement or allow it to expire, which would delay and may increase the cost
of developing our product candidates or commercializing ADASUVE.
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The REMS program for ADASUVE
imposes, and any REMS on any other approved products may impose, regulatory burdens on the distribution and sales of ADASUVE or any other approved products and also on healthcare providers that may make the products commercially unattractive or
impractical.
As a condition of FDA approval, Teva is required to have a REMS program for ADASUVE, and we may be
required to implement a REMS program for any other product candidates we may develop. A REMS may include various elements, such as distribution of a medication guide or a patient package insert; implementation of a communication plan to educate
healthcare providers of the drugs risks; imposition of limitations on who may prescribe or dispense the drug, including training and certification requirements; or other measures that the FDA deems necessary to assure the safe use of the drug.
The FDA has a wide degree of discretion in deciding which elements are necessary for the safe use of a product, and it may impose elements that significantly burden our ability to commercialize the product, or that burden healthcare providers to the
extent that use of the product is severely curtailed.
For ADASUVE, the REMS program contains measures to ensure that the
product is administered only in healthcare facilities enrolled in the ADASUVE REMS program that have immediate on-site access to equipment and personnel trained to manage acute bronchospasm, including advanced airway management (intubation and
mechanical ventilation). The REMS program may not allow commercialization and use of ADASUVE in a commercially feasible manner. In the future, the FDA could impose additional REMS elements, such as if the REMS proves inadequate in managing the risk
of bronchospasm associated with ADASUVE or if new safety risks emerge, and such additional elements could substantially burden or even eliminate our ability to commercialize ADASUVE in a feasible manner.
If we or our collaborators are unable to successfully complete the ADASUVE post-marketing studies required by the FDA and EC, or if
data generated from the post-marketing studies indicate safety concerns, our sales could be diminished and our ability to generate a profit could be negatively affected.
As a condition of U.S. ADASUVE approval, there are several required post-marketing studies, including a 10,000 patient observational
clinical trial that is designed to gather patient safety data based on the real-world use of ADASUVE in the hospital setting and a clinical program designed to evaluate the safety and efficacy of ADASUVE in agitated adolescent patients.
The data derived from any post-approval study or trial could result in additional restrictions on the commercialization of ADASUVE through changes to the approved ADASUVE label, additional goals or elements in the REMS program, the imposition of
additional post-approval studies or trials, or even the withdrawal of the approval of ADASUVE. Our business, operations and stock price may be negatively affected if any of these or similar events occur.
As a condition of the ADASUVE marketing authorization in the EU, we are responsible for the conduct and funding of post-authorization
studies, including (i) a benzodiazepine interaction study, which has been
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completed, (ii) a controlled study to determine ADASUVEs effect on cardiac rhythms, or a thorough QTc study, with two doses of ADASUVE, which has been completed, (iii) a clinical
program designed to evaluate the safety and efficacy of ADASUVE in agitated adolescent patients, (iv) an observational clinical trial, and (v) a drug utilization clinical trial. Results of the benzodiazepine interaction study and the
thorough QTc study have been submitted to the EMA.
If we or our collaborators are unable to fulfill the FDA or EC
post-approval obligations, or do not fulfill these obligations within an appropriate time, or if the EMA determines from the results of our completed benzodiazepine interaction study or our completed thorough QTc study that ADASUVE poses or may pose
actual or possible safety risks to some patients, the NDA could be suspended, withdrawn, or limited, and the current marketing authorization in the EU could be varied, suspended or withdrawn and our business, operations and stock price may be
negatively affected.
If we do not produce our commercial devices cost effectively, we will never be profitable.
ADASUVE and our
Staccato
system-based product candidates contain electronic and other components in addition to
the API. The cost to produce ADASUVE and our product candidates, and any additional approved products, will likely be higher per dose than the cost to produce intravenous or oral tablet products. This higher cost of goods may prevent us or our
collaborators from ever selling any products at a profit. The development and production of our technology entail a number of technical challenges, including achieving adequate dependability in our production, that may be expensive or time consuming
to solve. Any delay in or failure to develop and manufacture any future products in a cost effective way could prevent us from generating any meaningful revenues and prevent us from becoming profitable.
In October 2011, we committed to sell ADASUVE to Ferrer for a fixed transfer price, which is below our current production costs, and in
May 2013, we committed to supply ADASUVE to Teva at a price based on costs of commercial production, which transfer price will convert to a fixed price upon achievement of costs equal to a specified per-unit price. Our future manufacturing costs per
unit will be dependent on future demand of ADASUVE. If we and our collaborators do not generate sufficient demand, our manufacturing costs will exceed the fixed transfer price and will result in losses. In October 2013, Autoliv notified us that they
were terminating, effective October 2016, the Manufacture Agreement. Prior to October 2016, Autoliv and we remain fully obligated to perform pursuant to the terms of both the Manufacture Agreement and the Second Note. However, Autoliv may not
continue to perform its obligations in the same manner during the termination period. If we are unable to secure an adequate replacement manufacturer for sufficient quantities of the chemical heat packages in ADASUVE by October 2016 or if the costs
for such manufacturer to produce the chemical heat packages are higher than the cost from Autoliv, it will significantly impact our ability to produce our commercial devices or to produce them at quantities or at a cost to allow us to become
profitable.
If our products do not receive adequate coverage and reimbursement from third-party payors, our sales could
be diminished and our ability to sell our products profitably could be negatively affected.
Sales of ADASUVE will be
dependent on the availability and extent of coverage and reimbursement from third-party payers, including government healthcare programs and private insurance plans. We will rely in large part on the reimbursement and coverage by federal and state
sponsored government programs, such as Medicare and Medicaid in the United States and equivalent programs in other countries. Medicare, the dominant federal health insurance program for the elderly in the United States, may limit coverage of ADASUVE
for beneficiaries in accordance with the boxed warning against use of the drug in elderly patients with dementia-related psychosis. Governments and private payors may regulate prices, reimbursement levels and/or access to ADASUVE and any other
products we may market to control costs or to affect levels of use of our products.
Third-party payors are increasingly
challenging the prices charged for medical products and services and examining their cost effectiveness, in addition to their safety and efficacy. We or our collaborators may need to conduct expensive pharmacoeconomic studies in order to demonstrate
the cost effectiveness of ADASUVE and any future products. Even with studies, ADASUVE and our product candidates may be considered less safe, less effective or less cost effective than existing products, and some third-party payors therefore may not
provide
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coverage and reimbursement for our product candidates, in whole or in part. We cannot predict actions third party payors may take, or whether they will limit the coverage and level of
reimbursement for our products or refuse to provide any coverage at all.
Although Teva has been granted a reimbursement code
for ADASUVE by the Centers for Medicare & Medicaid Services, or CMS, we cannot predict the availability or level of coverage and reimbursement for ADASUVE or our product candidates. A reduction in coverage and/or reimbursement for our
products could have a material adverse effect on our product sales and results of operations.
The availability and
amount of reimbursement for ADASUVE and our product candidates and the manner in which government and private payors may reimburse for our potential products is uncertain.
Many of the patients in the United States who seek treatment with ADASUVE or any other of our products that are approved for marketing
will be eligible for Medicare benefits. Other patients may be covered by private health plans. The Medicare program is administered by CMS, and coverage and reimbursement for products and services under Medicare are determined pursuant to statute,
regulations promulgated by CMS, and CMSs subregulatory coverage and reimbursement determinations. CMSs regulations and interpretive determinations are subject to change, as are the procedures and criteria by which CMS makes coverage and
reimbursement determinations and the reimbursement amounts established by statute, particularly because of budgetary pressures facing the Medicare program. For example, we anticipate that ADASUVE will be used only in the hospital inpatient and
hospital outpatient settings. In the hospital inpatient setting, Medicare does not provide separate reimbursement for drugs but pays for them as part of the payment for the hospital stay. In the hospital outpatient setting, the statute establishes
the payment rate for new drugs and biologicals administered incident to a physicians service that are granted pass-through status at the rate applicable in physicians offices (i.e., ASP plus six percent) for two to three
years after FDA approval. For drugs and biologicals that do not have pass-through status, CMS establishes the payment rates by regulation. For 2014, these drugs are reimbursed at ASP plus six percent if they have an average cost per day exceeding
$90; drugs with an average cost per day of less than $90 are not separately reimbursed. In future years, CMS could change both the payment rate and the average cost threshold, and these changes could adversely affect payment for ADASUVE. In
addition, the President has proposed and Congress has considered amending the statute to reduce Medicares payment rates for drugs and biologicals, and if such legislation is enacted, it could adversely affect payment for ADASUVE. Moreover,
ADASUVE is different from many drugs covered by Medicare Part B because it is administered by a healthcare professional through a disposable inhaler.
Effective April 1, 2013, Medicare payments for all items and services, including drugs and biologicals, were reduced by up to 2% under the sequestration (i.e., automatic spending reductions) required
by the Budget Control Act of 2011, Pub. L. No. 112-25, or BCA, as amended by the American Taxpayer Relief Act of 2012, Pub. L. 112-240, or ATRA. The BCA requires sequestration for most federal programs, excluding Medicaid, Social Security, and
certain other programs, because Congress failed to enact legislation by January 15, 2012, to reduce federal deficits by $1.2 trillion over ten years. The BCA caps the cuts to Medicare payments or items and services at 2%, and requires the cuts
to be implemented on the first day of the first month following the issuance of a sequestration order. The ATRA delayed implementation of sequestration from January 2, 2013, to March 1, 2013, and as a result, the Medicare cuts took effect
April 1, 2013, and will remain in effect unless Congress enacts legislation to cancel the cuts. The cuts were originally scheduled to occur through 2021, but under the Bipartisan Budget Act of 2013, these cuts were extended through 2023. These
cuts could adversely impact payment for ADASUVE and related procedures.
In March 2014, Teva announced the U.S. launch of
ADASUVE. We expect ADASUVE to experience pricing pressures in the United States due to the trend toward managed healthcare, the increasing influence of health maintenance organizations and additional legislative proposals. We cannot be sure that
reimbursement amounts, or the lack of reimbursement, will not reduce the demand for, or the price of, ADASUVE or any future products. If reimbursement is not available or is available only to limited levels, we or any collaborator may not be able to
effectively commercialize ADASUVE or any future products, In addition, if we or any collaborator fail to successfully secure and maintain reimbursement coverage for ADASUVE or any future products or are significantly delayed in doing so, we or any
collaborator will have difficulty achieving market acceptance of our products and our business will be harmed.
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Payors also are increasingly considering new metrics as the basis for reimbursement rates,
such as ASP, AMP and Actual Acquisition Cost. The existing data for reimbursement based on these metrics is relatively limited, although certain states have begun to survey acquisition cost data for the purpose of setting Medicaid reimbursement
rates. CMS has made draft National Average Drug Acquisition Cost, or NADAC, and draft National Average Retail Price, or NARP, data publicly available on at least a monthly basis. In July 2013, CMS suspended the publication of draft NARP data,
pending funding decisions. In November 2013, CMS moved to publishing final rather than draft NADAC data and has since made updated NADAC data publicly available on a weekly basis. Therefore, it may be difficult to project the impact of these
evolving reimbursement mechanics on the willingness of payors to cover ADASUVE or any future products. As discussed below, once we or any collaborator begin to participate in government pricing programs, recent legislative changes to the 340B drug
pricing program, and the Medicaid Drug Rebate program also could impact our revenues. We anticipate that a significant portion of our revenue from sales of ADASUVE will be obtained through government payors, including Medicaid, and any failure to
qualify for reimbursement for ADASUVE under those programs would have a material negative effect on revenues from sales of ADASUVE.
The EU Member States are free to restrict the range of medicinal products for which their national health insurance systems provide reimbursement and to control the prices and/or reimbursement levels of
medicinal products for human use. An EU Member State may approve a specific price or level of reimbursement for the medicinal product, or alternatively adopt a system of direct or indirect controls on the profitability of the company responsible for
placing the medicinal product on the market, including volume-based arrangements and reference pricing mechanisms. We anticipate that pricing and reimbursement decisions concerning ADASUVE in the EU will have a significant impact on the sales of the
product in the EU. Failure to obtain pricing and reimbursement for ADASUVE at an appropriate level in any of the EU Member States would, in part due to EU parallel trade rules, have a material adverse effect on revenues from sales of ADASUVE.
Healthcare law and policy changes, including those based on recently enacted legislation, may impact our business in
ways that we cannot currently predict and these changes could have a material adverse effect on our business and financial condition.
Healthcare costs have risen significantly over the past decade. In March 2010, the Healthcare Reform Act, or PPACA, was adopted in the United States. The Healthcare Reform Act substantially changes the
way health care is financed by both governmental and private insurers, and significantly impacts the pharmaceutical industry. The Healthcare Reform Act contains a number of provisions that are expected to impact our business and operations, in some
cases in ways we cannot currently predict. Changes that may affect our business include those governing enrollment in federal and private healthcare programs, new Medicare reimbursement methods and rates, increased rebates and taxes on
pharmaceutical products, expansion of the 340B program, and revised fraud and abuse and enforcement requirements. These changes will impact existing government healthcare programs and will result in the development of new programs, including
Medicare payment for performance initiatives and improvements to the physician quality reporting system and feedback program.
We anticipate that with Tevas commercialization of ADASUVE in the United States or with other potential product candidates, some of
our revenue and the revenue from our collaborators may be derived from U.S. government healthcare programs, including Medicare. We expect that the Healthcare Reform Act and other healthcare reform measures that may be adopted in the future could
have an adverse effect on our industry generally and the ability to successfully commercialize ADASUVE or our product candidates or could limit or eliminate our spending on development projects.
The Healthcare Reform Act made significant changes to the Medicaid Drug Rebate program, in which we expect to participate. Effective
March 23, 2010, rebate liability expanded from fee-for-service Medicaid utilization to include the utilization of Medicaid managed care organizations as well. With regard to the amount of the rebates owed, the Healthcare Reform Act increased
the minimum Medicaid rebate from 15.1% to 23.1% of the average manufacturer price for most innovator products and from 11% to 13% for non-innovator products; changed the calculation of the rebate for certain innovator products that qualify as line
extensions of existing drugs; and capped the total rebate amount for innovator drugs at 100% of the average manufacturer price. We expect that the increased minimum rebate of 23.1% will apply to ADASUVE. In addition, the Healthcare Reform
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Act and subsequent legislation changed the definition of average manufacturer price. In 2012, the Centers for Medicare and Medicare Services, or CMS, the federal agency that administers the
Medicare and Medicaid Drug Rebate program, issued proposed regulations to implement the changes to the Medicaid Drug Rebate program under the Healthcare Reform Act but has not yet issued final regulations. CMS is currently expected to release the
final regulations in 2014. Finally, the Healthcare Reform Act requires pharmaceutical manufacturers of branded prescription drugs to pay a branded prescription drug fee to the federal government beginning in 2011. Each individual pharmaceutical
manufacturer pays a prorated share of the branded prescription drug fee of $3.0 billion in 2014 (and set to increase in ensuing years), based on the dollar value of its branded prescription drug sales to certain federal programs identified in the
law. Additional provisions of the Healthcare Reform Act, some of which became effective in 2011, may negatively affect our future revenues.
The Healthcare Reform Act also expanded the Public Health Services 340B drug pricing discount program, which we expect to participate in. The 340B pricing program requires participating
manufacturers to agree to charge statutorily-defined covered entities no more than the 340B ceiling price for the manufacturers covered outpatient drugs. The Healthcare Reform Act expanded the 340B program to include additional
types of covered entities: certain free-standing cancer hospitals, critical access hospitals, rural referral centers and sole community hospitals, each as defined by the Healthcare Reform Act. The Healthcare Reform Act exempts orphan
drugs those designated under section 526 of the FDCA from the ceiling price requirements for these newly-eligible entities. We believe our product candidate in active development, AZ-002 (
Staccato
alprazolam), could
qualify for orphan drug status. The Health Resources and Services Administration, or HRSA, which administers the 340B program, issued a final regulation to implement the orphan drug exception in July 2013. The final regulation interprets the orphan
drug exception narrowly. It exempts orphan drugs from the ceiling price requirements for the newly-eligible entities only when the orphan drug is used for its orphan indication. The newly-eligible entities are entitled to purchase orphan drugs at
the ceiling price when the orphan drug is not used for its orphan indication. The final regulation, which became effective October 1, 2013, is subject to a pending lawsuit that seeks to block its implementation. The narrow scope of the orphan
drug exception in HRSAs final regulation will increase the complexity of compliance, will make compliance more time-consuming, and could negatively impact our results of operations if we successfully commercialize AZ-002 (
Staccato
alprazolam) and AZ-002 qualifies for orphan drug status. We have not applied for, and
AZ-002
may not be granted, orphan drug status.
The Healthcare Reform Act also obligates the Secretary of the HHS to create regulations and processes to improve the integrity of the 340B program and to update the agreement that manufacturers must sign
to participate in the 340B program to obligate a manufacturer to offer the 340B price to covered entities if the manufacturer makes the drug available to any other purchaser at any price and to report to the government the ceiling prices for its
drugs. HRSA is expected to issue a comprehensive proposed regulation in 2014 that will address many aspects of the 340B program. When that regulation is finalized, it 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.
Many of the Healthcare Reform Acts most significant reforms take effect in 2014 and thereafter, and the details
will be shaped significantly as the various provisions become active, especially given the political nature of the law. In 2012, the Supreme Court of the United States heard challenges to the constitutionality of the individual mandate and the
viability of certain provisions of the Healthcare Reform Act. The Supreme Courts decision upheld most of the Healthcare Reform Act and determined that requiring individuals to maintain minimum essential health insurance coverage or
pay a penalty to the Internal Revenue Service was within Congresss constitutional taxing authority. However, the Supreme Court struck down a provision in the Healthcare Reform Act that penalized states that choose not to expand their Medicaid
programs through an increase in the Medicaid eligibility income limit from a states current eligibility levels to 133% of the federal poverty limit. As a result of the Supreme Courts ruling, it is unclear whether states will expand their
Medicaid programs by raising the income limit to 133% of the federal poverty level and whether there will be more uninsured patients in 2014 than anticipated when Congress passed the Healthcare Reform Act. For each state that does not choose to
expand its Medicaid program, there will be fewer insured patients overall. The reduction in the number of insured patients could impact the sales, business and financial condition.
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While the constitutionality of key provisions of the Healthcare Reform Act was upheld by the
Supreme Court, legislative changes to it remain possible. We expect that the Healthcare Reform Act, as currently enacted or as it may be amended in the future, and other healthcare reform measures that may be adopted in the future could have a
material adverse effect on our industry generally and on our ability to successfully commercialize our product candidates or could limit or eliminate our future spending on development projects.
In addition to the Healthcare Reform Act, there will continue to be proposals by legislators at both the federal and state levels,
regulators and third-party payors to keep these costs down while expanding individual healthcare benefits. Certain of these changes could impose limitations on the prices we will be able to charge for ADASUVE or any other product candidates that are
approved or the amounts of reimbursement available for these products from governmental agencies or third-party payors, or may increase the tax obligations on life sciences companies such as ours. While it is too early to predict specifically what
effect the Health Reform Act and its implementation or any future legislation or policies will have on our business, we believe that healthcare reform may have an adverse effect on our business and financial condition.
If we or any collaborator fail to comply with reporting and payment obligations under the Medicaid Drug Rebate program or other
governmental pricing programs, including programs developed by countries outside the United States, after we or any collaborator begin to participate in such programs, we or any collaborator 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 expect to participate, or any collaborator to participate, in the Medicaid Drug Rebate program, established by the Omnibus Budget Reconciliation Act of 1990 and amended by the Veterans Health Care Act
of 1992 as well as subsequent legislation. We also expect to participate, or any collaborator to participate, in and have certain price reporting obligations to several state Medicaid supplemental rebate programs, and we anticipate that we will have
obligations to report average sales price, or ASP, for the Medicare program for future product candidates. Under the Medicaid Drug Rebate program, we will be 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. Those rebates will be based on pricing
data that we will report on a monthly and quarterly basis to CMS, the federal agency that administers the Medicaid Drug Rebate program. These data will include the average manufacturer price, or AMP, and, in the case of innovator products, the best
price, or BP, for each drug. The rebate liability resulting from this reporting will negatively impact our financial results.
The PPACA made significant changes to the Medicaid Drug Rebate program. Effective March 23, 2010, rebate liability expanded from
fee-for-service Medicaid utilization to include the utilization of Medicaid managed care organizations as well. With regard to the amount of the rebates owed, the PPACA increased the minimum Medicaid rebate from 15.1% to 23.1% of the average
manufacturer price for most innovator products and from 11% to 13% for non-innovator products; changed the calculation of the rebate for certain innovator products that qualify as line extensions of existing drugs; and capped the total rebate amount
for innovator drugs at 100% of the average manufacturer price. We expect that the increased minimum rebate of 23.1% will apply to ADASUVE. In addition, the PPACA and subsequent legislation changed the definition of AMP. Finally, the PPACA requires
pharmaceutical manufacturers of branded prescription drugs to pay a new branded prescription drug fee to the federal government beginning in 2011. Each individual pharmaceutical manufacturer will pay a prorated share of the branded prescription drug
fee of $3.0 billion in 2014 (and set to increase in ensuing years) based on the dollar value of its branded prescription drug sales to certain federal programs identified in the law. Additional provisions of the Healthcare Reform Act, some of which
became effective in 2011, may negatively affect our future revenues.
On July 15, 2013, CMS issued its Final Rule
addressing prescription drug coverage for the Medicaid expansion population under the PPACA. The Final Rule dramatically restricts mandatory coverage of prescription drugs for the expansion Medicaid enrollees by essentially eliminating the
requirement that states must cover each covered outpatient drug subject to a national rebate agreement. Although drugs provided to the
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new Medicaid expansion population still are subject to manufacturer rebates, state Medicaid programs are no longer required to cover all drugs subject to the national rebate agreement. Instead,
states are required to cover a minimum of drugs consistent with the applicable benchmark plan in the state coverage for the Medicaid expansion population.
In the future, Congress could enact legislation that further increases Medicaid drug rebates or other costs and charges associated with participating in the Medicaid Drug Rebate program. The issuance of
regulations and coverage expansion by various governmental agencies relating to the Medicaid Drug Rebate program will increase our costs and the complexity of compliance, will be time-consuming, and could have a material adverse effect on our
results of operations.
Federal law requires that any company that participates in the Medicaid Drug Rebate Program also
participate in the Public Health Services 340B drug pricing discount program in order for federal funds to be available for the manufacturers drugs under Medicaid and Medicare Part B. The 340B pricing program requires participating
manufacturers to agree to charge statutorily-defined covered entities no more than the 340B ceiling price for the manufacturers covered outpatient drugs. These 340B covered entities include 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. The 340B ceiling price is calculated using a statutory formula, which is based on the
average manufacturer price and rebate amount for the covered outpatient drug as calculated under the Medicaid rebate program. Changes to the definition of average manufacturer price and the Medicaid rebate amount under PPACA and CMSs issuance
of final regulations implementing those changes also could affect our 340B ceiling price calculations and negatively impact our results of operations once we or any collaborator begin to participate in the 340B program.
Compliance with the regulations associated with the 340B program will increase our costs and the complexity of compliance, will be
time-consuming, and could have a material adverse effect on our results of operations once we or any collaborator begin to participate in the 340B program.
As described above, the Healthcare Reform Act expanded the 340B program to include additional types of covered entities but exempts orphan drugs those designated under section 526 of
the FDCA from the ceiling price requirements for these newly-eligible entities. We believe our product candidate in active development, AZ-002 (
Staccato
alprazolam), could qualify for orphan drug status. HRSA issued a final regulation
to implement the orphan drug exception in July 2013. The final regulation interprets the orphan drug exception narrowly. It exempts orphan drugs from the ceiling price requirements for the newly-eligible entities only when the orphan drug is used
for its orphan indication. The newly-eligible entities are entitled to purchase orphan drugs at the ceiling price when the orphan drug is not used for its orphan indication. The final regulation, which became effective October 1, 2013, is
subject to a pending lawsuit that seeks to block its implementation. The narrow scope of the orphan drug exception in HRSAs final regulation will increase the complexity of compliance, will make compliance more time-consuming, and could
negatively impact our results of operations if we successfully commercialize AZ-002 (
Staccato
alprazolam) and AZ-002 qualifies for orphan drug status.
The Healthcare Reform Act also obligates the Secretary of the HHS to create regulations and processes to improve the integrity of the 340B program and to update the agreement that manufacturers must sign
to participate in the 340B program to obligate a manufacturer to offer the 340B price to covered entities if the manufacturer makes the drug available to any other purchaser at any price and to report to the government the ceiling prices for its
drugs. HRSA is expected to issue a comprehensive proposed regulation in 2014 that will address many aspects of the 340B program. When that regulation is finalized, it 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.
Federal law also requires that a company that participates in the Medicaid Drug Rebate Program report average sales
price, or ASP, information to CMS for certain categories of drugs that are paid under Part B of the Medicare program. We anticipate that ADASUVE will fall into that category. Manufacturers calculate ASP based on a statutorily defined formula and
interpretations of the statute by CMS as to what should or should not be considered in computing ASP. An ASP for each National Drug Code for a product that is subject to the ASP
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reporting requirement must be submitted to CMS no later than 30 days after the end of each calendar quarter. CMS uses these submissions to determine payment rates for drugs under Medicare Part B.
Once we or any collaborator begin to participate in the Medicare program, changes affecting the calculation of ASP could affect the ASP calculations for our products and the resulting Medicare payment rate, and could negatively impact our results of
operations once we begin to participate in the Medicare program.
Pricing and rebate calculations vary among products and
programs. The calculations are complex and are often subject to interpretation by governmental or regulatory agencies and the courts. Once we or any collaborator begin to participate in the Medicaid program, the Medicaid rebate amount will be
computed each quarter based on our submission to the CMS of our current AMP and BP for the quarter. If we become aware that our reporting for prior quarters was incorrect, or has changed as a result of recalculation of the pricing data, we or any
collaborator will be obligated to resubmit the corrected data for a period not to exceed 12 quarters from the quarter in which the data originally were due. Such restatements and recalculations would serve to increase our costs for complying with
the laws and regulations governing the Medicaid rebate program. Once we begin to participate in the Medicaid program, any corrections to our rebate calculations could result in an overage or underage in our rebate liability for past quarters,
depending on the nature of the correction. Price recalculations also may affect the price that we or any collaborator will be required to charge certain safety-net providers under the Public Health Service 340B drug discount program.
Once we or any collaborator begin to participate in government pricing programs, we or any collaborator will be liable for errors
associated with our submission of pricing data. In addition to retroactive rebates and the potential for 340B program refunds, if we or any collaborator are found to have knowingly submitted false average manufacturer price, average sales price, or
best price information to the government, we or any collaborator may be liable for civil monetary penalties in the amount of $100,000 per item of false information. If a manufacturer is found to have made a misrepresentation in the reporting of ASP,
the statute provides for civil monetary penalties of up to $10,000 for each misrepresentation for each day in which the misrepresentation was applied. Failure to submit monthly/quarterly average manufacturer price, average sales price, and best
price data on a timely basis could result in a civil monetary penalty of $10,000 per day for each day the information is late beyond the due date. In the event that CMS were to terminate our rebate agreement after we or any collaborator begin to
participate in the Medicaid program, no federal payments would be available under Medicaid or Medicare Part B for our covered outpatient drugs.
In September 2010, CMS and the Office of the Inspector General indicated that they intend to pursue more aggressively companies who fail 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 or any
collaborators submissions, once we or any collaborator begin to submit pricing data to CMS, 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, or FSS, pricing program. To participate, we or any collaborator will be required to enter into an FSS contract with the VA, under
which we must make our innovator covered drugs, such as ADASUVE or other product candidates, available to the Big Four federal agencies the VA, the Department of Defense, or DoD, the Public Health Service, and the
Coast Guard at pricing that is capped pursuant to a statutory federal ceiling price, or 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 wholesaler price known
as the non-federal average manufacturer price, or 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. Pursuant to the
VHCA, knowing provision of false information in connection with a Non-FAMP filing can subject a manufacturer to penalties of $100,000 for each item of false information.
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
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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 contractors commercial most favored customer pricing. We cannot anticipate the pricing structure we will enter into with respect to our products. The FSS contract price may have a
material adverse effect on future revenues from sales of ADASUVE.
Once we or any collaborator enter into an FSS contract, if
we or any collaborator overcharge the government in connection with the FSS contract, whether due to a misstated FCP or otherwise, we or any collaborator will be required to refund the difference to the government. Failure to make necessary
disclosures and/or to identify contract overcharges could result in allegations under the Federal False Claims Act and other laws and regulations. Unexpected refunds to the government, and responding to a government investigation or enforcement
action, would be expensive and time-consuming, and could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
If we or any collaborators fail to gain market acceptance among physicians, patients, third-party payors and the medical community, we will not become profitable.
The
Staccato
system is a fundamentally new method of drug delivery. ADASUVE or any future product based on our
Staccato
system may not gain market acceptance among physicians, patients, third-party payors and the medical community. If these products do not achieve an adequate level of acceptance, we will not meet our revenue guidance nor will we generate
sufficient product or royalty revenues to become profitable. The degree of market acceptance of ADASUVE or any of our product candidates, if approved for commercial sale, will depend on a number of factors, including:
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the ability of our collaborators sales forces to convince potential purchasers of ADASUVEs advantages over other treatments;
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demonstration of acceptable quality, safety and efficacy in clinical trials and meeting applicable regulatory standards for approval;
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the existence, prevalence and severity of any side effects;
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potential or perceived advantages or disadvantages compared to alternative treatments;
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therapeutic or other improvements of ADASUVE over existing or future drugs used to treat the same or similar conditions;
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perceptions about the relationship or similarity between ADASUVE or our product candidates and the parent drug compound upon which ADASUVE or our
product candidate is based;
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the timing of market entry relative to competitive treatments;
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the ability to produce ADASUVE or any future products in commercial quantities at an acceptable cost, or at all;
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the ability to offer ADASUVE or any future products for sale at competitive prices;
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relative convenience, product dependability and ease of administration;
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the restrictions imposed on ADASUVE by the REMS program and labeling requirements;
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the strength of marketing and distribution support;
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acceptance by patients, the medical community or third-party payors;
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the sufficiency of coverage and reimbursement of ADASUVE or our product candidates by governmental and other third-party payors; and
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the product labeling, including the package insert, and the marketing restrictions required by the FDA or regulatory authorities in other countries.
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We are subject to significant ongoing regulatory obligations and oversight, which may
result in significant additional expense and limit our and our collaborators ability to commercialize our products.
We and our collaborators are subject to significant ongoing regulatory obligations, such as safety reporting requirements, periodic and annual reporting requirements, and regulatory oversight of the
promotion and marketing of our products. In addition, the manufacture, labeling, packaging, distribution, import, export, adverse event reporting, storage, advertising, promotion and recordkeeping for ADASUVE and any of our product candidates that
may be approved by the FDA or foreign regulatory authorities will be subject to extensive and ongoing regulatory requirements. Teva has agreed to take responsibility at its expense to complete several post-marketing requirements that were a
condition to FDA approval of ADASUVE, including the responsibility for conducting a 10,000 patient observational clinical trial designed to gather patient safety data based on the real-world use of ADASUVE, as well as a clinical program addressing
the safety and efficacy of ADASUVE in agitated adolescent patients. As a condition of grant of EU marketing authorization for ADASUVE by the EC, we are responsible for the conduct and funding of post-authorization studies, including (i) a
benzodiazepine interaction study, which has been completed, (ii) a controlled study to determine ADASUVEs effect on cardiac rhythms, or a thorough QTc study, with two doses of ADASUVE, which has been completed, (iii) a clinical
program designed to evaluate the safety and efficacy of ADASUVE in agitated adolescent patients, (iv) an observational clinical trial, and (v) a drug utilization clinical trial.
The FDA and foreign regulatory authorities may also impose significant restrictions on the indicated uses or marketing of our future
products, or impose requirements for burdensome post-approval study commitments. For example, ADASUVEs U.S. labeling contains a boxed warning regarding the risks of bronchospasm caused by the product and the increased risk of death
for elderly patients with dementia-related psychosis. Boxed warnings are used to highlight warning information that is especially important to the prescriber. Products with boxed warnings are subject to more restrictive advertising and promotion
regulations than products without such warnings. The terms of any product approval, including labeling, may be more restrictive than we desire and could affect the commercial potential of the product. If we become aware of previously unknown
problems with any of our products in the United States or overseas or at our contract manufacturers facilities, a regulatory agency may impose labeling changes or restrictions on our products, our collaborators, our manufacturers or on us. In
such an instance, we could experience a significant drop in the sales of the affected products, our product revenues and reputation in the marketplace may suffer, and we could become the target of lawsuits.
The FDA and other governmental authorities, including foreign regulatory authorities, also actively enforce regulations prohibiting
off-label promotion, and governments have levied large civil and criminal fines against companies for alleged improper promotion. Governments have also required companies to enter into corporate integrity agreements and/or non-prosecution agreements
that impose significant reporting and other burdens on the affected companies.
We and our commercial collaborators are also
subject to regulation by regional, national, state and local agencies, including the DEA, the Department of Justice, the Federal Trade Commission, the Office of Inspector General of the U.S. Department of Health and Human Services and other
regulatory bodies, as well as governmental authorities in those foreign countries in which we may in the future commercialize our products. The FDCA, the Public Health Service Act, the Social Security Act, and other federal and state statutes and
regulations govern to varying degrees the research, development, manufacturing and commercial activities relating to prescription pharmaceutical products, including preclinical testing, approval, production, labeling, sale, distribution, import,
export, post-market surveillance, advertising, dissemination of information, promotion, marketing, and pricing to government purchasers and government healthcare programs. Any manufacturing, licensing, or commercialization collaborators we have or
may in the future have, including Teva and Ferrer, will be subject to many of the same requirements.
The Federal Anti-Kickback
Statute prohibits, among other things, knowingly and willfully offering, paying, soliciting, or receiving remuneration to induce or in return for purchasing, leasing, ordering or arranging for the purchase, lease or order of any healthcare item or
service reimbursable under Medicare, Medicaid or other federally financed healthcare programs. This statute has been interpreted to apply to arrangements between pharmaceutical companies on one hand and prescribers, purchasers and formulary managers
on the other.
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Further, the Healthcare Reform Act, among other things, amends the intent requirement of the Federal Anti-Kickback Statute. A person or entity no longer needs to have actual knowledge of this
statute or specific intent to violate it. In addition, the Healthcare Reform Act provides that the government may assert that a claim including items or services resulting from a violation of the Federal Anti-Kickback Statute constitutes a false or
fraudulent claim for purposes of the false claims statutes. Although there are a number of statutory exemptions and regulatory safe harbors protecting certain common manufacturer business arrangements and activities from prosecution, the exemptions
and safe harbors are drawn narrowly, and practices that involve remuneration may be subject to scrutiny if they do not qualify for an exemption or safe harbor. We intend to comply with the exemptions and safe harbors whenever possible, but our
practices or those of our commercial collaborators may not in all cases meet all of the criteria for safe harbor protection from anti-kickback liability and may be subject to scrutiny.
The Federal False Claims Act prohibits any person from knowingly presenting, or causing to be presented, a false claim for payment to the
federal government, or knowingly making, or causing to be made, a false statement to get a false claim paid. Many pharmaceutical and other healthcare companies have been investigated and have reached substantial financial settlements with the
federal government under these laws for a variety of alleged marketing activities, including providing free product to customers with the expectation that the customers would bill federal programs for the product; providing consulting fees, grants,
free travel, and other benefits to physicians to induce them to prescribe the companys products; and inflating prices reported to private price publication services, which are used to set drug payment rates under government healthcare
programs. Companies have been prosecuted for causing false claims to be submitted because of the marketing of their products for unapproved uses. Pharmaceutical and other healthcare companies have also been prosecuted on other legal theories of
Medicare and Medicaid fraud.
The majority of U.S. states also have statutes or regulations similar to the Federal
Anti-Kickback Statute and Federal False Claims Act, which apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payor. Several states now 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 of these states also prohibit certain marketing related
activities including the provision of gifts, meals, or other items to certain health care providers. In addition, California, Connecticut, Nevada and Massachusetts require pharmaceutical companies to implement compliance programs or marketing codes.
Compliance with various federal and state laws is difficult and time consuming, and companies that violate them may face
substantial penalties. The potential sanctions include civil monetary penalties, exclusion of a companys products from reimbursement under government programs, criminal fines and imprisonment. Because of the breadth of these laws and the lack
of extensive legal guidance in the form of regulations or court decisions, it is possible that some of our business activities or those of our commercial collaborators could be subject to challenge under one or more of these laws. Such a challenge
could have a material adverse effect on our business and financial condition and growth prospects.
We or our commercial
collaborators could become subject to government investigations and related subpoenas. Such subpoenas are often associated with previously filed qui tam actions, or lawsuits filed under seal under the Federal False Claims Act. Qui tam actions are
brought by private plaintiffs suing on behalf of the federal government for alleged Federal False Claims Act violations. The time and expense associated with responding to such subpoenas, and any related qui tam or other actions, may be
extensive, and we cannot predict the results of our review of the responsive documents and underlying facts or the results of such actions. Responding to government investigations, defending any claims raised, and any resulting fines,
restitution, damages and penalties, settlement payments or administrative actions, as well as any related actions brought by stockholders or other third parties, could have a material impact on our reputation, business and financial condition and
divert the attention of our management from operating our business.
The number and complexity of both federal and state laws
continues to increase, and additional governmental resources are being added to enforce these laws and to prosecute companies and individuals who are believed to be violating them. In particular, the Healthcare Reform Act includes a number of
provisions aimed at strengthening the governments ability to pursue anti-kickback and false claims cases against
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pharmaceutical manufacturers and other healthcare entities, including substantially increased funding for healthcare fraud enforcement activities, enhanced investigative powers, amendments to the
False Claims Act that make it easier for the government and whistleblowers to pursue cases for alleged kickback and false claim violations and, beginning in March 2014 for payments made on or after August 1, 2013, public reporting of payments
by pharmaceutical manufacturers to physicians and teaching hospitals nationwide. While it is too early to predict what effect these changes will have on our business, we anticipate that government scrutiny of pharmaceutical sales and marketing
practices will continue for the foreseeable future and subject us and our commercial collaborators to the risk of government investigations and enforcement actions. Responding to a government investigation or enforcement action would be expensive
and time-consuming, and could have a material adverse effect on our business and financial condition and growth prospects.
Similar restrictions are imposed on the promotion and marketing of medicinal products in the EU and other countries. The applicable laws
at EU level and in the individual EU Member States require promotional materials and advertising concerning medicinal products to comply with the products Summary of Product Characteristics, or SmPC, as approved by the competent authorities.
The SmPC is the document that provides information to physicians concerning the safe and effective use of a medicinal product. Promotion of a medicinal product which does not comply with the SmPC is considered to constitute off-label promotion. The
off-label promotion of medicinal products is prohibited in the EU. The applicable laws at both EU level and in the individual EU Member States also prohibit the direct-to-consumer advertising of prescription-only medicinal products. Violations of
the rules governing the promotion of medicinal products in the EU could be penalized by administrative measures, fines and imprisonment.
Interactions between pharmaceutical companies and physicians are also governed by strict laws, regulations, industry self-regulation codes of conduct and physicians codes of professional conduct in
the individual EU Member States. The provision of any inducement to physicians to prescribe, recommend, endorse, order, purchase, supply, use or administer a medicinal product is prohibited. A number of EU Member States have introduced additional
rules requiring pharmaceutical companies to publically disclose their interactions with physicians and to obtain approval from employers, professional organizations and/or competent authorities before entering into agreements with physicians.
Violations of these rules could lead to the imposition of fines or imprisonment.
Laws, including those governing promotion,
marketing and anti-kickback provisions, industry regulations and professional codes of conduct are often strictly enforced. Increasing regulatory scrutiny of the promotional activities of pharmaceutical companies has been observed in a number of EU
Member States. The Bribery Act in the United Kingdom entered into force on 1 July 2011. This Act applies to any company incorporated in or carrying on business in the UK, irrespective of where in the world the alleged bribery
activity occurs. Even though we strive for complete and continuous adherence to all laws and rules during our promotion and marketing activities, this Act could have implications for our interactions or those of Ferrer with physicians both in and
outside the UK.
Payments made to physicians in certain EU Member States must be publically disclosed and this obligation will
expand to other EU Member States. Moreover, agreements with physicians must often be the subject of prior notification and approval by the physicians employer, his/her competent professional organization, and/or the competent authorities of
the individual EU Member States. These requirements are provided in the national laws, industry codes, or professional codes of conduct, applicable in the EU Member States. Failure to comply with these requirements could result in reputational risk,
public reprimands, administrative penalties, fines or imprisonment. Even in those countries where we are not directly responsible for the promotion and marketing of our products, inappropriate activity by our international distribution collaborators
can have implications for us.
If we or any collaborators fail to comply with applicable federal, state, local, or foreign
regulatory requirements, we or they could be subject to a range of regulatory actions that could affect our or any collaborators ability to commercialize our products and could harm or prevent sales of the affected products, or could
substantially increase the costs and expenses of commercializing and marketing our products. Any threatened or actual government enforcement action could also generate adverse publicity and require that we devote substantial resources that could
otherwise be used in other aspects of our business.
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We could be adversely affected by violations of applicable anti-corruption laws such
as the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act of 2010.
Anti-corruption laws, such as the U.S.
Foreign Corrupt Practices Act and the U.K. Bribery Act of 2010, generally prohibit directly or indirectly giving, offering, or promising anything of value to improperly induce the recipient to act, or refrain from acting, in a manner that would
confer a commercial advantage. The anti-bribery provisions of the U.S. Foreign Corrupt Practices Act generally prohibit directly or indirectly giving, offering or promising an inducement to a public official (broadly interpreted) to corruptly
influence the officials actions in order to obtain a commercial advantage. The U.K. Bribery Act of 2010 prohibits both domestic and international bribery, as well as bribery in both the private and public sectors. In addition, an
organization that fails to prevent bribery by anyone associated with the organization may be charged under the U.K. Bribery Act unless the organization can establish the defense of having implemented adequate procedures to
prevent bribery. In recent years, the U.S. Government has brought enforcement actions that resulted in significant monetary penalties against several multinational healthcare companies for violations of the U.S. Foreign Corrupt Practices Act
stemming from illegal payments made to non-U.S. healthcare professionals. We plan to adopt and implement policies and procedures to ensure that those involved in the marketing, sale, and distribution of our products are both aware of these legal
requirements and committed to complying therewith. However, we cannot assure that these policies and procedures will protect us from potentially illegal acts committed by individual employees or agents. If we were found to be liable for
anti-corruption law violations, we could be subject to criminal or civil penalties or other consequences that could have a material adverse effect on our business and financial condition.
If we do not establish additional strategic collaborations, we will have to undertake additional development and future
commercialization efforts on our own, which would be costly and delay our ability to commercialize any future products.
An element of our business strategy is our intent to selectively collaborate with pharmaceutical, biotechnology and other companies to
obtain assistance for the development and commercialization of ADASUVE and our product candidates. In October 2011, we entered into the Ferrer Agreement with Ferrer for the commercialization of ADASUVE in the Ferrer Territories. In May 2013, we
entered into a commercial collaboration with Teva, granting Teva an exclusive license to develop and commercialize ADASUVE in the United States. We may never enter into additional strategic collaborations with third parties to develop and
commercialize ADASUVE or our product candidates. Other than Teva and Ferrer, we do not currently have any strategic collaborations for ADASUVE or any of our product candidates.
We face significant competition in seeking appropriate strategic collaborators, and these strategic collaborations can be intricate and time consuming to negotiate and document. We may not be able to
negotiate additional strategic collaborations on acceptable terms, or at all. We are unable to predict when, if ever, we will enter into any additional strategic collaborations because of the numerous risks and uncertainties associated with
establishing strategic collaborations. We are currently seeking collaborations to commercialize ADASUVE outside of the United States and the Ferrer Territories. If we are unable to negotiate additional strategic collaborations for ADASUVE outside of
the United States and the Ferrer Territories, we may be unable to maximize ADASUVEs commercial potential.
If we are
unable to negotiate additional collaborations for ADASUVE or our product candidates we may be forced to curtail the development of a particular candidate, reduce or delay its development program, or one or more of our other development programs,
delay its commercialization, or undertake development or commercialization activities at our own expense. In addition, we will bear all the risk related to the development of a product candidate. If we elect to increase our expenditures to fund
development or commercialization activities on our own, we will need to obtain additional capital, which may not be available to us on acceptable terms, or at all. If we do not have sufficient funds, we will not be able to bring ADASUVE or our
product candidates to market successfully and generate revenue or profit.
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ADASUVE and any of our product candidates approved for marketing remain subject to
ongoing regulatory review in the United States, the EU or in other countries. If we or any collaborators fail to comply with the regulations, we could lose these approvals, and the sale of any future products could be suspended. If approval is
denied or limited in a country, or if a country imposes post-marketing requirements, that decision could negatively affect our ability to market our product in such countries.
Even with regulatory approval to market a particular product candidate, the FDA, the EC or another foreign regulatory authority could
condition approval on conducting additional costly post-approval studies or trials or could limit the scope of our approved labeling or could impose burdensome post-approval obligations, such as those required in the United States and in the
post-marketing obligations required as part of a marketing authorization in the EU. Moreover, the product may later cause adverse effects that limit or prevent its widespread use, force us to withdraw it from the market, cause the FDA, the EC or
another foreign regulatory authority to impose additional obligations or restriction on marketing, or impede or delay our ability to obtain regulatory approvals in additional countries. In addition, we will continue to be subject to FDA, EMA, EC and
other foreign regulatory authority regulations, as well as periodic inspections to ensure adherence to applicable regulations. After receiving marketing approval, the FDA, the EC and other foreign regulatory authorities could impose extensive
regulatory requirements on the manufacturing, labeling, packaging, adverse event reporting, storage, advertising, promotion, distribution, and record keeping related to the product. The approval of the ADASUVE NDA requires us to implement,
administer and assess at regular intervals a REMS program that, among other things, limits the use of ADASUVE to healthcare facilities enrolled in the ADASUVE REMS program.
As a condition to FDA approval of ADASUVE, Teva also has several post-approval commitments and requirements, including a 10,000 patient observational clinical trial designed to gather patient safety data
based on the real-world use of ADASUVE, as well as a clinical program addressing the safety and efficacy of ADASUVE in agitated adolescent patients.
As a condition to marketing authorization for ADASUVE granted by the EC in the EU, we are responsible for the conduct and funding of post-marketing studies, including (i) a benzodiazepine interaction
study, which has been completed, (ii) a controlled study to determine ADASUVEs effect on cardiac rhythms, or a thorough QTc study, with two doses of ADASUVE, which has been completed, (iii) a clinical program designed to evaluate the
safety and efficacy of ADASUVE in agitated adolescent patients, (iv) an observational clinical study, and (v) a drug utilization study. Results of the benzodiazepine interaction study and the thorough QTc study have been submitted to the
EMA.
The costs associated with development and approval of study protocols and the completion of studies and clinical
trials are significant. There are risks involved with relying on our own capabilities to perform the tasks required by the post-market studies for ADASUVE, as well as with entering into arrangements with third parties to perform these
services. If Teva enters into an arrangement with a third party or parties to perform the tasks required for the ADASUVE post-market studies and trials, the expense of such outsourcing could be significant, decreasing the profitability of
ADASUVE. Additionally, any third party with whom we may collaborate may not fulfill its obligations or carry out activities sufficiently to satisfy FDA, EC, EMA or other U.S. or foreign regulatory authority standards, which could result in increased
expenses needed to remediate any deficiencies or could even result in an FDA, EC, EMA or other U.S. or foreign regulatory authority enforcement action, including the imposition of civil money penalties and the withdrawal of approval of the product
in the U.S. Finally, the data derived from any post-market study or trial could result in additional restrictions on the commercialization of ADASUVE through changes to the approved ADASUVE label, a more burdensome REMS program, the imposition of
additional post-market studies or trials, or could even lead to the withdrawal of the approval of the product.
If we or any
collaborators fail to comply with the regulatory requirements of the FDA, the EMA, the EC or other applicable U.S. and foreign regulatory authorities, or previously unknown problems with any future products, suppliers or manufacturing processes are
discovered, we or our collaborators could be subject to administrative or judicially imposed sanctions, including:
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restrictions on the products, suppliers or manufacturing processes;
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warning letters or untitled letters;
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injunctions, consent decrees, or the imposition of civil or criminal penalties;
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product seizures, detentions or import or export bans;
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voluntary or mandatory product recalls and publicity requirements;
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variation, suspension or withdrawal of regulatory approvals;
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required variations of the clinical trial protocol
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suspension or termination of any clinical trials of the products;
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total or partial suspension of production;
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refusal to approve pending applications for marketing approval of new drugs or supplements to approved applications; and
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denial of permission to file an application or supplement in a jurisdiction.
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If we or our collaborators were subject to administrative or judicially-imposed sanctions arising out of enforcement of the FDA, EMA, EC
or other applicable U.S. and foreign laws, it could impair our ability to manufacture and the ability of our collaborators to successfully market ADASUVE, even if such an enforcement action does not relate specifically to ADASUVE. Such enforcement
could have a significant impact on our financial condition and results.
Problems with the third parties that
manufacture the API in ADASUVE or our product candidates may delay our clinical trials or subject us to liability.
We
do not currently own or operate manufacturing facilities for clinical or commercial production of the API used in ADASUVE or any of our product candidates. We have no experience in API manufacturing, and we lack the resources and the capability to
manufacture any of the APIs used in ADASUVE and our product candidates, on either a clinical or commercial scale. As a result, we rely on third parties to supply the API used in ADASUVE and each of our product candidates. We expect to continue to
depend on third parties to supply the API for ADASUVE and our current and future product candidates and to supply the API for ADASUVE in commercial quantities.
An API manufacturer must meet high precision and quality standards for that API to meet regulatory specifications and comply with regulatory requirements. A contract manufacturer is subject to ongoing
periodic unannounced inspection by the FDA and corresponding state and foreign authorities to ensure strict compliance with cGMP and other applicable government regulations and corresponding foreign standards. Additionally, a contract manufacturer
must pass a pre-approval inspection by the FDA and corresponding foreign authorities to ensure strict compliance with cGMP prior to the FDAs or corresponding foreign authorities approval of any product candidate for marketing. A contract
manufacturers failure to conform to cGMP could result in a refusal by the FDA or a corresponding foreign authority to approve or a delay in their approval of a product candidate for marketing. We are ultimately responsible for confirming that
the APIs used in ADASUVE and our product candidates are manufactured in accordance with applicable regulations.
Our
third-party suppliers may not carry out their contractual obligations or meet our deadlines. In addition, the API they supply to us may not meet our specifications and quality policies and procedures or they may not be able to supply the API in
commercial quantities. If we need to find alternative suppliers of the API used in ADASUVE or any of our product candidates, we may not be able to contract for such supplies on acceptable terms, if at all. Any such failure to supply or delay caused
by such contract manufacturers would have an adverse effect on our ability to continue clinical development of our product candidates or commercialize ADASUVE.
If our third-party drug suppliers fail to achieve and maintain high manufacturing standards in compliance with cGMP regulations, we could be subject to certain product liability claims in the event such
failure to comply resulted in defective products that caused injury or harm.
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Unless our preclinical studies demonstrate an acceptable safety profile of our product
candidates, we will not be able to pursue clinical development or commercialize our product candidates.
We must
satisfy the FDA and other regulatory authorities abroad, through extensive preclinical studies, that our product candidates have an acceptable safety profile. Our
Staccato
system creates a condensation aerosol from drug compounds, and there
currently are no approved products that use a similar method of drug delivery other than ADASUVE. Companies developing other inhalation products have not defined or successfully completed the types of preclinical studies we believe will be required
for submission to regulatory authorities as we seek approval to conduct our clinical trials. We may not have conducted or may not conduct in the future the types of preclinical testing ultimately required by regulatory authorities, or future
preclinical tests may indicate that our product candidates are not safe for use in humans. Preclinical testing is expensive, can take many years and has an uncertain outcome. In addition, success in initial preclinical testing does not ensure that
later preclinical testing will be successful.
We may experience numerous unforeseen events during, or as a result of, the
preclinical testing process, which could delay or prevent our ability to develop or commercialize our product candidates, including:
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our preclinical testing may produce inconclusive or negative safety results, which may require us to conduct additional preclinical testing or to
abandon product candidates that we believed to be promising;
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our product candidates may have unfavorable pharmacology, toxicology or carcinogenicity; and
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our product candidates may cause undesirable side effects.
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Any such events would increase our costs and could delay or prevent our ability to conduct clinical testing and commercialize our product candidates, which could adversely impact our business, financial
condition and results of operations.
Failure or delay in commencing or completing clinical trials for our product
candidates could harm our business.
Other than for ADASUVE, we have not completed all the clinical trials necessary to
support an application with the FDA or other regulatory authorities abroad for approval to market any of our product candidates other than for ADASUVE in the United States and the European Union. Future clinical trials may be delayed or terminated
as a result of many factors, including:
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insufficient financial resources to fund such trials;
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delays or failure in reaching agreement on acceptable clinical trial contracts or clinical trial protocols with prospective sites;
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regulators, Ethics Committees or IRBs may not authorize us to commence a clinical trial;
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regulators, Ethics Committees or IRBs may suspend or terminate clinical research for various reasons, including noncompliance with regulatory
requirements or concerns about patient safety;
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we may suspend or terminate our clinical trials if we believe that they expose the participating patients to unacceptable health risks;
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we may experience slower than expected patient enrollment or lack of a sufficient number of patients who meet the enrollment criteria for our clinical
trials;
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patients may not complete clinical trials due to safety issues, side effects, dissatisfaction with the product candidate, or other reasons;
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we may have difficulty in maintaining contact with patients after treatment, preventing us from collecting the data required by our study protocol;
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product candidates may demonstrate a lack of efficacy during clinical trials;
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we may experience governmental or regulatory delays, failure to obtain regulatory approval or changes in regulatory requirements, policy and
guidelines; and
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we may experience delays in our ability to manufacture clinical trial materials in a timely manner as a result of ongoing process and design
enhancements to our
Staccato
system.
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Any delay in commencing or completing clinical trials for our product candidates could delay
commercialization of our product candidates and harm our business, financial condition and results of operations. It is possible that none of our product candidates will successfully complete clinical trials or receive regulatory approval, which
would severely harm our business, financial condition and results of operations.
If our product candidates do not meet
safety and efficacy endpoints in clinical trials, they will not receive regulatory approval, and we will be unable to market them.
The clinical development and regulatory approval process is extremely expensive and takes many years. Prior clinical trial program designs and results are not necessarily predictive of future clinical
trial designs or results. Initial results may not be confirmed upon full analysis of the detailed results of a trial. Product candidates in later stage clinical trials may fail to show the desired safety and efficacy despite having progressed
through initial clinical trials with acceptable endpoints. Whether an approval will be granted, and the timing of such approval cannot be accurately predicted. If we fail to obtain regulatory approval for ADASUVE in markets outside of the United
States and the Ferrer Territories or for our other product candidates in any markets where we seek regulatory approval, we will be unable to market and sell them in those locations and therefore we may never be profitable.
As part of the regulatory process, we must conduct clinical trials for each product candidate to demonstrate safety and efficacy to the
satisfaction of the FDA, the EMA, the EC and other regulatory authorities abroad. The number and design of clinical trials that will be required varies depending on the product candidate, the condition being evaluated, the trial results and
regulations applicable to any particular product candidate. In June 2008, we announced that our Phase 2a proof-of-concept clinical trial of AZ-002 (
Staccato
alprazolam) did not meet either of its two primary endpoints. In September 2009, we
announced that our Phase 2b clinical trial of AZ-104 (
Staccato
loxapine, low-dose) for the treatment of migraine did not meet its primary endpoint.
If our product candidates fail to show a clinically significant benefit compared to placebo, they will not be approved for marketing.
The design of our clinical trials is based on many assumptions about the expected effect of our product candidates, and if those
assumptions prove incorrect, the clinical trials may not produce statistically significant results. For example, in 2008 we released the preliminary results from our Phase 2a clinical trial with AZ-002 in patients with panic disorder, a separate
indication from our current AZ-002 indication of ARS. The study did not meet its two primary endpoints, which were the effect of AZ-002 on the incidence of a doxapram-induced panic attack and the effect of AZ-002 on the duration of a
doxapram-induced panic attack, both as compared with placebo. Our
Staccato
system is not similar to other approved drug delivery methods, and there is no precedent for the application of detailed regulatory requirements to our product
candidates. We cannot assure you that the design of, or data collected from, the clinical trials of our product candidates will be sufficient to support the FDA, the EC and other foreign regulatory approvals.
Regulatory authorities may not approve our product candidates even if they meet safety and efficacy endpoints in clinical trials.
The FDA, the EC and other foreign regulatory agencies can delay, limit or deny marketing approval for many reasons,
including:
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a product candidate may not be considered to have a favorable risk-benefit ratio;
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the manufacturing processes or facilities we have selected may not meet the applicable requirements; and
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changes in their approval policies or adoption of new regulations may require additional work on our part.
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Part of the regulatory approval process includes compliance inspections of manufacturing facilities to ensure adherence to applicable
regulations and guidelines. The regulatory agency may delay, limit or deny marketing approval of our other product candidates as a result of such inspections. Any delay in, or failure to receive or maintain, approval for any of our product
candidates could prevent us from ever generating meaningful revenues or achieving profitability.
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Our product candidates may not be approved even if they achieve their endpoints in clinical
trials. Regulatory agencies, including the FDA, the EMA, the EC or their advisors may disagree with our trial design and our interpretations of data from preclinical studies and clinical trials. Regulatory agencies may change requirements for
approval even after a clinical trial design has been approved. For example, ADASUVE and our other product candidates combine drug and device components in a manner that the FDA considers to meet the definition of a combination product under FDA
regulations. The FDA exercises significant discretion over the regulation of combination products, including the discretion to require separate marketing applications for the drug and device components in a combination product. ADASUVE and our
product candidates are being regulated as drug products under the NDA process administered by the FDA. The FDA could in the future require additional regulation of ADASUVE or our product candidates under the medical device provisions of the FDCA.
Our systems are designed to comply with the QSR, which sets forth the FDAs cGMP requirements for medical devices, and other applicable government regulations and corresponding foreign standards. If we fail to comply with these regulations, it
could have a material adverse effect on our business and financial condition.
Regulatory agencies also may approve a product
candidate for fewer or more limited indications than requested or may grant approval subject to the performance of post-marketing studies, such as the FDAs requirement that we perform a Phase 4 observational study and a study in adolescent
patients for ADASUVE. Similarly, as a condition to EC approval of ADASUVE, we are responsible for the conduct and funding of post-authorization studies, including (i) a benzodiazepine interaction study, which has been completed, (ii) a
controlled study to determine ADASUVEs effect on cardiac rhythms, or a thorough QTc study, with two doses of ADASUVE, which has been completed, (iii) a clinical program designed to evaluate the safety and efficacy of ADASUVE in agitated
adolescent patients, (iv) an observational clinical study, and (v) a drug utilization study. In addition, regulatory agencies may not approve the labeling claims that are necessary or desirable for the successful commercialization of our
product candidates.
We rely on third parties to conduct our preclinical studies and our clinical trials. If these third
parties do not perform as contractually required or expected, we may not be able to obtain regulatory approval for our product candidates, or we may be delayed in doing so.
We rely on third parties, such as contract research organizations, medical institutions, academic institutions, clinical investigators and
contract laboratories, to conduct our preclinical studies and clinical trials. We are responsible for confirming that our preclinical studies are conducted in accordance with applicable regulations and that each of our clinical trials is conducted
in accordance with its general investigational plan and protocol. The FDA requires us to comply with regulations and standards, commonly referred to as good laboratory practices, or GLP, for conducting and recording the results of our preclinical
studies and with good clinical practices, or GCP, for conducting, monitoring, recording and reporting the results of clinical trials, to assure that data and reported results are accurate and that the clinical trial participants are adequately
protected. Our reliance on third parties does not relieve us of these responsibilities. If the third parties conducting our clinical trials do not perform their contractual duties or obligations, do not meet expected deadlines, fail to comply with
the FDAs GLP or GCP regulations and standards, do not adhere to our clinical trial protocols or otherwise fail to generate reliable clinical data, we may need to enter into new arrangements with alternative third parties and our clinical
trials may be extended, delayed or terminated or may need to be repeated, and we may not be able to obtain regulatory approval for or commercialize the product candidate being tested in such trials.
If we experience problems with the manufacturers of components of ADASUVE or our product candidates, our ability to supply ADASUVE
and our other product candidates will be impaired, our sales may be lower than expected and our development programs may be delayed and we may be subject to liability.
We outsource the manufacturing of the components of our
Staccato
system, including the printed circuit boards, the plastic airways, and the chemical heat packages to be used in our commercial
single dose device. We have no experience in the manufacturing of components, other than our chemical heat packages, and we currently lack the resources and the capability to manufacture them, on either a clinical or commercial scale. As a result,
we rely on third parties to supply these components. We expect to continue to depend on third parties to supply these components for ADASUVE and our current product candidates and any devices based on the
Staccato
system we develop in the
foreseeable future.
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The third-party suppliers of the components of our
Staccato
system must meet high
precision and quality standards for our finished devices to comply with regulatory requirements. A contract manufacturer is subject to ongoing periodic unannounced inspection by the FDA and corresponding state and foreign authorities to ensure that
our finished devices remain in strict compliance with the QSR, and other applicable government regulations and corresponding foreign standards. We are ultimately responsible for confirming that the components used in the
Staccato
system are
manufactured in accordance with specifications, standards and procedures necessary to ensure that our finished devices comply with the QSR or other applicable regulations.
Our third party suppliers may not comply with their contractual obligations or meet our deadlines, or the components they supply to us may not meet our specifications and quality policies and procedures.
If we need to find alternative suppliers of the components used in the
Staccato
system, we may not be able to contract for such components on acceptable terms, if at all. Any such failure to supply or delay caused by such contract
manufacturers would have an adverse effect on our ability to manufacture commercial quantities of ADASUVE and on our ability to continue clinical development of our product candidates or commercialize ADASUVE.
In addition, the heat packages used in the single dose version of our
Staccato
system are manufactured using certain energetic, or
highly combustible, materials that are used to generate the rapid heating necessary for vaporizing the drug compound while avoiding degradation. Manufacture of products containing energetic materials is regulated by the U.S. government. We have
entered into a manufacture agreement with Autoliv for the manufacture of the heat packages in the commercial design of our single dose version of our
Staccato
system. If Autoliv fails to manufacture the heat packages to the necessary
specifications, or does not carry out its contractual obligations to supply our heat packages to us, or if the FDA requires different manufacturing or quality standards than those set forth in our manufacture agreement, our clinical trials or
commercialization efforts may be delayed, suspended or terminated while we seek additional suitable manufacturers of our heat packages, which may prevent us from commercializing ADASUVE or our product candidates that utilize the single dose version
of the
Staccato
system. In October 2013, Autoliv notified us of their intent to terminate, effective October 2016, the Manufacture Agreement. Prior to October 2016, Autoliv and we remain fully obligated to perform pursuant to the terms of
both the Manufacture Agreement and the Second Note. However, Autoliv may not continue to perform its obligations in the same manner during the termination period. If we are unable to secure an adequate replacement manufacturer for sufficient
quantities of the chemical heat packages in ADASUVE or if the costs for such manufacturer to produce the chemical heat packages are higher than the cost from Autoliv, it will significantly impact our ability to produce our commercial devices or to
produce them at quantities or at a cost to allow us to become profitable.
Product candidates that we may develop may
require expensive carcinogenicity tests.
We combine small molecule drugs with our
Staccato
system to create
proprietary product candidates. Some of these drugs may not have previously undergone carcinogenicity testing that is now generally required for marketing approval. We may be required to perform carcinogenicity testing with product candidates
incorporating drugs that have not undergone carcinogenicity testing or may be required to do additional carcinogenicity testing for drugs that have undergone such testing. Any carcinogenicity testing we are required to complete will increase the
costs to develop a particular product candidate and may delay or halt the development of such product candidate.
If
some or all of our patents expire, are invalidated or are unenforceable, or if some or all of our patent applications do not yield issued patents or yield patents with narrow claims, competitors may develop competing products using our or similar
intellectual property and our business will suffer.
Our success will depend in part on our ability to obtain and
maintain patent and trade secret protection for our technologies, ADASUVE and our product candidates both in the United States and other countries. We do not know whether any patents will issue from any of our pending or future patent applications.
In addition, a third party may successfully circumvent our patents. Our rights under any issued patents may not provide us with sufficient protection against competitive products or otherwise cover commercially valuable products or processes.
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The degree of protection for our proprietary technologies, ADASUVE and our product
candidates is uncertain because legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep our competitive advantage. For example:
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we might not have been the first to make the inventions covered by each of our pending patent applications and issued patents;
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we might not have been the first to file patent applications for these inventions;
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others may independently develop similar or alternative technologies or duplicate any of our technologies;
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the claims of our issued patents may be narrower than as filed and not sufficiently broad to prevent third parties from circumventing them;
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it is possible that none of our pending patent applications will result in issued patents;
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we may not develop additional proprietary technologies or drug candidates that are patentable;
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our patent applications or patents may be subject to interference, opposition or similar administrative proceedings;
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any patents issued to us or our potential strategic collaborators may not provide a basis for commercially viable products or may be challenged by
third parties in the course of litigation or administrative proceedings such as reexaminations or interferences; and
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the patents of others may have an adverse effect on our ability to do business.
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On September 16, 2011, the Leahy-Smith America Invents Act, or the Leahy-Smith Act, was signed into law. The Leahy-Smith Act includes
a number of significant changes to U.S. patent law. These include provisions that affect the way patent applications will be prosecuted and may also affect patent litigation. The United States Patent and Trademark Office has developed
regulations and procedures to govern administration of the Leahy-Smith Act, but many of the substantive changes to patent law associated with the Leahy-Smith Act, particularly the first inventor to file provisions, only became effective 18 months
after its enactment. Accordingly, it is not clear what, if any, impact the Leahy-Smith Act will have on the operation of our business. However, the Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding
the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business and financial condition.
Even if valid and enforceable patents cover ADASUVE, our product candidates and our technologies, the patents will provide
protection only for a limited amount of time.
The Teva Agreement provides Teva with the first right to enforce certain
of the Alexza patents listed in the FDA Orange Book as well as product-specific patents related to ADASUVE that may be identified and prosecuted during the term of the Teva Agreement. While Teva may not settle any such enforcement action without our
consent, there can be no assurance that Teva would enforce the ADASUVE patents in the same manner or with the same strategy as we might if we maintained the sole right to control litigation against potential third-party infringers. Our current
patents or any future patents that may be issued regarding ADASUVE or our product candidates or methods of using them, can be challenged by our competitors who can argue that our patents are invalid and/or unenforceable. Third parties may challenge
our rights to, or the scope or validity of, our patents. Patents also may not protect ADASUVE or our product candidates if competitors devise ways of making these or similar product candidates without legally infringing our patents. The FDCA and the
FDA regulations and policies provide incentives to manufacturers to challenge patent validity or create modified, non-infringing versions of a drug or device in order to facilitate the approval of generic substitutes. These same types of incentives
encourage manufacturers to submit new drug applications that rely on literature and clinical data not prepared for or by the drug sponsor.
Our potential strategic collaborators ability to obtain patents is uncertain because, to date, some legal principles remain unresolved, there has not been a consistent policy regarding the breadth
or interpretation of
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claims allowed in patents in the United States, and the specific content of patents and patent applications that are necessary to support and interpret patent claims is highly uncertain due to
the complex nature of the relevant legal, scientific and factual issues. Furthermore, the policies governing pharmaceutical and medical device patents outside the United States may be even more uncertain. Changes in either patent laws or
interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property or narrow the scope of our patent protection.
We also rely on trade secrets to protect our technology, especially where we do not believe that patent protection is appropriate or obtainable. However, trade secrets are difficult to protect. The
employees, consultants, contractors, outside scientific collaborators and other advisors of our company and our strategic collaborators may unintentionally or willfully disclose our confidential information to competitors. Enforcing a claim that a
third party illegally obtained and is using our trade secrets is expensive and time consuming and the outcome is unpredictable. Failure to protect or maintain trade secret protection could adversely affect our competitive business position.
Our research and development collaborators may have rights to publish data and other information in which we have rights. In
addition, we sometimes engage individuals or entities to conduct research that may be relevant to our business. The ability of these individuals or entities to publish or otherwise publicly disclose data and other information generated during the
course of their research is subject to certain contractual limitations. These contractual provisions may be insufficient or inadequate to protect our trade secrets and may impair our patent rights. If we do not apply for patent protection prior to
such publication or if we cannot otherwise maintain the confidentiality of our technology and other confidential information, then our ability to receive patent protection or protect our proprietary information may be jeopardized.
Litigation or other proceedings or third-party claims of intellectual property infringement could require us to spend time and
money and could shut down some of our operations.
Our commercial success depends in part on not infringing patents and
proprietary rights of third parties. Others have filed, and in the future are likely to file, patent applications covering products that are similar to ADASUVE or our product candidates, as well as methods of making or using similar or identical
products. We are aware of certain pending U.S. patent applications related generally to a systemic respiratory delivery of loxapine. If these patent applications result in issued patents and we wish to use the claimed technology, we would need to
obtain a license from the third party. We may not be able to obtain these licenses at a reasonable cost, if at all.
In
addition, administrative proceedings, such as interferences and reexaminations before the U.S. Patent and Trademark Office, could limit the scope of our patent rights. We may incur substantial costs and diversion of management and technical
personnel as a result of our involvement in such proceedings. In particular, our patents and patent applications may be subject to interferences in which the priority of invention may be awarded to a third party. We do not know whether our patents
and patent applications would be entitled to priority over patents or patent applications held by such a third party. Our issued patents may also be subject to reexamination proceedings. We do not know whether our patents would survive reexamination
in light of new questions of patentability that may be raised following their issuance.
Third parties may assert that we are
employing their proprietary technology or their proprietary products without authorization. In addition, third parties may already have or may obtain patents in the future and claim that use of our technologies or our products infringes these
patents. We could incur substantial costs and diversion of management and technical personnel in defending against any of these claims. Furthermore, parties making claims against us may be able to obtain injunctive or other equitable relief, which
could effectively block our ability to further develop, commercialize and sell any future products and could result in the award of substantial damages against us. In the event of a successful claim of infringement against us, we may be required to
pay damages and obtain one or more licenses from third parties. We may not be able to obtain these licenses at a reasonable cost, if at all. In that event, we could encounter delays in product introductions while we attempt to develop alternative
methods or products. In the event we cannot develop alternative methods or products, we may be effectively blocked from developing, commercializing or selling any future products. Defense of any lawsuit or failure to obtain any of these licenses
would be expensive and could prevent us from commercializing any future products.
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We review from time to time publicly available information concerning the technological
development efforts of other companies in our industry. If we determine that these efforts violate our intellectual property or other rights, we intend to take appropriate action, which could include litigation. Any action we take could result in
substantial costs and diversion of management and technical personnel in enforcing our patents or other intellectual property rights against others. Furthermore, the outcome of any action we take to protect our rights may not be resolved in our
favor.
Competition in the pharmaceutical industry is intense. If our competitors are able to develop and market
products that are more effective, safer or less costly than ADASUVE or any future products that we may develop, our commercial opportunity will be reduced or eliminated.
We face competition from established as well as emerging pharmaceutical and biotechnology companies, academic institutions, government
agencies and private and public research institutions. Our commercial opportunity will be reduced or eliminated if our competitors develop and commercialize products that are safer, more effective, have fewer side effects or are less expensive than
ADASUVE or any future products that we may develop and commercialize. In addition, significant delays in the development or commercialization of ADASUVE or our product candidates could allow our competitors to bring products to market before us and
impair our ability to commercialize ADASUVE or our product candidates.
We anticipate that ADASUVE will compete with various
injectable formulations of other antipsychotic and benzodiazepine drugs and oral, orally-disintegrating tablet and liquid formulations of other antipsychotic drugs and benzodiazepine drugs. Only the injectable antipsychotics are approved for the
treatment of agitation.
We anticipate that, if approved, AZ-002 would compete with the oral tablet forms of alprazolam and
possibly IV, oral and rectal forms of other benzodiazepines.
We anticipate that, if approved, AZ-007 would compete with
non-benzodiazepine GABA-A receptor agonists. We are aware of more than 13 approved generic versions of zolpidem, or zaleplon, oral tablets, as well as at least one insomnia product, a version of zolpidem intended to treat middle of the night
awakening, that is approved by the FDA.
We anticipate that, if approved, AZ-104 would compete with currently marketed triptan
drugs and with other migraine headache treatments.
We anticipate that, if approved, AZ-003 would compete with some of the
available forms of fentanyl, including injectable fentanyl, oral transmucosal and nasal fentanyl formulations and ionophoretic transdermal delivery of fentanyl. We are also aware of two fentanyl products approved by regulatory agencies in the
United States or abroad. In addition, if approved, AZ-003 would compete with various generic opioid drugs, such as oxycodone, hydrocodone and morphine, or combination products including one or more of such drugs.
We anticipate that, if approved,
Staccato
Nicotine would compete with other treatments for smoking cessation, some of which are
available over the counter.
Many of our competitors have significantly greater financial resources and expertise in research
and development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approvals and marketing approved products than we do. Established pharmaceutical companies may invest heavily to discover quickly and develop novel
compounds or drug delivery technology that could make ADASUVE or our product candidates obsolete. Smaller or early stage companies may also prove to be significant competitors, particularly through strategic collaborations with large and established
companies. In addition, these third parties compete with us in recruiting and retaining qualified scientific, sales, marketing, and management personnel, establishing clinical trial sites and patient registration for clinical trials, as well as in
acquiring technologies and technology licenses complementary to our programs or advantageous to our business. Accordingly, our competitors may succeed in obtaining patent protection, receiving FDA approval or discovering, developing and
commercializing products before we do. If we are not able to compete effectively against our current and future competitors, our business will not grow and our financial condition will suffer.
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If we lose our key personnel or are unable to attract and retain additional personnel,
we may be unable to develop or commercialize ADASUVE or our product candidates.
We are highly dependent on our
President and Chief Executive Officer, Thomas B. King, the loss of whose services might adversely impact the achievement of our objectives. In addition, recruiting and retaining qualified clinical, scientific and engineering personnel to manage
clinical trials of our product candidates and to perform future research and development work will be critical to our success. There is currently a shortage of skilled executives in our industry, which is likely to continue. As a result, competition
for skilled personnel is intense and the turnover rate can be high. Although we believe we will be successful in attracting and retaining qualified personnel, competition for experienced management and clinical, scientific and engineering personnel
from numerous companies and academic and other research institutions may limit our ability to do so on acceptable terms. In addition, we do not have employment agreements with any of our employees, and they could leave our employment at will. We
have change of control agreements with our executive officers and vice presidents that provide for certain benefits upon termination or a change in role or responsibility in connection with a change of control of our company. We do not maintain life
insurance policies on any employees. Failure to attract and retain personnel would prevent us from developing and commercializing ADASUVE and our product candidates.
If plaintiffs bring product liability claims or lawsuits against us or our collaborators, we may incur substantial liabilities and may be required to limit commercialization of ADASUVE or product
candidates that we may develop.
As the supplier of ADASUVE to Teva and Ferrer, we are obligated to deliver commercial
supply from a qualified manufacturing facility in accordance with certain specifications. In addition, we are obligated to supply ADASUVE free from product defects or manufacturing defects from our manufacture of ADASUVE. The development,
manufacture, testing, marketing and sale of combination pharmaceutical and medical device products, like ADASUVE, entail significant risk of product liability claims, lawsuits, safety alerts or recalls. We may be held liable if any product we
develop or manufacture causes injury or is found otherwise unsuitable or unsafe during product testing, manufacturing, marketing or sale, including, but not limited to quality issues, component failures, manufacturing flaws, unanticipated or
improper uses of ADASUVE or any future products, design defects, inadequate disclosure of product-related risks or product-related information, or for unlawful, unfair or fraudulent competition or business practices relating to such
products. Side effects of, or design or manufacturing defects in, the products tested or commercialized by us or any collaborator could result in exacerbation of a clinical trial participant or patients condition, serious injury or
impairment or even death. This could result in product liability claims, lawsuits, safety alerts and/or recalls for ADASUVE or any future products, including those in clinical testing, to be commercialized, or already
commercialized. Product liability claims or lawsuits may be brought by individuals seeking relief for themselves, by persons seeking to represent a class of claimants/plaintiffs, or by a large number of individual claimants in a coordinated or
mass litigation. We cannot predict the frequency, outcome, or cost to defend or resolve product liability claims or lawsuits.
While we have not had to defend against any product liability claims or lawsuits to date, we face greater risk of product liability claims or lawsuits as we or any collaborator commercialize ADASUVE or
other future products. As ADASUVE or any future product is more widely prescribed, we believe it is likely that product liability claims or lawsuits will eventually be brought against us. Regardless of merit or eventual outcome, such
claims or lawsuits may result in decreased demand for any products or product candidates that we may develop, injury to our reputation, withdrawal of clinical trials, issuance of safety alerts, recall of products under investigation or already
commercialized, costs and legal fees to defend and resolve litigation, injunctive relief, disgorgement of profits, or substantial monetary awards to clinical trial participants or patients, loss of revenue, and the inability to commercialize any
products we develop. Safety alerts or recalls could result in the FDA or similar government agencies in the United States, or abroad, investigating or bringing enforcement actions regarding any products and/or practices, with resulting significant
costs and negative publicity, all of which could materially adversely affect us.
Product liability insurance is expensive, can
be difficult to obtain and may not be available in the future on acceptable terms, if at all. We currently have product liability insurance that covers commercial product and clinical trials. Partly as a result of product liability lawsuits
related to pharmaceutical and medical device
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products, product liability and other types of insurance have become more difficult and costly for pharmaceutical and medical device companies to obtain. Insurance may be prohibitively
expensive, or may not fully cover our potential liabilities. Inability to maintain sufficient insurance coverage at an acceptable cost or otherwise to protect against potential product liability claims or lawsuits could impede or negatively affect
the commercialization of ADASUVE or our product candidates. If we are sued for any injury caused by any product, our liability could exceed our insurance coverage and total assets. In addition, there is no guarantee that insurers will pay for
defense and indemnity of claims or lawsuits or that coverage will be adequate or otherwise available.
A successful claim or
lawsuit brought against us in excess of available insurance coverage could subject us to significant liabilities and could have a materially adverse effect on our business, financial condition, results of operations and growth prospects. Such claims
could also harm our reputation and the reputation of ADASUVE or any future products, adversely affecting our ability to develop and market any products successfully. In addition, defending a product liability claim or lawsuit is expensive and
can divert the attention of key employees from operating our business.
Product recalls and safety alerts may be issued at our
discretion or at the discretion of our suppliers, collaborators, government agencies, and other entities that have regulatory authority for medical device and pharmaceutical sales. Any recall of ADASUVE could materially adversely affect our
business by rendering us unable to sell ADASUVE for some time, causing us to incur significant recall costs and by adversely affecting our reputation. A recall could also result in product liability claims.
Our product candidates AZ-002, AZ-003 and AZ-007 contain drug substances that are regulated by the U.S. Drug Enforcement
Administration. Failure to comply with applicable regulations and requirements could harm our business.
The Controlled
Substances Act imposes various registration, recordkeeping and reporting requirements, procurement and manufacturing quotas, labeling and packaging requirements, security controls and a restriction on prescription refills on certain pharmaceutical
products. The DEA regulates drug substances as Schedule I, II, III, IV or V substances, with Schedule I substances considered to present the highest potential for abuse and Schedule V substances the lowest potential for abuse relative to the other
schedules in the CSA. Alprazolam, the API in AZ-002, is regulated as a Schedule IV substance, fentanyl, the API in AZ-003, is regulated as a Schedule II substance, and zaleplon, the API in AZ-007, is regulated as a Schedule IV substance. Each of
these product candidates is subject to DEA regulations relating to registration, security, record keeping and reporting, distribution and, if approved, physician prescription procedures, and DEA regulations may impact the availability of the
scheduled substance available for clinical trials and commercial distribution. As a Schedule II substance, fentanyl is subject to more stringent controls, including quotas on the amount of product that can be manufactured as well as a prohibition on
the refilling of prescriptions without a new prescription from the physician. The DEA periodically inspects facilities for compliance with its rules and regulations. Failure to comply with current and future regulations of the DEA could lead to a
variety of sanctions, including revocation, or denial of renewal, of DEA registrations, injunctions, or civil or criminal penalties and could harm our business, financial condition and results of operations.
The single dose version of our Staccato system contains materials that are regulated by the U.S. government, and failure to comply
with applicable regulations could harm our business.
The single dose version of our
Staccato
system uses
energetic materials to generate the rapid heating necessary for vaporizing the drug, while avoiding degradation. Manufacture of products containing energetic materials is controlled by the ATF. Technically, the energetic materials used in our
Staccato
system are classified as low explosives, and the ATF has granted us a license/permit for the manufacture of such low explosives. Additionally, due to inclusion of the energetic materials in our
Staccato
system, the
DOT, might regulate shipments of the single dose version of our
Staccato
system. However, the DOT has granted the single dose version of our
Staccato
system Not Regulated as an Explosive status. Failure to comply with the
current and future regulations of the ATF or DOT could subject us to future liabilities and could harm our business, financial condition and results of operations. Furthermore, these regulations could restrict our ability to expand our facilities or
construct new facilities or could require us to incur other significant expenses in order to maintain compliance.
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We use hazardous chemicals and highly combustible materials in our business. Any
claims relating to improper handling, storage or disposal of these materials could be time consuming and costly.
Our
research and development processes involve the controlled use of hazardous materials, including chemicals. We also use energetic materials in the manufacture of the chemical heat packages that are used in our single dose devices. Our operations
produce hazardous waste. We cannot eliminate the risk of accidental contamination or discharge or injury from these materials. Federal, state and local laws and regulations govern the use, manufacture, storage, handling and disposal of these
materials. We could be subject to civil damages in the event of an improper or unauthorized release of, or exposure of individuals to, hazardous materials. In addition, claimants may sue us for injury or contamination that results from our use of
these materials and our liability may exceed our total assets. Compliance with environmental and other laws and regulations may be expensive, and current or future regulations may impair our research, development or production efforts.
Certain of our suppliers are working with these types of hazardous and energetic materials in connection with our component manufacturing
agreements. In the event of a lawsuit or investigation, we could be held responsible for any injury caused to persons or property by exposure to, or release of, these hazardous and energetic materials. Further, under certain circumstances, we have
agreed to indemnify our suppliers against damages and other liabilities arising out of development activities or products produced in connection with these agreements.
We identified a material weakness in our internal control over financial reporting, and our business and stock price may be adversely affected if we do not adequately address this weakness or if we
have other material weaknesses or significant deficiencies in our internal control over financial reporting.
We did
not adequately implement certain controls relating to our review and verification of internally prepared reports and analyses utilized in the financial statement closing process. Therefore, we identified a material weakness in our internal control
over financial reporting relating to the financial statement closing process as of December 31, 2013. The existence of this or one or more other material weaknesses or significant deficiencies could result in errors in our financial statements,
and substantial costs and resources may be required to rectify any internal control deficiencies. If we cannot produce reliable financial reports, investors could lose confidence in our reported financial information, the market price of our stock
could decline significantly, we may be unable to obtain additional financing to operate and expand our business, and our business and financial condition could be harmed.
We will need to implement additional systems, procedures and controls in the future as we grow and to satisfy new reporting requirements as a commercial entity.
Numerous laws and regulations affect commercial companies, including, but not limited to, the Federal Anti-Kickback, False Claims Act, the
Federal Physician Payment Sunshine Act, the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act of 2010. The rules make it more difficult and costly for us to obtain certain types of insurance, including director and officer liability
insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage as compared to the policies generally available to public companies. The impact of these events
could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors or our board committees or as executive officers.
Compliance with the Federal Anti-Kickback, False Claims Act, the Federal Physician Payment Sunshine Act, the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act of 2010 and other regulations will
continue to increase our costs and require additional management resources. As we grow, we will need to continue to implement additional reporting systems, procedures and controls to satisfy new reporting requirements. We currently do not have an
internal audit group. In addition, we may need to hire additional legal and accounting staff with appropriate experience and technical knowledge, and we cannot assure you that if additional staffing is necessary that we will be able to do so in a
timely fashion.
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Our business is subject to complex corporate governance, public disclosure and
accounting requirements that could adversely affect our business and financial results.
We are subject to changing
rules and regulations of federal and state governments, the SEC, and the NASDAQ Global Market. These entities have issued a significant number of new and increasingly complex requirements and regulations over the course of the last several years and
continue to develop additional regulations and requirements. On July 21, 2010, the Dodd-Frank Wall Street Reform and Protection Act, or the Dodd-Frank Act, was enacted. The Dodd-Frank Act contains significant corporate governance and executive
compensation-related provisions, some of which the SEC, has implemented by adopting additional rules and regulations in areas such as the compensation of executives, referred to as say-on-pay. We cannot assure you that we are or will be
in compliance with all potentially applicable regulations. If we fail to comply with the Sarbanes Oxley Act of 2002, the Dodd-Frank Act and associated SEC rules, or any other regulations or if our interpretations of these rules and regulations
differ from the regulating bodies, we could be subject to a range of consequences, including restrictions on our ability to sell equity securities or otherwise raise capital funds, the de-listing of our common stock from the NASDAQ Global Market,
suspension or termination of our clinical trials, restrictions on future products or our manufacturing processes, significant fines, or other sanctions or litigation. Any of such consequences could have a material adverse effect on our business,
results of operations and the price of our common stock. Our efforts to comply with these requirements have resulted in, and are likely to continue to result in, an increase in expenses and a diversion of managements time from other business
activities.
Our facility is located near known earthquake fault zones, and the occurrence of an earthquake or other
catastrophic disaster could damage our facility and equipment, which could cause us to curtail or cease operations.
Our facility, which is the location where the final manufacturing of our product occurs, is located in the San Francisco Bay Area near
known earthquake fault zones and, therefore, is vulnerable to damage from earthquakes. We are also vulnerable to damage from other types of disasters, such as power loss, fire, floods and similar events. If any disaster were to occur, our ability to
operate our business could be seriously impaired. We currently may not have adequate insurance to cover our losses resulting from disasters or other similar significant business interruptions, and we do not plan to purchase additional insurance to
cover such losses due to the cost of obtaining such coverage. Any significant losses that are not recoverable under our insurance policies could seriously impair our business, financial condition and results of operations.
Significant disruptions of information technology systems or breaches of data security could adversely affect our business.
We are increasingly dependent on information technology systems and infrastructure, including mobile technologies, to
operate our business. In the ordinary course of our business, we collect, store and transmit large amounts of confidential information, including intellectual property, proprietary business information and personal information. It is critical that
we do so in a secure manner to maintain the confidentiality and integrity of such confidential information. We have also outsourced elements of our information technology infrastructure, and as a result we manage a number of third party vendors who
may or could have access to our confidential information. The size and complexity of our information technology systems, and those of third-party vendors with whom we contract, make such systems potentially vulnerable to breakdown, malicious
intrusion, security breaches and other cyber attacks. In addition, the prevalent use of mobile devices that access confidential information increases the risk of data security breaches, which could lead to the loss of confidential information, trade
secrets or other intellectual property. While we have implemented security measures to protect our data security and information technology systems, such measures may not prevent the adverse effect of such events. Significant disruptions of our
information technology systems or breaches of data security could adversely affect our business.
Regulations related to
conflict minerals could adversely impact our business.
The Dodd-Frank Wall Street Reform and Consumer Protection Act
contains provisions to improve transparency and accountability concerning the supply of tin, tantalum, tungsten and gold, known as conflict
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minerals, originating from the Democratic Republic of Congo, or the DRC, and adjoining countries. As a result, in August 2012 the SEC adopted annual disclosure and reporting requirements for
public companies that use conflict minerals mined from the DRC and adjoining countries in their products. We have determined that we use at least one of these conflict minerals in the manufacture of ADASUVE and our other product candidates, although
we have not yet determined the source of the conflict minerals that we use. These new disclosure requirements require us to use diligent efforts to determine which conflict minerals we use and the source of those conflict minerals, and disclose the
results of our findings beginning in May 2014. There are and will be costs associated with complying with these disclosure requirements, including those costs incurred in conducting diligent efforts to determine which conflict minerals we use and
the sources of conflict minerals used in ADASUVE and our other product candidates. Further, the implementation of these rules could adversely affect the sourcing, supply and pricing of materials used in ADASUVE and our other product candidates. As
there may be only a limited number of suppliers offering conflict free conflict minerals, and we cannot be sure that we will be able to obtain necessary conflict free conflict minerals in sufficient quantities or at competitive prices. In addition,
we may face reputational challenges if we determine that ADASUVE and our other product candidates contain minerals not determined to be conflict free or if we are unable to sufficiently verify the origins for all conflict minerals used in ADASUVE
and our other product candidates through the procedures we may implement. If we determine to redesign ADASUVE and our other product candidates to not use conflict minerals, we would incur costs associated with doing so.
Risks Relating to Owning Our Common Stock
Our stock price has been and may continue to be extremely volatile.
Our common stock price has experienced large fluctuations. In addition, the trading prices of life science and biotechnology company
stocks in general have experienced extreme price fluctuations in recent years. The valuations of many life science companies without consistent product revenues and earnings are extraordinarily high based on conventional valuation standards, such as
price to revenue ratios. These trading prices and valuations may not be sustained. Any negative change in the publics perception of the prospects of life science or biotechnology companies could depress our stock price regardless of our
results of operations. Other broad market and industry factors may decrease the trading price of our common stock, regardless of our performance. Market fluctuations, as well as general political and economic conditions such as terrorism, military
conflict, recession or interest rate or currency rate fluctuations, also may decrease the trading price of our common stock. In addition, our stock price could be subject to wide fluctuations in response to various factors, including:
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the success of the commercial launches of ADASUVE in the United States and the Ferrer Territories;
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our and our collaborators ability to complete and implement our post-approval commitments for ADASUVE;
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the process and outcome of our post-approval commitments for ADASUVE;
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our ability to manufacture ADASUVE at a cost effective price;
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actual or anticipated regulatory approvals or non-approvals of our product candidates or competing products;
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actual or anticipated cash depletion of our financial resources;
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actual or anticipated results and timing of our clinical trials;
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changes in laws or regulations applicable to ADASUVE or our product candidates;
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changes in the expected or actual timing of our development programs such as for AZ-002, including delays or cancellations of clinical trials for our
product candidates;
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period to period fluctuations in our operating results;
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announcements of new technological innovations or new products by us or our competitors;
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changes in financial estimates or recommendations by securities analysts;
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conditions or trends in the life science and biotechnology industries;
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changes in the market valuations of other life science or biotechnology companies;
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developments in domestic and international governmental policy or regulations;
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announcements by us or our competitors of significant acquisitions, strategic collaborations, joint ventures or capital commitments;
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additions or departures of key personnel;
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difficulty, or increased costs, associated with replacing Autoliv as the supplier of chemical heat packages for ADASUVE and other product candidates;
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disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for
our technologies;
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sales of our common stock (or other securities) by us; and
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sales and distributions of our common stock by our stockholders.
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In the past, stockholders have often instituted securities class action litigation after periods of volatility in the market price of a
companys securities. If a stockholder files a securities class action suit against us, we would incur substantial legal fees, and our managements attention and resources would be diverted from operating our business in order to respond
to the litigation.
If we sell shares of our common stock in future financings, existing common stockholders will
experience immediate dilution and, as a result, our stock price may go down.
We will need to raise additional capital
to fund our operations to develop our product candidates and to develop our manufacturing capabilities. We may obtain such financing through the sale of our equity securities from time to time. As a result, our existing common stockholders will
experience immediate dilution upon any such issuance. For example, in February 2012, we issued 4,400,000 shares of our common stock and warrants to purchase up to an additional 4,400,000 shares of our common stock in an underwritten public offering;
in March 2012, we issued 241,936 shares of our common stock in a private placement to Ferrer; in July 2012 we issued 80,429 shares of our common stock to Azimuth in consideration for its execution and delivery of the Purchase Agreement; in August
and September 2012, we issued an aggregate of 3,489,860 shares of our common stock to Azimuth under the Purchase Agreement; and in May 2013, we issued 1,437,481 shares of our common stock to Azimuth under the Purchase Agreement. If we enter into
other financing transactions in which we issue equity securities in the future, our existing common stockholders will experience immediate dilution upon any such issuance.
If we fail to maintain compliance with the listing requirements of The NASDAQ Global Market, we may be delisted and the price of our common stock and our ability to access the capital markets could
be negatively impacted.
Our common stock is currently listed on The NASDAQ Global Market. To maintain the listing of
our common stock on The NASDAQ Global Market, we are required to meet certain listing requirements, including, among others, either: (i) a minimum closing bid price of $1.00 per share, a market value of publicly held shares (excluding shares
held by our executive officers, directors and 10% or more stockholders) of at least $5 million and stockholders equity of at least $10 million; or (ii) a minimum closing bid price of $1.00 per share, a market value of publicly held shares
(excluding shares held by our executive officers, directors, affiliates and 10% or more stockholders) of at least $15 million and a total market value of listed securities of at least $50 million. On January 31, 2012, we received a notice from
The NASDAQ Stock Market indicating that our common stock had not met the $1.00 per share minimum closing bid price requirement for 30 consecutive business days and that, if we were unable to demonstrate compliance with this requirement during the
applicable grace periods, our common stock would be delisted after that time. We were notified that we had regained compliance with the minimum closing bid requirement on June 27, 2012 after our one-for-ten reverse stock split.
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This reverse stock split may not prevent our common stock from dropping back down below The
NASDAQ Global Market minimum closing bid price requirement in the future. It is also possible that we would otherwise fail to satisfy another NASDAQ Global Market requirement for continued listing of our common stock. As of March 14, 2014, the
total market value of our publicly held shares of our common stock (excluding shares held by our executive officers, directors, affiliates and 10% or more stockholders) was $87.0 million, the total market value of our listed securities was
$88.3 million and the closing bid price of our common stock was $5.11 per share. As of December 31, 2013, we had a stockholders deficit of $24.0 million.