Overview
We
are a
biopharmaceutical company that has been involved in the development of
injectable collagenase for multiple indications. We have a development and
license agreement with Auxilium Pharmaceuticals, Inc. (“Auxilium”) for
injectable collagenase (which Auxilium has named “XIAFLEX
TM
”
(formerly
known
as “AA4500”)) for clinical indications in Dupuytren’s disease, Peyronie’s
disease and frozen shoulder (
adhesive capsulitis
), and Auxilium has an
option to acquire additional indications that we may pursue, including cellulite
and lipomas. Injectable collagenase has completed a pivotal clinical
trial for the treatment of Dupuytren’s disease. A Phase III clinical trial had
been initiated and was put on clinical hold. In a press release dated
September 10, 2007, Auxilium announced that it has restarted its Phase III
clinical trials for XIAFLEX
for the
treatment of Dupuytren’s disease.
Marketed
Product
Prior
to
the sale of our collagenase topical business to DFB Biotech, Inc. and its
affiliates (“DFB”) in March 2006, we had been in the business of manufacturing
the active pharmaceutical ingredient (“API” or “API Enzyme”) for a topical
collagenase prescription product. We had developed and achieved Food and
Drug
Administration (“FDA”) approval for the topical collagenase prescription
product. This topical collagenase product is an FDA approved biologic product
indicated for debridement of chronic dermal ulcers and severely burned areas.
Abbott Laboratories, Inc. and its subsidiaries (“Abbott”), under the terms of an
exclusive licensing agreement (the "Abbott Agreement"), compounded the API
into
a topical collagenase ointment utilizing the API Enzyme manufactured by
us.
Because
sales of this topical collagenase had declined significantly since the peak
year
of 1999, we decided to sell the collagenase topical business and focus on
the
clinical indications related to our injectable collagenase business. As part
of
the sales agreement, DFB assumed ownership and operation of our wholly-owned
subsidiary, ABC-Curacao, where the API is manufactured, along with certain
other
assets, including our FDA manufacturing license and the Abbott
Agreement.
Development
of Injectable Collagenase for Multiple Indications
We
are
developing an injectable collagenase for multiple indications. The most advanced
indications are for the treatment of Dupuytren’s disease, Peyronie’s disease and
frozen shoulder. In June 2004, we entered into a development and licensing
agreement with Auxilium, which was amended on May 10, 2005 (the “Auxilium
Agreement”). Under the Auxilium Agreement, we have granted Auxilium an exclusive
worldwide license to develop products containing our injectable collagenase
for
the treatment of Dupuytren’s disease and Peyronie's disease and the option to
develop and license the technology for use in additional indications other
than
dermal formulations labeled for topical administration. In December
of 2005, Auxilium exercised its option to include the clinical indication
of
frozen shoulder. The Auxilium Agreement and other licensing agreements are
discussed more fully in this Item 1, under the section titled “Licensing and
Marketing Agreements.”
In
its
current report on Form 8-K filed on June 14, 2007, Auxilium stated:
“We
believe that AA4500 has significant commercial potential:
--450,000
potential patients annually in U.S. and EU for Dupuytren’s disease &
Peyronie’s indications -> $1 Billion opportunity based on market research and
analysis
--Potential
to replace surgery
--Great
fit for Speciality Biopharmaceutical Company
--Worldwide
rights offer options to build company or generate cash.”
Background
on Collagenase
Collagenase
is the only protease that can hydrolyze the triple helical region of collagen
under physiological conditions. The specific substrate collagen comprises
approximately one-third of the total protein in mammalian organisms and it
is
the main constituent of skin, tendon, and cartilage, as well as the organic
component of teeth and bone. The body relies on endogenous collagenase
production to remove dead tissue and collagenase production is an essential
biological mechanism, which regulates matrix remodeling and the normal turnover
of tissue. The
Clostridial
collagenase produced by us has a
broad specificity towards all types of collagen and is acknowledged as much
more
efficient than mammalian collagenases.
Clostridial
collagenase cleaves
the collagen molecule at multiple sites along the triple helix whereas the
mammalian collagenase is only able to cleave the molecule at a single site
along
the triple helix. Because collagenase does not damage the cell membrane,
it is
widely used for cell dispersion for tissue disassociation and cell culture.
Since the main component of scar tissue is collagen, collagenase has been
used
in a variety of clinical investigations to remove scar tissue without surgery.
Histological and biochemical studies have shown that the tissue responsible
for
the deformities associated with Dupuytren’s disease and Peyronie’s disease is
primarily composed of collagen. The contracture associated with Dupuytren’s
disease is an example of a disease that results from excessive collagen
formation. Surgical removal of scar tissue has the potential to result in
complications including increased scar formation. Due to the highly specific
nature of the enzyme, we consider its use to be more desirable than the
application of general proteolytic enzymes for the removal of unwanted tissue.
Treatment with injectable collagenase for removal of excessive scar tissue
represents a first in class non-invasive approach to this unmet medical need.
New uses involving the therapeutic application of exogenous collagenase to
supplement the body’s own natural enzymes are periodically being
proposed.
We
have
developed a proprietary process to produce a purified collagenase product,
which
is fully characterized and has shown stability for years.
Collagenase
for Treatment of Dupuytren’s Disease
Dupuytren’s
disease is a deforming condition of the hand in which one or more fingers
contract toward the palm, often resulting in physical disability. The onset
of
Dupuytren’s disease is characterized by the formation of nodules in the palm
that are composed primarily of collagen. As the disease progresses, the collagen
nodules begin to form a cord causing the patient’s finger(s) to contract, making
it impossible to open the hand fully. Patients often complain about inability
to
wash their hands, wear gloves, or grasp some objects. Dupuytren’s
disease has a genetic basis and it is most prevalent in individuals of northern
European ancestry. Well-known individuals with Dupuytren’s disease include
President Ronald Reagan and Prime Minister Margaret Thatcher.
The
only
proven treatment for Dupuytren’s disease is surgery. Recurrence rates can range
from 26-80%. The post surgical recovery is often associated with significant
pain, delayed return to work, and extended periods of post-operative physical
therapy. Because many of the individuals with Dupuytren’s disease are older than
60 years of age, there is considerable resistance from the patients to undergo
the surgical procedure, which also involves the risk of general anesthesia.
We
anticipate that many of the patients who are now willing to live with the
disease, given the current treatment options, would be receptive to an
alternative treatment involving an injection into the hand that could be
performed in an office setting.
Hand
surgeons note that the Dupuytren’s disease surgery is tedious, lengthy and
poorly reimbursed in the U.S. In a conference on February 8, 2007,
Auxilium stated that the average cost of Dupuytren’s disease surgery is $5,000
in the U.S. and $3,500 in Europe. Auxilium has reported that U.S.
based hand surgeons would recommend the use of collagenase injection on 76%
of
the patients who were candidates for surgery. This figure confirms an earlier
survey of U.S. hand surgeons conducted by us, which found that they would
recommend the use of collagenase injection on 80% of patients considered
eligible for Dupuytren’s disease surgery.
Phase
III Clinical Trials
Phase
III
clinical results with injectable collagenase manufactured by us were published
in the July-August 2007 issue of the Journal of Hand Surgery. The
study was designed and monitored by us in collaboration with Marie Badalamente,
PhD and Lawrence Hurst, MD who are clinical investigators from the Department
of
Orthopaedics, at the State University of New York, Health Science Center
Stony
Brook, New York. Auxilium issued a press release on July 24, 2007
based on their statistical analysis of the results.
Thirty-three
of 35 patients who entered the double-blind phase of the trial completed
the
study and 19 of them entered the open label extension. In the double
blind phase of the study, 23 patients received injectable collagenase and
12
received placebo. The results show that 21 of 23 patients (91%) treated with
up
to 3 injections of injectable collagenase achieved clinical success (reduction
in joint contracture to within 0° to 5° of normal) in the double-blind phase. 12
of 14 (86%) of metacarpophalangeal (“MP”) joints and 9 of 9 (100%) proximal
intraphalangeal (“PIP”) joints were successfully treated. No patient treated
with placebo achieved clinical success.
Of
the 19
patients entering the open label phase, 15 had previously received placebo,
and
4 had received active drug but required further treatment due to incomplete
success or treatment failure or needed treatment for other contractures.
17 of
19 patients (89%) receiving up to 3 injections of injectable collagenase
achieved clinical success in at least one treated joint in the open label
phase.
14 of 16 (88%) of MP joints and 13 of 19 (68%) PIP joints were successfully
treated.
During
the double blind and extension phases, the mean number of injections needed
to
achieve clinical success was 1.5 and 1.4 respectively. Clinical
success was achieved in a median of 8 days during the double blind phase.
The
time to clinical success ranged between 1 and 29 days in the open label
extension phase of the study.
An
evaluation of the long- term durability of treatment was conducted for patients
treated in this Phase III trial and its open label extension. At the 24-month
follow up, recurrence of contracture of at least 20° was favorable compared to
the long-term results observed post surgery according to the investigators.
Of
the 54 successfully treated joints, all were followed up for 24 months. Over
the
24- month period, 5 joints (9%) had a recurrence. Dr. Badalamente
stated that reported recurrence rates post surgery vary widely from 27% to
80%.
The
most
common adverse events were pain and swelling of the hand at the injection
site,
and, and post-injection temporary swelling of a modest nature in the lymph
node
area of the armpit. There were no nerve or arterial injuries. Adverse events
were generally mild to moderate in nature and resolved without treatment
within
30 days.
In
a
press release dated July 31, 2007 Auxilium released information related to
the
latest Phase III clinical trials conducted with injectable
collagenase.
Auxilium
discussed the results of the suspended clinical trials of XIAFLEX for the
treatment of Dupuytren's contracture conducted in the fourth quarter of 2006
after they had reviewed the data to assess key findings prior to the expected
initiation of new trials later this year. A total of 30 patients were treated;
22 received XIAFLEX and 8 received placebo injections. Two of the patients
who
received XIAFLEX received two injections in a primary joint; one patient
received one injection in a primary joint and one injection in a secondary
joint; and the other 19 patients all received a single injection of XIAFLEX
into
a primary joint. The data indicate that 14 of the 22 (64%) patients injected
with XIAFLEX achieved clinical success, defined as reduction of the contracture
to zero to five degrees of normal. None of the patients that received placebo
injections achieved clinical success. No serious adverse events related to
study
drug were reported, and adverse events included injection site pain, contusions
and edema.
Phase
II Trials
A
Phase
II clinical study was designed to evaluate the relative safety and efficacy
of
collagenase compared to placebo injection in improving the degree of flexion
deformity, and range of finger motion in patients with Dupuytren’s disease. The
investigation was carried out as a randomized, double-blind placebo-controlled
clinical trial using collagenase or placebo. Thirty-six MP patients and thirteen
PIP patients were enrolled in the study. The success rate was determined
one
month after the first injection of collagenase or placebo. The
overall success rate, defined by the primary endpoint of reduction in
contracture to 0º–5º, was fourteen out of eighteen patients
(78%)
for MP joints (p=0.001) and approximately 70% for PIP
joints. Adverse events reported during this protocol included pain and swelling
of the hand, bruising, and post-injection self-limiting swelling of the lymph
nodes. Some patients experienced transient increases in blood pressure on
the
day of injection, which were attributed to anxiety in anticipation of the
treatment. Only one serious adverse event was reported and it was not
attributed to the study drug by the clinical investigator.
This
study demonstrated a statistically significant reduction in contracture to
within 0º-5
°
of
normal at day 30 and improved range of motion at 7 and 14 days and at day
30
after a single injection of collagenase into the cord affecting the MP
joint.
A
second
Phase II study designed as a double-blind, randomized, parallel group,
placebo-controlled, dose response clinical trial was
conducted. Fifty-five MP patients and twenty-five PIP patients with a
mean baseline fixed flexion deformity of forty-nine degrees were enrolled
in the
study at two centers. Patients were treated with low (2,500), mid (5,000)
or
high (10,000) number of units of collagenase or placebo. The overall
success rate and primary endpoint was defined as reduction in contracture
to
within 0º–5º 30 days
after the first injection.
Eighteen
out of the twenty-three patients (78%) who received the high number of units
returned to normal extension (0º-5º) at one month post-treatment as compared to
ten out of twenty-two (45%) in the mid number of units group, and nine out
of
eighteen (50%) in the low number of units group. There was no
response to placebo in any patient. For PIP joints, five out of seven (71%)
patients who received the high number of units of collagenase returned to
normal
extension at the one month post-treatment as compared to four out of seven
(57%)
patients in the mid number of units group, two out of four (50%) in the low
number of units group and zero out of seven (0%) in the placebo
group. For MP joints, thirteen out of sixteen (81%) patients who
received the high number of units group of collagenase returned to normal
extension at the one month post-treatment as compared to six out of fifteen
(43%) patients in the mid number of units group, seven out of fourteen (50%)
in
the low number of units group and zero out of ten (0%) in the placebo
group.
None
of
the serious adverse events that occurred were attributed by the investigators
to
the study drug.
Development
Status
On
November 20, 2006, Auxilium announced that they had initiated a Phase III
clinical trial for Dupuytren’s disease.
Auxilium issued a
press
release dated December 6, 2006 and announced that it had temporarily suspended
the dosing of patients in its ongoing Phase III trial for AA4500 for the
treatment of Dupuytren's contracture in response to a visual appearance failure
of the lyophilized material in some vials of AA4500 for use in the clinical
trial. Auxilium said that they were conducting an investigation to determine
the
cause of this failure and they believe that it is likely related to the higher
than expected moisture content within the vial. Based on tests
conducted, Auxilium has excluded container closure as a cause and believes
that
the issue is related to the lyophilization process and/or equipment. The
issue
was identified as part of routine ongoing stability testing. In a
press release dated September 10, 2007, Auxilium announced that it has restarted
its Phase III clinical trials for XIAFLEX for the treatment of Dupuytren’s
disease.
Collagenase
for Treatment of Peyronie’s Disease
Peyronie’s
disease affects the penis and it is characterized by the presence of a collagen
plaque on the shaft of the penis, which can distort an erection and make
intercourse difficult or impossible in advanced cases. The plaque is not
elastic
and it does not stretch during erection. In some mild cases, the plaque can
resolve spontaneously without medical intervention. The most common plaque
forms
on the top of the penis causing the penis to arc upward. In severe cases,
the
penis can be bent at a 90-degree angle during erection. Significant
psychological distress has been noted in patients with Peyronie’s disease who
are sexually active. Frequent patient complaints include increased pain,
painful
erections, palpable plaque, penile deformity, and erectile
dysfunction. Patients with Peyronie’s disease have been reported to
have an increased likelihood of having Dupuytren’s disease, frozen shoulder,
plantar fibromatosis, knuckle pads, hypertension and diabetes. Peyronie’s
disease typically affects males in the range of 40-70 years. The cause of
Peyronie’s disease is unknown, although some investigators have proposed that it
may be due to trauma or an autoimmune component. A number of researchers
have
suggested that the incidence of Peyronie’s disease has increased due to the use
of erectile dysfunction drugs.
Surgery
is the only proven treatment for Peyronie’s disease and the results are
variable. Surgery often results in shortening of the penis. Auxilium has
reported that 33% of Peyronie’s disease patients who undergo surgery are
subsequently dissatisfied with the results and they frequently require a
penile
implant. Patients with Peyronie’s disease strongly desire therapeutic
alternatives to surgery. Auxilium has reported that 90% of urologists would
use
collagenase
injection to delay or avoid surgery and this finding is consistent with a
survey
of urologists performed for us.
Histological
and biochemical studies indicate that the scarring on the penis due to
Peyronie’s disease is composed primarily of collagen.
An
independent investigator carried out a positive Phase I clinical trial in
which
he treated approximately 180 patients in an open-label trial. In
addition, two positive open label clinical trials have been conducted by
an
independent investigator at Tidewater Urology in Norfolk, Virginia, which
is the
largest center for treatment of Peyronie’s disease in the world.
Auxilium
announced on October 25, 2006 the results of two Phase II trials. They
stated:
Both
studies were open label and up to 12 months in duration. They were conducted
to
evaluate the efficacy and tolerability of AA4500 in the treatment of Peyronie’s
disease. Clinical success was defined as change from baseline in deviation
angle
of at least 25 percent.
In
Study
A (n=25) [25 patients], 3 injections of AA4500, each administered on a separate
day, were given over 7-10 days. Patients received a second series of 3
injections 12 weeks later. Patients were evaluated at three, six, and nine
months post-last injection. The mean baseline deviation angle was 52.8 degrees.
At months three and six, 58 percent and 53 percent of patients (respectively)
achieved clinical success with respect to deviation angle.
The
best
results were achieved with a three-treatment series of three injections each
in
Study B (n=10) [10 patients]. In Study B, patients received three injections
of
AA4500 administered one per day, separated by at least one day each, over
a one
week timeframe. Patients received two additional series of 3 injections,
each
spaced 6 weeks apart. The mean baseline deviation angle was 50.2 degrees.
At 9
month follow up (post-first injections), 25 percent or greater reduction
in
deviation angle was achieved in 8/9 patients who completed the study (89
percent, 1 patient had 24 percent reduction in deviation angle). Based on
the
investigator’s global assessment, 67 percent of subjects were very much improved
or much improved after treatment with AA4500.
The
most
common adverse events reported in both studies were local administration
site
reactions that were mid or moderate in severity, non-serious, and resolved
in
time without medical attention.
Development
Status
Auxilium
reported in its Form 10-Q filed on August 8, 2007 that they will initiate
a
Phase IIb trial for Peyronie’s disease in the first or second quarter of
2008.
Collagenase
For Treatment of Frozen Shoulder (
Adhesive
Capsulitis
)
Frozen
shoulder is a clinical syndrome of pain and decreased motion in the shoulder
joint. It is estimated to affect 2-5% of the general population with a slightly
higher incidence in women. It typically occurs between the ages of
40-70. Individuals with insulin dependent diabetes have been reported to
have a
36% higher incidence rate and are more likely to have bilateral
symptoms.
Results
of a Phase II randomized double-blind, placebo controlled, dose response
study
were presented at the annual meeting of the American Academy of Orthopaedic
Surgeons (AAOS) in March 2006. Based on Auxilium’s prior review of the data
contained in the oral presentation, they elected to exercise their option
to
develop and commercialize this additional indication for collagenase injection
in December 2005.
Other
Clinical Indications For Collagenase
Lipomas
Lipomas
are benign fatty tumors that occur as bulges under the skin. An open label
clinical trial has been completed for treatment of lipomas utilizing a single
injection of collagenase. Based on observations made during pre-clinical
studies
that a collagenase injection decreased the size of fat pads in animals, a
Phase
I open label clinical trial was conducted. Favorable initial results from
this
study for treatment of lipomas were presented at a meeting of the
American
Society of Plastic Surgeons. We are currently planning the next steps for
development of this clinical indication.
Cellulite
Cellulite
is a condition characterized by dimpling of the skin and a mattress phenomenon
typically affecting the thighs and buttocks. It is due to irregular and
discontinuous subcutaneous connective tissue. An open label study has been
completed to assess whether injectable collagenase can restore the
cellulite-affected areas to a more cosmetically acceptable appearance. An
abstract describing the promising results of this study was published in
Plastic and Reconstructive Surgery
on September 15, 2006 (see A. Dagum
and M. Badalamente. “Collagenase Injection in the Treatment of
Cellulite.”
Plastic and Reconstructive Surgery
118.4 Sept. 2006: 53).
We are currently planning the next steps for development of this clinical
indication.
Scarred
Tendon
Traumatic
injuries to the hand may result in an inability to return to normal function
due
to scar formation between flexor tendon and surrounding tissues. Scarring
frequently results in the formation of adhesions, which complicates the ability
of the tendon to glide further impairing finger movement. Surgical repairs
of
the flexor tendon are notably difficult because of the post-traumatic
accumulation of scar tissue, as such it is considered to be one of the most
difficult issues in orthopaedic surgery. An open label clinical investigation
has been conducted to determine if collagenase injection can be of help to
patients with scarred flexor tendons. We are in the process of closing out
the
clinical investigation.
Total
Patient Exposure
Clinical
investigations with our collagenase injection have been conducted in the
treatment of herniated disc disease, keloids and hypertrophic scars, as an
adjunct to vitrectomy, Peyronie’s disease, Dupuytren’s disease, glaucoma, frozen
shoulder, lipoma, flexor tendon adhesions and cellulite. Over 1300 patients
have
been treated in these studies and the data suggest a very acceptable safety
profile for the product.
LICENSING
AND MARKETING AGREEMENTS
Topical
Collagenase Agreement
Prior
to
March 2006, we were a party to the Abbott Agreement, an exclusive license
agreement with Knoll Pharmaceutical Company, a subsidiary of Abbott, for
the
production of the API for topical collagenase.
In
March
2006 we sold our topical collagenase business to DFB, including all rights
to
the exclusive license agreement and we were released of any obligations
thereunder.
In
addition, DFB acquired all of the issued and outstanding shares of ABC-Curacao,
pursuant to an asset purchase agreement between us, DFB and ABC-NY (the “Asset
Purchase Agreement”). ABC-Curacao manufactured the API Enzyme, which in its
final formulation was marketed by Abbott.
In
addition, at the closing of the Asset Purchase Agreement, DFB (i) acquired
from
us certain inventory and manufacturing equipment used in the topical collagenase
business, (ii) was granted a perpetual royalty free license to use, solely
in
connection with the topical collagenase business, certain intangible assets
retained by us and (iii) was granted the right (for a limited period of time)
to
use, solely in connection with the topical collagenase business, certain
tangible assets retained by us. As part of the sale, we transferred to DFB
our
FDA manufacturing license.
As
consideration for the purchased assets we received $8 million in cash, DFB’s
assumption of certain liabilities, and the right to receive earn out payments
in
the future based on sales of certain products. In connection with the closing
of
the Asset Purchase Agreement, we agreed to provide certain technical assistance
and certain transition services to DFB in consideration of fees and costs
totaling over $1.4 million. At the closing, DFB paid to us a partial payment
of
$400,000
in respect of the technical assistance to be provided by us. The consulting
obligations generally expire during March 2011.
On
January 8, 2007, we entered into an Amendment to the Asset Purchase Agreement
with ABC-NY and DFB (the “Amendment”) in order to clarify the intent of the
parties with respect to certain provisions of the Asset Purchase Agreement
and
the parties are discussing further clarifications to address certain concerns
raised by Auxilium.
Auxilium
Agreement
In
June
2004, we entered into the Auxilium Agreement, which was amended in May
2005. Under the Auxilium Agreement, we granted to Auxilium exclusive
worldwide rights to develop, market and sell certain products containing
our
injectable collagenase. Auxilium’s licensed rights concern the
development of products, other than dermal formulations labeled for topical
administration, and currently its licensed rights cover the indications of
Dupuytren’s and Peyronie’s diseases and frozen shoulder, for which Auxilium
exercised its option in December 2005. Auxilium may further expand the Auxilium
Agreement, at its option, to cover other indications as they are developed
by
us.
The
Auxilium Agreement extends, on a country-by-country and product-by-product
basis, for the longer of the patent life, the expiration of any regulatory
exclusivity period or 12 years. Auxilium may terminate the Auxilium Agreement
upon 90 days prior written notice.
Auxilium
is responsible, at its own cost and expense (excluding the third party costs
for
the development of the lyophilization of the injection formulation, which
are
shared equally by the parties), for developing the formulation and finished
dosage form of products and arranging for the clinical supply of
products. Auxilium is responsible for all clinical development and
regulatory costs for Peyronie’s disease, Dupuytren’s disease, frozen shoulder
and all additional indications for which they exercise their
options.
We
have
the option, exercisable no later than six months after FDA approval of the
first
New Drug Application (“NDA”) or Biologics License Application (“BLA”) with
respect to a product, to assume the right and obligation to supply, or arrange
for the supply from a third party other than a back-up supplier qualified
by
Auxilium, of a specified portion of Auxilium’s commercial product requirements.
The Auxilium Agreement provides that Auxilium may withhold a specified amount
of
a milestone payment until (i) we execute an agreement, containing certain
milestones, with a third party for the commercial manufacture of the product,
(ii) we commence construction of a facility, compliant with Current Good
Manufacturing Practices (“cGMP”), for the commercial supply of the product or
(iii) 30 days after we notify Auxilium in writing that we will not exercise
the
supply option. If we exercise the supply option, commencing on a
specified date from the date of regulatory approval, we will be responsible
for
supplying either ourselves or through a third party other than a back-up
supplier qualified by Auxilium, a specified portion of the commercial supply
of
the product. If we do not exercise the supply option, then Auxilium will
be
responsible for arranging for the entire commercial product supply. In the
event
that we do exercise the supply option, then we and Auxilium are required
to use
commercially reasonable efforts to enter into a commercial supply agreement
on
customary and reasonable terms and conditions which are not worse than those
with back-up suppliers qualified by Auxilium.
Auxilium
must pay us on a country-by-country and product-by-product basis a specified
percentage of net sales for products covered by the Auxilium Agreement. Such
percentage may vary depending on whether we exercise the supply option. In
addition, the percentage may be reduced if (i) we fail to supply commercial
product supply in accordance with the terms of the Auxilium Agreement; (ii)
market share of a competing product exceeds a specified threshold; or (iii)
Auxilium is required to obtain a license from a third party in order to practice
our patents without infringing such third party’s patent rights. In
addition, if Auxilium out-licenses to a third party, then we receive a certain
specified percentage of all non royalty payments made to Auxilium in
consideration of such out-licenses.
In
addition to the payments set forth above, Auxilium must pay to us an amount
equal to a specified mark-up of the cost of goods sold for products sold
by
Auxilium that are not manufactured by or on behalf of us, provided that,
in the
event that we exercise the supply option, no payment will be due for so long
as
we fail to supply the commercial supply of the product in accordance with
the
terms of the Auxilium Agreement.
Finally,
Auxilium will be obligated to make
contingent milestone payments upon the filing of regulatory applications
and
receipt of regulatory approval. Through December 31, 2006, Auxilium paid
us both
up-front and milestone payments under the Auxilium Agreement of $8.5 million.
Auxilium could make in excess of $5 million of additional contingent milestone
payments for listed indications under the Auxilium Agreement if all existing
conditions are met.
Additional milestone obligations will be due if Auxilium
exercises an option to develop and license XIAFLEX for additional medical
indications.
In-Licensing
and Royalty Agreements
We
have
entered into several in-licensing and royalty agreements with various
investigators, universities and other entities throughout the
years.
Dupuytren’s
Disease
On
November 21, 2006, we entered into a license agreement (the “Dupuytren’s License
Agreement”) with The Research Foundation of the State University of New York at
Stony Brook (the “Research Foundation”), pursuant to which the Research
Foundation granted to us and our affiliates an exclusive worldwide license,
with
the right to sublicense to certain third parties, to know-how owned by the
Research Foundation related to the development, manufacture, use or sale
of (i)
the collagenase enzyme obtained by a fermentation and purification process
(the
“Enzyme”), and (ii) all pharmaceutical products containing the Enzyme or
injectable collagenase, in each case to the extent it pertains to the treatment
and prevention of Dupuytren’s disease.
In
consideration of the license granted under the Dupuytren’s License Agreement, we
agreed to pay to the Research Foundation certain royalties on net sales (if
any)
of pharmaceutical products containing the Enzyme or injectable collagenase
for
the treatment and prevention of Dupuytren’s disease (each a “Dupuytren’s
Licensed Product”).
Our
obligation to pay royalties to the Research Foundation with respect to sales
by
the Company, its affiliates or any sublicensee of any Dupuytren’s Licensed
Product in any country (including the U.S.) arises only upon the first
commercial sale of such Dupuytren’s Licensed Product. Our obligation to pay
royalties to the Research Foundation will continue until the later of (i)
the
expiration of the last valid claim of a patent pertaining to the Dupuytren’s
Licensed Product; (ii) the expiration of the regulatory exclusivity period
conveyed by the FDA’s Orphan Product Division with respect to the Licensed
Product or (iii) June 3, 2016.
Unless
terminated earlier in accordance with its termination provisions, the
Dupuytren’s License Agreement and licenses granted thereunder will continue in
effect until the termination of our royalty obligations. Thereafter, all
licenses granted to us under the Dupuytren’s License Agreement will become fully
paid, irrevocable exclusive licenses.
Peyronie’s
Disease
In
October 1993, we entered into a royalty agreement with Martin K. Gelbard,
M.D.,
pursuant to which we are obligated to pay certain royalties on net
sales.
Frozen
Shoulder
On
November 21, 2006, we also entered into a license agreement (the “Frozen
Shoulder License Agreement”) with the Research Foundation, pursuant to which the
Research Foundation granted to us and our affiliates an exclusive worldwide
license, with the right to sublicense to certain third parties, to know-how
owned by the Research Foundation related to the development, manufacture,
use or
sale of (i) the Enzyme and (ii) all pharmaceutical products containing the
Enzyme or injectable collagenase, in each case to the extent it pertains
to the
treatment and prevention of frozen shoulder. Additionally, the Research
Foundation granted to us an exclusive license to the patent applications
in
respect of frozen shoulder. The license granted to us under the Frozen Shoulder
License Agreement is subject to the non-exclusive license (with right to
sublicense) granted to the U.S. government by the Research Foundation in
connection with the U.S. government’s funding of the initial
research.
In
consideration of the license granted under the Frozen Shoulder License
Agreement, we agreed to pay to the Research Foundation certain royalties
on net
sales (if any) of pharmaceutical products containing the Enzyme or injectable
collagenase for the treatment and prevention of frozen shoulder (each a “Frozen
Shoulder Licensed
Product”). In
addition, we and the Research Foundation will share in any milestone payments
and sublicense income received by us in respect of the rights licensed under
the
Frozen Shoulder License Agreement.
Our
obligation to pay royalties to the Research Foundation with respect to sales
by
us, our affiliates or any sublicensee of any Frozen Shoulder Licensed Product
in
any country (including the U.S.) arises only upon the first commercial sale
of a
Frozen Shoulder Licensed Product. Our obligation to pay royalties to the
Research Foundation will continue until, the later of (i) the expiration
of the
last valid claim of a patent pertaining to a Frozen Shoulder Licensed Product;
or (ii) June 3, 2016.
Unless
terminated earlier in accordance with its termination provisions, the Frozen
Shoulder License Agreement and licenses granted thereunder will continue
in
effect until the termination of our royalty obligations. Thereafter, all
licenses granted to us under the Frozen Shoulder License Agreement will become
fully paid, irrevocable exclusive licenses.
In
connection with the execution of the Dupuytren’s License Agreement and the
Frozen Shoulder License Agreement, certain up-front payments were made by
us to
the Research Foundation and the clinical investigators working on the
Dupuytren’s disease and frozen shoulder indications for the Enzyme.
Other
Indications
We
have
entered into certain other license and royalty agreements with respect to
certain other indications that we may elect to pursue.
COMPETITION
We
face
worldwide competition from larger pharmaceutical companies, specialty
pharmaceutical companies and biotechnology firms, universities and other
research institutions and government agencies that are developing and
commercializing pharmaceutical products. Many of our competitors have
substantially greater financial, technical and human resources than we have
and
may subsequently develop products that are more effective, safer or less
costly
than any that have been or are being developed by us or that are generics.
Our
success will depend on our ability to acquire, develop and commercialize
products and our ability to establish and maintain markets for our products
for
which we receive marketing approval.
RESEARCH
AND DEVELOPMENT
Cost
of Research and Development Activities
In
2006,
the Company invested $1,217,306 in research and development
activities.
Dupuytren’s
Disease
Following
an end-of-Phase II meeting between the FDA and us, we supplied requisite
study
drug, initiated and monitored a pivotal clinical trial. Auxilium presented
the
results of this trial in their press release on February 20, 2007, as stated
in
this Item 1, under the section titled “Collagenase for Treatment of Dupuytren’s
Disease.”
Peyronie‘s
Disease
Based
on
clinical trial protocols submitted to the FDA, we supplied requisite study
drug,
initiated and monitored clinical investigations, which were described by
Auxilium in their press release dated October 25, 2006. An excerpt of
this press release appears in this Item 1, under the section titled “Collagenase
for Treatment of Peyronie’s Disease.”
Frozen
Shoulder
We
have
supplied requisite study drug, initiated and monitored a Phase II clinical
trial
using the injectable enzyme in the treatment of frozen
shoulder. Three different doses of the enzyme were compared to
placebo in this double-blind, randomized trial in 60 patients. The results
from
this trial suggest that local injection of the enzyme are encouraging and
may be
effective in patients suffering from frozen shoulder. Additional studies
are
needed to assess the optimal dose and dosing regimen of injectable collagenase
in this indication. In its press release dated December 20, 2005,
concurrent with its exercise of its option with respect to frozen shoulder,
Auxilium reported: “AA4500 is a very
important
product candidate for Auxilium, and we believe the addition of a third
indication for this development program enhances the commercial potential
of
AA4500.” In their current report on Form 8-K filed on June 14, 2007, Auxilium
stated that an estimated 3% of people develop frozen shoulder over their
lifetime.
Additional
Clinical Indications
Lipomas
As
described in this Item 1, under the section titled “Other Clinical Indications
for Collagenase,” we have supplied requisite study drug, initiated and monitored
a positive open label clinical study for treatment of lipomas with injectable
collagenase. These results suggest the possibility of chemical
liposuction. We are in the process of analyzing the results of the
study and evaluating the possibility of conducting a Phase II study for the
treatment of lipomas with injectable collagenase.
Cellulite
As
described in this Item 1, under the section titled “Other Clinical Indications
for Collagenase,” we have referenced the promising open label clinical trial
results for treatment of cellulite with injectable collagenase. We are currently
planning for a Phase II study for the treatment of cellulite with injectable
collagenase, subject to the availability of suitable clinical
material.
Scarred
Tendon
Traumatic
injuries to the hand may result in an inability to return to normal function
due
to scar formation between flexor tendon and surrounding
tissues. Scarring frequently results in the formation of adhesions,
which complicates the ability of the tendon to glide further impairing finger
movement. Surgical repairs of the flexor tendon are notably difficult
because of the post-traumatic accumulation of scar tissue, as such it is
considered to be one of the most difficult issues in orthopaedic surgery.
We
have supplied requisite study drug and we monitor an open-label clinical
investigation with collagenase for the treatment of scarred tendons in the
hand.
An open label clinical investigation has been conducted by independent
investigators to determine if collagenase injection can be of help to patients
with scarred flexor tendons. We are in the process of closing out the
clinical investigation.
New
Products
We
continue to selectively review new technologies and products in the areas
of
wound healing and tissue remodeling for possible acquisition or
in-licensing.
GOVERNMENT
REGULATION
All
of
our products labeled for use in humans require regulatory approval by government
agencies prior to commercialization. In particular, human therapeutic products
are subject to rigorous preclinical and clinical trials to demonstrate safety
and efficacy and other approval procedures of the FDA and similar regulatory
authorities in foreign countries. Various federal, state, local, and foreign
statutes and regulations also govern testing, manufacturing, labeling,
distribution, storage and record-keeping related to such products and their
promotion and marketing. The process of obtaining these approvals and the
compliance with federal, state, local, and foreign statutes and regulations
require the expenditure of substantial time and financial resources. In
addition, the current political environment and the current regulatory
environment at the FDA could lead to increased testing and data requirements
which could impact regulatory timelines and costs.
Clinical
trials involve the administration of the investigational product candidate
or
approved products to human subjects under the supervision of qualified
investigators. Clinical trials are conducted under protocols detailing, among
other things, the objectives of the study, the parameters to be used in
assessing the safety and the effectiveness of the drug. Typically, clinical
evaluation involves a time-consuming and costly three-phase sequential process,
but the
phases
may overlap. Each trial must be reviewed, approved and conducted under the
auspices of an independent institutional review board, and each trial must
include the patient’s informed consent.
Clinical
testing may not be completed successfully within any specified time period,
if
at all. The FDA monitors the progress of each of the first phases of clinical
trials that are conducted in the U.S. and may, at its discretion, reevaluate,
alter, suspend or terminate the testing based upon the data accumulated to
that
point and the FDA’s assessment of the risk/benefit ratio to the patient. The FDA
can also provide specific guidance on the acceptability of protocol design
for
clinical trials. The FDA or we may suspend or terminate clinical trials at
any
time for various reasons, including a finding that the subjects or patients
are
being exposed to an unacceptable health risk. The FDA can also request that
additional clinical trials be conducted as a condition to product approval.
During all clinical trials, physicians monitor the patients to determine
effectiveness and/or to observe and report any reactions or other safety
risks
that may result from use of the drug candidate.
Assuming
successful completion of the required clinical trial, drug developers submit
the
results of preclinical studies and clinical trials, together with other detailed
information including information on the chemistry, manufacture and control
of
the product, to the FDA, in the form of a NDA or BLA, requesting approval
to
market the product for one or more indications. In most cases, the NDA/BLA
must
be accompanied by a substantial user fee. The FDA reviews an NDA/BLA to
determine, among other things, whether a product is safe and effective for
its
intended use.
Before
approving an application, the FDA will inspect the facility or facilities
where
the product is manufactured. The FDA will not approve the application unless
cGMP compliance is satisfactory. The FDA will issue an approval letter if
it
determines that the application, manufacturing process and manufacturing
facilities are acceptable. If the FDA determines that the application,
manufacturing process or manufacturing facilities are not acceptable, it
will
outline the deficiencies in the submission and will often request additional
testing or information. Notwithstanding the submission of any requested
additional information, the FDA ultimately may decide that the application
does
not satisfy the regulatory criteria for approval and refuse to approve the
application by issuing a “not approvable” letter.
The
testing and approval process requires substantial time, effort and financial
resources, which may take several years to complete. The FDA may not grant
approval on a timely basis, or at all. We may encounter difficulties or
unanticipated costs in our efforts to secure necessary governmental approvals,
which could delay or preclude us from marketing our products. Furthermore,
the
FDA may prevent a drug developer from marketing a product under a label for
its
desired indications or place other conditions, including restrictive labeling,
on distribution as a condition of any approvals, which may impair
commercialization of the product. After approval, some types of changes to
the
approved product, such as adding new indications, manufacturing changes and
additional labeling claims, are subject to further FDA review and
approval.
If
the
FDA approves the NDA or BLA, the drug can be marketed to physicians to prescribe
in the U.S. After approval, the drug developer must comply with a number
of
post-approval requirements, including delivering periodic reports to the
FDA
(i.e., annual reports), submitting descriptions of any adverse reactions
reported, biological product deviation reporting, and complying with drug
sampling and distribution requirements. The holder of an approved NDA/BLA
is
required to provide updated safety and efficacy information and to comply
with
requirements concerning advertising and promotional labeling. Also, quality
control and manufacturing procedures must continue to conform to cGMP after
approval. Drug manufacturers and their subcontractors are required to register
their facilities and are subject to periodic unannounced inspections by the
FDA
to assess compliance with cGMP which imposes procedural and documentation
requirements relating to manufacturing, quality assurance and quality control.
Accordingly, manufacturers must continue to expend time, money and effort
in the
area of production and quality control to maintain compliance with cGMP and
other aspects of regulatory compliance. The FDA may require post-market testing
and surveillance to monitor the product’s safety or efficacy, including
additional studies to evaluate long-term effects.
In
addition to studies requested by the FDA after approval, a drug developer
may
conduct other trials and studies to explore use of the approved drug for
treatment of new indications, which require submission of a supplemental
or new
NDA and FDA approval of the new labeling claims. The purpose of these trials
and
studies is to broaden the application and use of the drug and its acceptance
in
the medical community.
We
use,
and will continue to use, third-party manufacturers to produce our products
in
clinical quantities. Future FDA inspections may identify compliance
issues at our facilities or at the facilities of our contract manufacturers
that
may disrupt production or distribution, or require substantial resources
to
correct. In addition, discovery of problems with a product or the failure
to
comply with requirements may result in restrictions on a product, manufacturer
or holder of an approved NDA/BLA, including withdrawal or recall of the product
from the market or other voluntary or FDA-
initiated
action that could delay further marketing. Newly discovered or developed
safety
or effectiveness data may require changes to a product’s approved labeling,
including the addition of new warnings and contraindications. Also, new
government requirements may be established that could delay or prevent
regulatory approval of our products under development.
INTELLECTUAL
PROPERTY AND RIGHTS
PATENT
PROTECTION
Patents
We
are
the assignee or licensee of six U.S. patents, four of which have received
patent
protection in various foreign countries. In addition, we have licenses to
another patent under application. There can be no assurances when, if ever,
such
patent will be issued, or that such patent, if issued, will be of any value
to
us.
The
scope
of the intellectual property rights held by pharmaceutical firms involves
complex legal, scientific and factual questions and consequently is generally
uncertain. In addition, the coverage claimed in a patent application can
be
significantly reduced before the patent is issued. Consequently, we do not
know
whether any of our current patent applications, or the products or product
candidates we develop, acquire or license will result in the issuance of
patents
or, if any patents are issued, whether they will provide significant proprietary
protection or will be challenged, circumvented or invalidated. Because patent
applications in the U.S. and some other jurisdictions are sometimes maintained
in secrecy until patents issue, and since publication of discoveries in the
scientific or patent literature often lags behind actual discoveries, we
cannot
be certain of the priority of inventions covered by pending patent applications.
Moreover, we may have to participate in interference proceedings declared
by the
U.S. Patent and Trademark Office (the “USPTO”), or a foreign patent office to
determine priority of invention, or in opposition proceedings in a foreign
patent office, either of which could result in substantial cost to us, even
if
the eventual outcome is favorable to us. There can be no assurance that the
patents, if issued and challenged, in a court of competent jurisdiction would
be
found valid or enforceable. An adverse outcome could subject us to significant
liabilities to third parties, require disputed rights to be licensed from
third
parties or require us to cease using such technology.
Although
we believe these patent applications, if they issue as patents, will provide
a
competitive advantage, the patent positions of pharmaceutical and biotechnology
companies are highly uncertain and involve complex legal and factual questions.
We may not be able to develop patentable products or processes and may not
be
able to obtain patents from pending applications. Even if patent claims are
allowed, the claims may not issue, or in the event of issuance, may not be
sufficient to protect our technology. In addition, any patents or patent
rights
we obtain may be circumvented, challenged or invalidated by our
competitors.
While
we
attempt to ensure that our product candidates and the methods we employ to
manufacture them do not infringe other parties’ patents and proprietary rights,
competitors or other parties may assert that we infringe on their proprietary
rights. Additionally, because patent prosecution can proceed in secret prior
to
issuance of a patent, third parties may obtain other patents without our
knowledge prior to the issuance of patents relating to our product candidates
which they could attempt to assert against us.
Although
we believe that our product candidates, production methods and other activities
do not currently infringe the intellectual property rights of third parties,
we
cannot be certain that a third party will not challenge our position in the
future. If a third party alleges that we are infringing its intellectual
property rights, we may need to obtain a license from that third party, but
there can be no assurance that any such license will be available on acceptable
terms or at all. Any infringement claim that results in litigation could
result
in substantial cost to us and the diversion of management’s attention away from
our core business. To enforce patents issued to us or to determine the scope
and
validity of other parties’ proprietary rights, we may also become involved in
litigation or in interference proceedings declared by the USPTO, which could
result in substantial costs to us or an adverse decision as to the priority
of
our
inventions.
We may be involved in interference and/or opposition proceedings in the future.
We believe there will continue to be litigation in our industry regarding
patent
and other intellectual property rights.
We
also
rely on trade secret protection for our confidential and proprietary
information. No assurance can be given that others will not independently
develop substantially equivalent proprietary information and techniques or
otherwise gain access to our trade secrets or disclose such technology or
that
we can meaningfully protect our trade secrets.
It
is our
policy to require certain employees, consultants, outside scientific
collaborators, sponsored researchers and other advisors to execute
confidentiality agreements upon the commencement of employment or consulting
relationships with us. These agreements provide that all confidential
information developed or made known to the individual during the course of
the
individual’s relationship with us is to be kept confidential and not disclosed
to third parties except in specific circumstances. In the case of employees,
the
agreements provide that all inventions conceived by the individual shall
be our
exclusive property. There can be no assurance, however, that these agreements
will provide meaningful protection or adequate remedies for our trade secrets
in
the event of unauthorized use or disclosure of such information.
Our
success will depend in part on our ability to protect our existing products
and
the products we acquire or in-license by obtaining and maintaining a strong
proprietary position both in the U.S. and in other countries. To develop
and
maintain such a position, we intend to continue relying upon patent protection,
trade secrets, know-how, continuing technological innovations and licensing
opportunities. In addition, we intend to seek patent protection whenever
available for any products or product candidates and related technology we
develop or acquire in the future.
We
licensed to Auxilium our injectable collagenase for the treatment of Dupuytren’s
and Peyronie’s diseases as well as frozen shoulder. In addition to the marketing
exclusivity which comes with its orphan drug status as a treatment for
Dupuytren’s and Peyronie’s diseases, the enzyme underlying this product
candidate is covered by two use patents in the U.S., one for the treatment
of
Dupuytren’s disease and one for the treatment of Peyronie’s disease. The
Dupuytren’s patent expires in 2014, and the Peyronie’s patent expires in 2019.
The patent relating to Dupuytren’s disease has been the subject of a reissue
application in the USPTO for, among other things, the purpose of submitting
prior art that was not previously submitted during the prosecution of the
Dupuytren’s patent. The USPTO issed a Notice of Allowance for this patent in May
2007. Both the Dupuytren’s and Peyronie’s patents are limited to the use of the
enzyme for the treatment of Dupuytren’s and Peyronie’s diseases within certain
dose ranges. Foreign patents also cover these products in certain
countries.
Orphan
Drug Designations
The
FDA’s
Office of Orphan Products Development (“OOPD”) administers the major provisions
of the Orphan Drug Act (the “Act”), an innovative program that provides
incentives for sponsors to develop products for rare diseases.
The incentives for products that qualify under the Act
include seven-year exclusive marketing rights post FDA approval, tax credits
for
expenses associated with clinical trials including a 20 year tax carry-forward,
availability of FDA grants, and advice on design of the clinical development
plan.
The
orphan drug provisions of the Federal Food, Drug, and Cosmetic Act also provide
incentives to drug and biologics suppliers to develop and supply drugs for
the
treatment of rare diseases, currently defined as diseases that affect fewer
than
200,000 individuals in the U.S. or, for a disease that affects more than
200,000
individuals in the U.S. and for which there is no reasonable expectation
that
the cost of developing and making available in the U.S. a drug for such disease
or condition will be recovered from its sales in the U.S. Under these
provisions, a supplier of a designated orphan product can seek tax benefits,
and
the holder of the first FDA approval of a designated orphan product will
be
granted a seven-year period of marketing exclusivity for that product for
the
orphan indication. It would not prevent other drugs from being
approved for the same indication.
Two
indications, Dupuytren’s disease and Peyronie’s disease, have received Orphan
Drug status from the OOPD.
In
the
European Union (“E.U.”), incentives for suppliers to develop medicinal products
for the treatment of rare diseases are provided pursuant to the Orphan Medicinal
Products Regulation. Orphan medicinal products are those products designed
to
diagnose, treat or prevent a condition which occurs so infrequently that
the
cost of developing and bringing the product to the market would not be recovered
by the expected sale of the product. In the E.U., the criterion for designation
is a prevalence of the relevant condition in no more than 5 per 10,000 of
the population. The incentives include, among others, a reduction in the
fees
payable in respect of the marketing authorization application,
protocol
assistance for clinical trials in support of the application, and marketing
exclusivity once the authorization is granted.
EMPLOYEES
Following
the sale of the collagenase topical business to DFB in March, 2006, the total
number of our employees decreased to six and with the death of Edwin H. Wegman
on February 16, 2007, and the termination of Lawrence Dobroff on May 7, 2007
we
now have four employees. All of our employees are full time
employees.
CORPORATE
INFORMATION
BioSpecifics
Technologies Corp. was incorporated in Delaware in 1990. ABC-NY was incorporated
in New York in 1957. ABC-Curaçao was incorporated in Curaçao,
Netherlands Antilles in 1976. Our corporate headquarters are located
at 35 Wilbur St., Lynbrook, NY 11563. Our telephone number is 516-593-7000.
Until March 2006, our manufacturing operations were located in Lynbrook,
NY and
Brievengat Curacao, Netherlands Antilles.
RISK
FACTORS
In
addition to the other information included in this Report, the following
factors
should be considered in evaluating our business and future prospects. Any
of the
following risks, either alone or taken together, could materially and adversely
affect our business, financial position or results of operations. If one
or more
of these or other risks or uncertainties materialize or if our underlying
assumptions prove to be incorrect, our actual results may vary materially
from
what we projected. There may be additional risks that we do not presently
know
or that we currently believe are immaterial which could also impair our business
or financial position.
Risks
Related to Our Limited Sources of Revenue
Our
future revenue is primarily dependent upon option, milestone and contingent
royalty payments from Auxilium and, as part of our sale of our topical
collagenase business to DFB, technical assistance payments and contingent
earn
out payments from DFB.
Following
our sale of our topical business to DFB, our primary sources of revenues
are
from (i) option, milestone and contingent royalty
payments
from Auxilium under the Auxilium Agreement, (ii) payments from DFB for technical
assistance we provide and contingent earn out payments from DFB and (iii)
the
sale of small amounts of collagenase for laboratory research.
Under
the
Auxilium Agreement, in exchange for the right to receive royalties and other
rights, we granted to Auxilium the right to develop, manufacture, market
and
sell worldwide products (other than dermal formulations for topical
administration) that contain collagenase for the treatment of Dupuytren’s and
Peyronie’s diseases and frozen shoulder, which Auxilium exercised in December
2005, subject to certain reversionary rights. However, we may not
receive any royalty payments from Auxilium because we have no control over
Auxilium’s decision to pursue commercialization, or its ability to successfully
manufacture, market and sell candidate products for the treatment of Dupuytren’s
and Peyronie’s diseases, and frozen shoulder. Subject to certain conditions, we
have retained an option to manufacture a portion of the developed product
licensed to Auxilium after it has been marketed for several years. We have
received in the past, and are entitled to receive in the future, certain
milestone payments from Auxilium in respect of its efforts to commercialize
such
candidate products. However, we have no control over Auxilium’s ability to
achieve the milestones.
We
have
also retained the right to pursue other clinical indications for injectable
collagenase, and have granted Auxilium an option to expand its license and
development rights to one or more additional indications (“Additional
Indications”) for injectable collagenase not currently licensed to Auxilium,
including lipomas and cellulite. The option is exercisable as to any such
Additional Indications for which we have submitted a Phase II clinical trial
report to Auxilium and which meet other criteria provided in the Auxilium
Agreement. Upon Auxilium’s exercise of the option with respect to any Additional
Indication, it must pay to us a one-time license fee for the rights to such
new
indication. In addition, we are also entitled to receive milestone payments
and,
subject to commercialization of any Additional Indications, royalty payments
with respect to any such Additional Indications. If Auxilium does not
exercise its
option
as
to any Additional Indication, we have the right to offer it to any third
party,
provided that we first offer the same terms to Auxilium, or to develop the
product ourselves. Auxilium has no obligation to exercise its option with
respect to any such Additional Indication, and its decision to do so is in
its
complete discretion. Clinical trials can be expensive and the results are
subject to different interpretations, therefore, there is no assurance that
after conducting Phase II clinical trials on any Additional Indication, and
incurring the associated expenses, Auxilium will exercise its option or we
will
receive any revenue from it.
On
December 6, 2006 Auxilium announced the suspension of its Phase III clinical
trial for Dupuytren’s disease. In a press release dated September 10,
2007, Auxilium announced that it has restarted its Phase III clinical trials
for
XIAFLEX for the treatment of Dupuytren’s disease. The failure of
Auxilium to adhere to its schedule regarding its Phase III clinical trial
will
have an effect on the timing of our receipt of milestone and royalty payments
from Auxilium.
As
part
of the sale of our topical collagenase business to DFB, we are entitled to
receive earn out payments in respect of sales of certain products developed
and
manufactured by DFB that contain collagenase for topical
administration. However, our right to receive earn out payments from
DFB is dependent upon DFB’s decision to pursue, and its ability to succeed in,
the manufacture and commercialization of such products, and achieve certain
sales thresholds at which its obligations to pay earn out payments to us
would
commence. We are aware that DFB has certain competitive products that may
adversely affect the volume of sales of those topical collagenase products
for
which we are entitled to the earn out.
We
also
agreed to provide technical assistance to DFB’s affiliate, DPT Lakewood, for a
fixed period of time in consideration for certain payments and we are required
to maintain certain scientific resources and records in order to provide
such
assistance and be entitled to receive such payments.
Our
dependence upon revenue from Auxilium and DFB make us subject to the
commercialization and other risk factors affecting those two companies over
which we have limited or no control.
Auxilium
has disclosed in its securities filings a number of risk factors to consider
when evaluating its business and future prospects. Given our dependence upon
revenue from Auxilium, Auxilium’s operating success or failure has a significant
impact on our potential royalty stream and other payment rights. As such,
we
refer you to the full text of Auxilium’s disclosed risk factors in its
securities filings, which were most recently included on Form S-3 filed on
August 27, 2007.
DFB
is
not a publicly traded company and therefore we have little information about
its
business and future prospects. Although we cannot be certain, we presume
that
many of the risk factors affecting Auxilium’s business may have some bearing in
evaluating DFB’s ability to meet its payment obligations to us for technical
assistance or to generate sufficient sales of topical collagenase products
for
us to be entitled to receive any of the earn out.
Risks
Related to Limited Supply of Clinical Materials
The
FDA’s action in December 2005 to place on hold a clinical trial related to
hypertrophic scarring being conducted on our behalf by an independent
investigator, because of questions regarding certain of our clinical materials,
may limit our ability to conduct other clinical trials and to obtain the
associated option, milestone and contingent royalty payments under our agreement
with Auxilium.
One
of
the independent investigators who has performed a clinical trial on hypertrophic
scarring was notified by the FDA that a clinical hold has been placed on
an
investigational new drug (an “IND”) application for that indication. Prior to
commencing clinical trials in U.S. interstate commerce, there must be an
effective IND for each of our product candidates. As a result of the clinical
hold, the independent investigators are not permitted to conduct a clinical
trial for that indication under the IND until the FDA releases the hold.
Although we believe that the clinical hold only applies to the use of our
clinical materials in connection with the indication specified in the clinical
hold notification, it is possible that the FDA might broaden the scope of
the
clinical hold to cover use of our clinical materials in clinical trials for
other indications that we may want to pursue. If the FDA’s hold also limits our
ability to
conduct
clinical trials on other indications, it may make it difficult for us to
conduct
clinical trials on Additional Indications under the Auxilium
Agreement. Consequently, it may limit our ability to obtain the
option, milestone and contingent royalty payments under the Auxilium
Agreement.
We
have a limited supply of clinical material, which may limit our ability to
conduct other clinical trials and to obtain the associated option, milestone
and
contingent royalty payments under our agreement with
Auxilium.
Although
we currently have our own clinical material, which may be sufficient to conduct
clinical trials contemplated for cellulite and lipoma, if this clinical material
is damaged or otherwise becomes unusable, then we may have insufficient clinical
material to conduct other clinical trials. Although Auxilium has
agreed to provide us with additional clinical material, there is no guaranty
that Auxilium will do so in a timely manner, if at all. Consequently,
the lack of availability of clinical material may limit our ability to obtain
the option, milestone and contingent royalty payments under the Auxilium
Agreement.
Risks
Related to our Agreements with Auxilium and DFB
Our
ability to conduct clinical trials and develop products for dermal formulations
for topical or injectable administration of collagenase is limited by the
agreements we have signed with Auxilium and DFB.
Under
our
agreements with Auxilium and DFB, we have sold, licensed, or granted options
to
certain of our rights to conduct clinical trials and develop products for
dermal
formulations for
topical or injectable administration of
collagenase. Under the terms of the Auxilium Agreement and our
agreement with DFB, we have agreed to certain non-competition provisions,
which
limit our clinical development activities.
Risks
Related to our Limited Financial and Employee
Resources
Our
limited financial and employee resources following our sale of the topical
collagenase business to DFB limit our ability to develop other indications
or
products.
Following
the sale of our topical business to DFB, we retained only six employees (and
with the death of Edwin H. Wegman and termination of Lawrence Dobroff, we
now
have only four employees) and the sources of revenue described above. Because
we
have limited internal research capabilities, we are dependent upon independent
investigators, pharmaceutical and biotechnology companies and other researchers
to conduct clinical trials, sell or license products or technologies to
us.
To
end
our reliance on Auxilium and DFB for the majority of our revenues, we would
need
to in-license, acquire, develop and market other products and product
candidates. However, we may not be able to successfully identify any commercial
products or product candidates to in-license, acquire or internally develop
given our limited financial and employee resources. Moreover, negotiating
and
implementing an economically viable in-licensing arrangement or acquisition
is a
lengthy and complex process. Other companies, including those with substantially
greater financial, marketing and sales resources, may, if we decide to follow
this strategy, compete with us for the in-licensing or acquisition of product
candidates and approved products. We may not be able to acquire or in-license
the rights to additional product candidates and approved products on terms
that
we find acceptable, or at all. If we are unable to in-license or acquire
additional commercial products or product candidates our ability to grow
our
business or increase our profits could be severely limited.
Our
revenues are difficult to forecast.
Forecasting
our revenues is complicated by the difficult task of predicting the level
of
success that Auxilium and DFB will have in meeting milestones, manufacturing,
marketing and selling products or candidate products for which we would receive
milestone, earn out or royalty payments.
If
we are unable to obtain option payments, milestone and contingent royalty
payments from Auxilium or DFB or meet our needs for additional funding from
other sources, we may be required to limit, scale back or cease our
operations.
Our
negative cash flows from operations are expected to continue for at least
the
foreseeable future. Our business strategy contains elements that we will
not be
able to execute if we do not receive the anticipated option, milestone,
royalty
or earn out payments from Auxilium or DFB, or secure additional funding from
other sources. Specifically, we may need to raise additional capital
to:
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acquire
or in-license approved products or product candidates or technologies
for
development;
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fund
our product development, including clinical trials relating to
in-licensed
technology and the remaining indications;
and
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commercialize
any resulting product candidates for which we receive regulatory
approval.
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We
believe that our existing cash resources and interest on these funds will
be
sufficient to meet our anticipated operating requirements until at least
the
third quarter of 2008. Our future funding requirements will depend on many
factors, including:
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DFB’s
ability to meet its payment obligations and to manufacture and
commercialize topical collagenase products for which we would receive
earn
out payments;
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Auxilium’s
ability to manufacture and commercialize injectable product for
which we
would receive milestone and royalty
payments;
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the
scope, rate of progress, cost and results of our clinical trials
on
remaining Additional Indications, including lipomas and cellulite,
and
whether Auxilium exercises its option to acquire rights to
them;
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the
ability of the estate of our former chairman (“Chairman”) and chief
executive officer (“CEO”) to repay his personal loans owed to the
Company;
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the
terms and timing of any future collaborative, licensing, co-promotion
and
other arrangements that we may establish;
and
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the
cost of filing, prosecuting, defending and enforcing any patent
claims and
other intellectual property rights or defending against any other
litigation.
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These
factors could result in variations from our currently projected operating
requirements. If our existing resources are insufficient to satisfy our
operating requirements, we may need to limit, scale back or cease operations
or,
in the alternative, borrow money. Given our operations and history,
and the fact that we are not current in our SEC filings, we may not be able
to
borrow money on commercially reasonable terms, if at all. If we issue any
equity
or debt securities, the terms of such issuance may not be acceptable to us
and
would likely result in substantial dilution of our stockholders’
investment. If we do not receive revenues from Auxilium or DFB, and
are unable to secure additional financing, we may be required to cease
operations.
In
order to finance and to secure the rights to conduct clinical trials for
products we have licensed to Auxilium, we have granted to third-parties
significant rights to share in royalty payments received by us, which are
in the
process of being clarified.
To
finance and secure the rights to conduct clinical trials for products we
have
licensed to Auxilium, we have granted to third parties certain rights to
share
in royalty payments received by us from Auxilium under the Auxilium Agreement.
Consequently, we will be required to share a significant portion of the payments
due from Auxilium under the Auxilium Agreement. We are in the process
of clarifying the terms of certain of these agreements relating to Peyronie’s
disease and other indications.
Risks
Related to the Recent Death of our Former Chairman and CEO and the Age and
Qualifications of the Members of Our Board of
Directors
The
recent death of our founder, Chairman and CEO on February 16, 2007 may limit
our
future growth and will cause us to continue to incur significant expenses
for
outside consulting services. His death may affect our ability to
collect the personal debt owed to us by his estate and may thus create a
financial hardship for us. His death may also affect the control of
the Company.
As
a result of the illness and recent death of our
founder, former Chairman and CEO, we have and will continue to incur significant
expenses for outside consulting services to assist in business planning and
execution of transactions.
As
of
December 31, 2006 our former Chairman and CEO owed to us an aggregate amount
of
$1,016,595. We entered into an amended and restated promissory note
for this amount with our former Chairman and CEO, which is secured by a pledge
of 100% of the shares of The S.J. Wegman Company. At December 31,
2006 the total number of shares pledged, 1,843,327, have a current market
value
of $3.80 per share. His death has resulted in the immediate obligation of
his
estate to repay the loan. However, it is uncertain whether his estate
will be able to repay the loan and, if so, on what terms. His death
has also resulted in the dissolution of The S.J. Wegman Company, which triggered
a default under the pledge agreement, giving our board of directors (the
“Board”
or “Board of Directors”) the right to vote the pledged
shares. However, it is unclear as a practical matter whether the
Company will be able to foreclose on the pledge. Our inability to
collect this debt may create a financial hardship for us. Given his beneficial
ownership and/or control of a significant portion of the Company’s stock, the
death of our former Chairman and CEO may affect the control of the Company
and
the ability of the Company to obtain majority stockholder consent for certain
actions. Thus, the death of our Chairman and CEO may adversely affect
our stock price.
Because
of the age of some of our independent Board members, we may have to find
replacements shortly, and due to our financial condition and Securities and
Exchange Commission (“SEC”) compliance history this may be difficult, which
could impact our ability to be re-listed on another securities
exchange. None of the independent Board members, who are also the
members of the Audit Committee is a financial expert, as required by certain
exchanges. With the election of Toby and Mark Wegman to the Board of
Directors on June 25, 2007, we no longer have a majority of independent
directors, as required by certain exchanges.
The
three
independent members of our Board, who are also members of our audit committee
(the “Audit Committee”), are sixty-six, sixty-six and eighty-six years old,
respectively, as of December 31, 2006. Upon the retirement, incapacity or
death
of one or more of our independent Board members, we would have to find
replacements in a short period of time. In addition, none of the members
of the
Audit Committee is a financial expert, which is required by certain exchanges.
With the election of Toby and Mark Wegman to the Board of Directors on June
25,
2007, we no longer have a majority of independent Board directors, as required
by certain exchanges. As of the date hereof, we are not current in
our SEC filings. In light of our financial condition and SEC compliance history,
it may be difficult to find any replacements for our independent Board members.
If we fail to find replacements in a timely manner, or fail to recruit a
financial expert for the Audit Committee or fail to recruit another independent
Board member, it could negatively impact our ability to list on certain
exchanges and our stock price.
Risks
Related to Regulatory Requirements
We
are subject to numerous complex regulatory requirements and failure to comply
with these regulations, or the cost of compliance with these regulations,
may
harm our business.
Conducting
clinical trials, and the testing, development and manufacturing and distribution
of any product candidates are subject to regulation by numerous governmental
authorities in the U.S. and other jurisdictions, if we desire to export the
resulting products to such other jurisdictions. These regulations govern
or
affect the testing, manufacture, safety, labeling, storage, record-keeping,
approval, distribution, advertising and promotion of any product candidates,
as
well as safe working conditions. Noncompliance with any applicable regulatory
requirements can result in suspension or termination of any ongoing clinical
trials of a product candidate or refusal of the government to approve product
candidate for commercialization, criminal prosecution and fines, recall or
seizure of products, total or partial suspension of production, prohibitions
or
limitations on the commercial sale of products or refusal to allow the entering
into of federal and state supply contracts. The FDA and comparable governmental
authorities have the authority to suspend or terminate any ongoing clinical
trials of a product candidate or withdraw product approvals that have been
previously granted. Currently, there is a substantial amount of congressional
and administrative review of the FDA and the regulatory approval process
for
drug candidates in the U.S. As a result, there may be significant changes
made
to the regulatory approval process in the U.S. In addition, the regulatory
requirements relating to the development, manufacturing, testing, promotion,
marketing and distribution of products candidates may change in the U.S.
Such
changes may increase our costs and adversely affect our operations.
Additionally,
failure to comply with or changes to the regulatory requirements that are
applicable, or may become applicable, to us or any product candidates we
may
develop or obtain, may result in a variety of consequences, including the
following:
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restrictions
on our products or manufacturing
processes;
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withdrawal
of a product candidate from the
market;
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voluntary
or mandatory recall of a product
candidate;
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suspension
or withdrawal of regulatory approvals for a product
candidate;
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refusal
to permit the import or export of our
products;
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refusal
to approve pending applications or supplements to approved applications
that we submit;
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denial
of permission to file an application or supplement in a
jurisdiction;
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injunctions
or the imposition of civil or criminal penalties against
us.
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Our
corporate compliance program cannot guarantee that we are in compliance with
all
potentially applicable laws and regulations and we have and will continue
to
incur costs relating to compliance with applicable laws and
regulations.
We
are a
relatively small company and we rely heavily on third parties and outside
consultants to conduct many important functions. As a biopharmaceutical company,
we are subject to a large body of legal and regulatory requirements. In
addition, as a publicly traded company we are subject to significant
regulations, including the Sarbanes-Oxley Act of 2002 (“SOX”), some of which
have either only recently been adopted or are currently proposals subject
to
change. We cannot assure you that we are or will be in compliance with all
potentially applicable laws and regulations. Failure to comply with all
potentially applicable laws and regulations could lead to the imposition
of
fines, cause the value of our common stock to decline, impede our ability
to
raise capital or list our securities on certain securities exchanges. Although
we are not required to issue an evaluation of our internal control over
financial reporting under Section 404 of SOX until December 31, 2007 at the
earliest, preparations for the issuance of this report will result in increased
costs to us. If we are not able to issue an evaluation of our internal control
over financial reporting as required or we or our independent registered
public
accounting firm determine that our internal control over financial reporting
is
not effective, this shortcoming could have an adverse effect on our business
and
financial results and the price of our common stock could be negatively
affected. The new rules could make it more difficult or more 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.
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, our board
committees and as executive officers. We cannot predict or estimate the amount
of the additional costs we may incur or the timing of such costs to comply
with
these rules and regulations.
We
have, and will continue to incur, significant costs to bring the company
current
in its SEC filings and to list our stock on certain securities
exchanges. In addition, there can be no assurance that we will be
successful in such listing.
We
are
not current in our SEC filings and we have incurred, and will continue to
incur,
significant costs to become current and to list our stock on certain securities
exchanges. There are no assurances that we will be successful in bringing
the
company current or listing our stock. Continued failure to comply
with SEC filing requirements could expose us to SEC enforcement action and
makes
it difficult to comply with the requirements relating to the solicitation
of
proxies from our stockholders.
Risks
Related to Growth and Employees
Our
failure to successfully in-license or acquire additional technologies,
product
candidates or approved
products
could impair our ability to grow or continue to operate.
We
may
decide to pursue other opportunities to in-license, acquire, develop and
market
additional products and product candidates so that we are not solely reliant
on
Auxilium and DFB sales for our revenues. Because we have limited internal
research capabilities, we are dependent upon pharmaceutical and biotechnology
companies and other researchers and independent investigators to sell or
license
products or technologies to us. The success of this strategy depends upon
our
ability to identify, select and acquire the right pharmaceutical product
candidates, products and technologies.
We
may
not be able to successfully identify any commercial products or product
candidates to in-license, acquire or internally develop. Moreover, negotiating
and implementing an economically viable in-licensing arrangement or acquisition
is a lengthy and complex process. Other companies, including those with
substantially greater financial, marketing and sales resources, may compete
with
us for the in-licensing or acquisition of product candidates and approved
products. We may not be able to acquire or in-license the rights to additional
product candidates and approved products on terms that we find acceptable,
or at
all. If we are unable to in-license or acquire additional commercial products
or
product candidates we may be reliant solely on Auxilium and DFB sales for
revenues. As a result, our ability to grow our business or increase our revenues
could be severely limited.
If
we are able to develop any product candidates for Additional Indications
of
injectable collagenase, we may not be able to obtain option, milestone or
royalty payments under the Auxilium Agreement, which could impair our ability
to
grow and could cause a decline in the price of our stock.
The
process of conducting clinical trials and developing product candidates involves
a high degree of risk and may take several years. Product candidates that
appear
promising in the early phases of development may fail to reach the market
for
several reasons, including:
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clinical
trials may show product candidates to be ineffective or not as
effective
as anticipated or to have harmful side effects or any unforeseen
result;
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product
candidates may fail to receive regulatory approvals required to
bring the
products to market;
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manufacturing
costs, the inability to scale up to produce supplies for clinical
trials
or other factors may make our product candidates uneconomical;
and
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the
proprietary rights of others and their competing products and technologies
may prevent product candidates from being effectively commercialized
or to
obtain exclusivity.
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Success
in preclinical and early clinical trials does not ensure that large-scale
clinical trials will be successful. Clinical results are frequently susceptible
to varying interpretations that may delay, limit or prevent regulatory
approvals. The length of time necessary to complete clinical trials and to
submit an application for marketing approval for a final decision by a
regulatory authority varies significantly and may be difficult to predict.
Currently, there is substantial congressional and administration review of
the
regulatory approval process for drug candidates in the U.S. Any changes to
the
U.S. regulatory approval process could significantly increase the timing
or cost
of regulatory approval for a product candidates making further development
uneconomical or impossible. In addition, once Auxilium exercises its option
with
respect to any product candidate for any Additional Indications, further
clinical trials, development, manufacturing, marketing and selling of such
product is out of our control. Our interest is limited to receiving option,
milestone and royalty payment, and the option in certain circumstances to
manufacture according to particular specifications set by Auxilium.
Any
product acquisition or development efforts also could result in large and
immediate write-offs, incurrence of debt and contingent liabilities or
amortization of expenses related to intangible assets, any of which could
negatively impact our financial results.
Adverse
events or lack of efficacy in clinical trials may force us and/or our partners
whom we are wholly dependent upon to stop development of our product candidates
or prevent regulatory approval of our product candidates, which could materially
harm our business.
If we decide to proceed with conducting clinical trials
with
respect to any Additional Indications, adverse events or lack of efficacy
may
force us to stop development of our product candidates or prevent regulatory
approval of our
product
candidates, which could materially harm our business. In addition,
any adverse events or lack of efficacy may force Auxilium to stop development
of
the products we have licensed to them or prevent regulatory approval of such
products, which could materially impair all or a material part of the future
revenue we hope to receive from Auxilium.
We
face competition in our product development efforts from pharmaceutical and
biotechnology companies, universities and other not-for-profit
institutions.
We
face
competition in our product development from entities that have substantially
greater research and product development capabilities and greater financial,
scientific, marketing and human resources. These entities include pharmaceutical
and biotechnology companies, as well as universities and not-for-profit
institutions. Our competitors may succeed in developing products or intellectual
property earlier than we do, entering into successful collaborations before
us,
obtaining approvals from the FDA or other regulatory agencies for such
products before us, or developing products that are more effective than those
we
could develop. The success of any one competitor in these or other respects
will
have a material adverse effect on our business, our ability to receive option
payments from Auxilium or ability to generate revenues from third party
arrangements with respect to the Additional Indications (to the extent that
Auxilium does not exercise its option with respect to an Additional
Indication).
Because
of the specialized nature of our business, the termination of relationships
with
key management, consulting and scientific personnel or the inability to recruit
and retain additional personnel could prevent us from developing our
technologies, conducting clinical trials and obtaining
financing.
The
competition for qualified personnel in the biotechnology field is intense,
and
we rely heavily on our ability to attract and contract with qualified
independent scientific and medical investigators, technical and managerial
personnel. We face intense competition for qualified individuals from numerous
pharmaceutical, biopharmaceutical and biotechnology companies, as well as
academic and other research institutions. To the extent we are unable to
attract
and retain any of these individuals on favorable terms our business may be
adversely affected.
If
product liability lawsuits are brought against us, we may incur substantial
liabilities.
We
continue to have product liability exposure for topical product sold by us
prior
to the sale of our topical business to DFB. In addition, under the Auxilium
Agreement, we are obligated to indemnify Auxilium and its affiliates for
any
harm or losses they suffered relating to any personal injury and other product
liability resulting from our development, manufacture or commercialization
of
any injectable collagenase product. In addition, the clinical testing
and, if approved, commercialization of our product candidates involves
significant exposure to product liability claims. We have clinical trial
and
product liability insurance in the aggregate amount of $3 million dollars
that
covers us and the clinical trials of our other product candidates that we
believe is adequate in both scope and amount and has been placed with what
we
believe are reputable insurers. Our current and future coverage may, however,
not be adequate to protect us from all the liabilities that we may incur.
If
losses from product liability claims exceed our insurance coverage, we may
incur
substantial liabilities that exceed our financial resources. Whether or not
we
were ultimately successful in product liability litigation, such litigation
could consume substantial amounts of our financial and managerial resources,
and
might result in adverse publicity, all of which would impair our business.
We
may not be able to maintain our clinical trial and product liability insurance
at an acceptable cost, if at all, and this insurance may not provide adequate
coverage against potential claims or losses. If we are required to pay a
product
liability claim, we may not have sufficient financial resources and our business
and results of operations may be harmed.
Risks
Related to Intellectual Property Rights
If
we breach any of the agreements under which we license rights to products
or
technology from others, we could lose license rights that are critical to
our
business and our business could be harmed.
We
are a
party to a number of license agreements by which we have acquired rights
to use
the intellectual property of third parties that are necessary for us to operate
our business. If any of the parties terminate their agreements, whether by
their
terms or due to a breach by us, our right to use their intellectual property
may
negatively affect our licenses to Auxilium or DFB and, in turn, their obligation
to make option, milestone, contingent royalty or other payments to
us.
We
may have to engage in costly litigation to
enforce our contractual rights or to enforce, or protect, our proprietary
technology, or to defend challenges to our proprietary technology by our
competitors, which may harm our business, results of operations, financial
condition and cash flow.
In
connection with the sale of our topical collagenase business to DFB, Auxilium
has raised certain concerns regarding certain provisions of the Asset Purchase
Agreement. We believe that these concerns have been or will be
adequately addressed in amendments to the Asset Purchase Agreement entered
into
between us, ABC-NY and DFB, discussed above in the section titled “Licensing and
Marketing Agreements—Topical Collagenase Agreement,” although we cannot be
certain that Auxilium will agree.
In
connection with the execution of our license agreements with the Research
Foundation, Auxilium has raised certain concerns that the parties are
discussing.
If
we are
unable to resolve our current or future issues with Auxilium or DFB then
we
could be sued by either or both parties. This litigation could be costly
and
materially adversely affect our business.
In
addition, the pharmaceutical field is characterized by a large number of
patent
filings involving complex legal and factual questions, and, therefore, we
cannot
predict with certainty whether our patents will be enforceable. Competitors
may
have filed applications for or have been issued patents and may obtain
additional patents and proprietary rights related to products or processes
that
compete with or are similar to our collagenase enzyme. We may not be aware
of
all of the patents potentially adverse to our interests that may have been
issued to others. Litigation may be necessary to protect our proprietary
rights,
and we cannot be certain that we will have the required resources to pursue
litigation or otherwise to protect our proprietary rights. If patent
laws or the interpretation of patent laws change, our competitors may be
able to
develop and commercialize our discoveries.
Under
the
agreements executed with Auxilium and DFB, we are obligated to maintain and
defend in all relevant jurisdictions, any patents or other intellectual property
to which we granted a license to those parties. The cost of maintaining and
defending such intellectual property could require significant capital, consume
a substantial portion of our resources, and adversely affect our ability
to
continue to operate.
Competitors
may infringe our patents or successfully avoid them through design innovation.
To prevent infringement or unauthorized use, we may need to file infringement
lawsuits, which are expensive and time-consuming.
Our
ability and the ability of out licensors, licensees and collaborators to
develop
and license products based on our patents may be impaired by the intellectual
property of third parties.
Auxilium’s,
DFB’s and our commercial success in developing and manufacturing collagenase
products based on our patents is dependent on these products not infringing
the
patents or proprietary rights of third parties. While we currently
believe we, our licensees, licensors and collaborators have freedom to operate
in the collagenase market, others may challenge that position in the future.
There has been, and we believe that there will continue to be, significant
litigation in the pharmaceutical industry regarding patent and other
intellectual property rights.
Third
parties could bring legal actions against us, our licensees, licensors or
collaborators claiming damages and seeking to enjoin clinical testing,
manufacturing and marketing of the affected product or products. A third
party
might request a court to rule that the patents we in-licensed or licensed
to
others, or those we may in-license in the future, are invalid or unenforceable.
In such a case, even if the validity or enforceability of those patents were
upheld, a court might hold that the third party’s actions do not infringe the
patent we in-license or license to others thereby, in effect,
limiting the scope of our patent rights and those of our licensees, licensors
or
collaborators. We are obligated by our agreements with Auxilium and DFB to
indemnify them against any claims for infringement based on the use of our
technology. If we become involved in any litigation, it could consume a
substantial portion of our resources, regardless of the outcome of the
litigation. If Auxilium or DFB becomes involved in such litigation, it could
also consume a substantial portion of their resources, regardless of the
outcome
of the litigation, thereby jeopardizing their ability to commercialize candidate
products and/or their ability to make option, milestone or royalty payments
to
us. If any of these actions are successful, in addition to any potential
liability for damages, we could be required to obtain a license to permit
ourselves, our licensees, licensors or our collaborators to conduct clinical
trials, manufacture or market the affected product, in which case we may
be
required to pay substantial royalties or grant cross-licenses to our patents.
However, there can be no assurance that any such license will be available
on
acceptable terms or at all. Ultimately, we, our licensees, licensors or
collaborators could be prevented from commercializing a product, or forced
to
cease some aspect of their or our business, as a result of patent infringement
claims, which could harm our business or right to receive option, milestone
and
contingent royalty payments.
Risks
Related to our Common Stock
If
securities analysts do not publish research or reports about our business
or if
they downgrade us or our or our sector, the price of our common stock could
decline.
The
trading market for our common stock will depend in part on research and reports
that industry or financial analysts publish about us or our
business. We are not currently covered by any research
analysts. Furthermore, if the analysts who cover us in the future
downgrade us or the industry in which we operate or the stock of any of our
competitors, the price of our common stock will probably decline.
Future
sales of our common stock could negatively affect our stock
price.
If
our
common stockholders sell substantial amounts of common stock in the public
market, or the market perceives that such sales may occur, the market price
of
our common stock could decline. In addition, we may need to raise additional
capital in the future to fund our operations. If we raise additional funds
by
issuing equity securities, our stock price may decline and our existing
stockholders may experience dilution of their interests. Because we historically
have not declared dividends, stockholders must rely on an increase in the
stock
price for any return on their investment in us.
Our
stock price is likely to be volatile, and the market price of our common
stock
may drop below the current price.
Our
stock
price has, at times, been volatile. Currently, our stock is quoted on the
Pink
Sheets and is thinly traded.
Market
prices for securities of pharmaceutical, biotechnology and specialty
pharmaceutical companies have been particularly volatile. Some of the factors
that may cause the market price of our common stock to fluctuate
include:
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listing
of our stock on a securities exchange or
market;
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our
failure to be current in our SEC
filings;
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results
of our clinical trials;
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failure
of any product candidates we have licensed to Auxilium or sold
to DFB to
achieve commercial success;
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regulatory
developments in the U.S. and foreign
countries;
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developments
or disputes concerning patents or other proprietary
rights;
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litigation
involving us or our general industry, or
both;
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future
sales of our common stock by the estate of our former Chairman
and CEO or
others;
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changes
in the structure of healthcare payment systems, including developments
in
price control legislation;
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departure
of key personnel;
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announcements
of material events by those companies that are our competitors
or
perceived to be similar to us;
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changes
in estimates of our financial
results;
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investors’
general perception of us; and
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general
economic, industry and market
conditions.
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If
any of these risks occurs, or continues to occur,
it could cause our stock price to fall and may expose us to class
action
lawsuits that, even if unsuccessful, could be costly to defend and a distraction
to management.
We
cannot assure you that our common stock will become listed on a securities
exchange.
We
plan
to seek listing of our common stock on the OTC Bulletin Board or the OTCQX
as
soon as reasonably practicable. We do not currently meet the listing
standards of any other stock exchanges and cannot assure you when or if we
will
meeting such listing standards, or that we will be able to maintain a listing
of
our common stock if we do meet such listing standards.
Our
common stock may be considered “penny stock.”
The
SEC
has adopted regulations that generally define “penny stock” to be an equity
security that has a market price of less than $5.00 per share, subject to
specific exemptions. If the market price of our common stock is less
than $5.00 per share, then it will be considered “penny
stock.” Brokers and dealers effecting transactions in “penny stock”
must disclose certain information concerning the transaction, obtain a written
agreement from the purchaser and determine that the purchaser is reasonably
suitable to purchase those types of securities. These rules may
restrict the ability of brokers or dealers to sell our common stock and may
affect your ability to sell shares.
We
have no current plan to pay dividends on our common stock and investors may
lose
the entire amount of their investment.
We
have
no current plans to pay dividends on our common stock. Therefore,
investors will not receive any funds absent a sale of their
shares. We cannot assure investors of a positive return on their
investment when they sell their shares nor can we assure that investors will
not
lose the entire amount of their investment.
Our
outstanding
stock options could have a possible dilutive effect.
As
of
December 31, 2006, stock options to purchase 1,281,125 shares of common
stock were outstanding. In addition, as of December 31, 2006 a total of
896,199 stock options were available for grant under our stock option
plans. The issuance of common stock upon the exercise of these
options could adversely affect the market price of the common stock or result
in
substantial dilution to our existing stockholders. Until the Company
becomes current in its SEC filings, however, we will not be able to issue
any
freely tradable stock upon the exercise of these options. As a result
of this, we may choose to extend the exercise period for certain expiring
options, which could result in an unfavorable accounting charge.
Provisions
in our certificate of incorporation, bylaws and stockholder rights agreement
may
prevent or frustrate a change in control.
Provisions
of our certificate of incorporation, bylaws (as amended) and stockholder
rights
agreement may discourage, delay or prevent a merger, acquisition or other
change
in control that stockholders may consider favorable, including transactions
in
which you might otherwise receive a premium for your shares. These
provisions:
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provide
for a classified board of
directors;
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give
our Board the ability to designate the terms of and issue new series
of
preferred stock without stockholder approval, commonly referred
to as
“blank check” preferred stock, with rights senior to those of our common
stock;
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limit
the ability of the stockholders to call special meetings;
and
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impose
advance notice requirements on stockholders concerning the election
of
directors and other proposals to be presented at stockholder
meetings.
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In
addition, during May 2002, the Board implemented a rights agreement (commonly
known as a “Poison Pill”) which effectively discourages or prevents acquisitions
of more than 15% of our common stock in transactions (mergers, consolidations,
tender offer, etc.) that have not been approved by our Board.
These
provisions could make it more difficult for
common stockholders to replace members of the Board. Because our Board is
responsible for appointing the members of our management team, these provisions
could in turn affect any
attempt
to replace the current management team.
If
our principal stockholders, executive officers and directors choose to act
together, they may be able to control our operations, acting in their own
best
interests and not necessarily those of other stockholders.
As
of
June 30, 2007, our executive officers, directors and their affiliates, in
the
aggregate, beneficially own shares representing approximately 50.7% of our
common stock, although the death of Edwin H. Wegman, our former Chairman
and
CEO, may result in a change of control of certain of these shares. Beneficial
ownership includes shares over which an individual or entity has investment
or
voting power and includes shares that could be issued upon the exercise of
options within 60 days. As a result, if these stockholders were to choose
to act
together, they may be able to control all matters submitted to our stockholders
for approval, as well as our management and affairs. For example, these
individuals, if they chose to act together, could control the election of
directors and approval of any merger, consolidation or sale of all or
substantially all of our assets. This concentration of ownership could have
the
effect of delaying, deferring or preventing a change in control or impeding
a
merger or consolidation, takeover or other business combination that could
be
favorable to other stockholders.
This
significant concentration of share ownership may adversely affect the trading
price for our common stock because investors often perceive disadvantages
in
owning stock in companies with controlling stockholders.
Changes
in the expensing of stock-based compensation will result in unfavorable
accounting charges and may require us to change our compensation practices.
Any
change in our compensation practices may adversely affect our ability to
attract
and retain qualified scientific, technical and business
personnel.
In
the
past, we have relied on stock options to compensate existing directors,
employees and attract new employees. The Financial Accounting Standards Board
(“FASB”) has announced new rules for recording expense for the fair value of
stock options. As a result of these new rules, commencing on January 1,
2006, we will expense the fair value of stock options, thereby increasing
our
operating expenses and reported losses. Although we may continue to include
various forms of equity in our compensation plans, if the extent to which
we use
forms of equity in our plans is reduced due to the negative effects on earnings,
it may be difficult for us to attract and retain qualified scientific, technical
and business personnel.
SUBSEQUENT
EVENTS
On
February 16, 2007, our Chairman and CEO, Edwin H. Wegman, died. Upon
the death of Edwin H. Wegman his notes became the obligation of his
estate. As of December 31, 2006, the aggregate principal amount of
$724,027, including compounded interest of $596,965, owed to us by Edwin
H.
Wegman and the Wilbur Street Corporation (“WSC”) were $1,016,595 and $304,397,
respectively. We entered into an amended and restated promissory note
for these amounts with our former Chairman and CEO, which is secured by a
pledge
of 100% of the shares of The S.J. Wegman Company. His death has
resulted in the immediate obligation of his estate to repay the
loans. However, it is uncertain whether his estate will be able to
repay the loans and, if so, on what terms. His death has also
resulted in the dissolution of The S.J. Wegman Company, which triggered a
default under the pledge agreement, giving our Board the right to vote the
pledged shares. However, it is unclear as a practical matter whether
the Company will be able to foreclose on the pledge.
In
March
2007, in full repayment of the $304,397 loan owed to the Company by WSC,
WSC
offset $304,397 in back rent due from the Company in repayment of the
loan.
On
May 7,
2007, Lawrence Dobroff, our Chief Financial Officer, was terminated and Tom
Wegman assumed the role of the “Principal Accounting Officer” for purposes of
making the certifications required by the Sarbanes-Oxley Act of
2002.
On
June,
18, 2007, we entered into change of control agreements with our Directors
and
President providing certain benefits in the event of a change of control
of the
Company.
On
June
25, 2007, we elected Toby and Mark Wegman to the Board of Directors of the
Company.
In
a press release dated September 10, 2007, Auxilium
announced that it has restarted its Phase III clinical trials for XIAFLEX
for
the treatment of Dupuytren's disease.
In
addition to the foregoing subsequent events, there have been a number of
additional events that are described in the Form 8-Ks that have been filed
by
the Company since December 31, 2006 that are listed in Item 13,
“Exhibits—Reports on Form 8-K.”