ITEM 1A. RISK FACTORS

 

Our business is subject to substantial risks and uncertainties. Any of the risks and uncertainties described below, either alone or taken together, could materially and adversely affect our business, financial condition, results of operations, prospects for growth, or the value of an investment in our common stock.  In addition, these risks and uncertainties could cause actual results to differ materially from those expressed or implied by forward-looking statements contained in this Form 10-K (please read the “Cautionary Note Regarding Forward-Looking Statements” appearing at the beginning of this Form 10-K). The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially and adversely affect our business, financial condition, results of operations, prospects and the value of an investment in our common stock and could cause actual results, performance or achievements to differ materially from those expressed or implied by forward-looking statements.

 

Risks Related to Development and Commercialization of our Product Candidates

 

Our near term prospects are highly dependent on the success of our most advanced product candidate, ARIKACE.  If we are unable to successfully complete the development of, obtain regulatory approval for, and commercialize ARIKACE, our business and the value of our common stock may be materially adversely affected.

 

We are investing substantially all of our efforts and financial resources in the development of ARIKACE, our most advanced product candidate.  Our ability to generate product revenue from ARIKACE, which we do not expect will occur for at least the next several years, if ever, will depend heavily on the successful completion of development of, receipt of regulatory approval for and commercialization of ARIKACE.

 

 

Positive results from preclinical studies of a drug candidate may not be predictive of similar results in human clinical trials, and promising results from earlier clinical trials of a drug candidate may not be replicated in later clinical trials.  Many companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in late-stage clinical trials even after achieving promising results in earlier stages of development. Accordingly, the results of the completed clinical trials for ARIKACE may not be predictive of the results we may obtain in our clinical trials currently in progress or other trials.  We do not expect ARIKACE or any other drug candidates we may develop to be commercially available for at least several years, if at all.

We have not completed the research and development stage of ARIKACE or any other product candidates other than IPLEX, which we no longer market.  If we are unable to successfully commercialize ARIKACE or any other products, it may materially adversely affect our business, financial condition, results of operations and our prospects.

 

Our long-term viability and growth depend on the successful commercialization of ARIKACE and potentially other product candidates that lead to revenue and profits.  Pharmaceutical product development is an expensive, high risk, lengthy, complicated, resource intensive process.  In order to conduct the development programs for our products, we must, among other things, be able to successfully:

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Identify potential drug product candidates;

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Design and conduct appropriate laboratory, preclinical and other research;

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Submit for and receive regulatory approval to perform clinical studies;

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Design and conduct appropriate preclinical and clinical studies according to good laboratory and good clinical practices and FDA disease-specific expectations;

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Select and recruit clinical investigators;

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Select and recruit subjects for our studies;

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Collect, analyze and correctly interpret the data from our studies;

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Submit for and receive regulatory approvals for marketing; and

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Manufacture the drug product candidates and device components according to cGMP.

 

The development program with respect to any given product will take many years and thus delay our ability to generate profits.  In addition, potential products that appear promising at early stages of development may fail for a number of reasons, including the possibility that the products may require significant additional testing or turn out to be unsafe, ineffective, too difficult or expensive to develop or manufacture, too difficult to administer or unstable. If we do not proceed with the development of our ARIKACE program in the CF or NTM indications, certain organizations that provided funding to us for such developmental efforts may elect to proceed with the development of these indications. Even if we are successful in obtaining regulatory approval for our product candidates, including ARIKACE, we may not obtain labeling that permits us to market them with commercially viable claims because our clinical trials may not provide head-to-head comparisons with other drugs.  Failure to successfully commercialize our products will adversely affect our business, financial condition, results of operations and prospects.

 

If the FDA or EMA limits our proposed CF or NTM treatment population for ARIKACE, our preclinical studies do not produce positive results or our clinical trials are delayed, or if serious side effects are identified during drug development, we may experience delays, incur additional costs and ultimately be unable to commercialize our product candidates in the US, Europe or other countries.

 

Before obtaining regulatory approval for the sale of our product candidates, we must conduct, at our own expense, extensive preclinical tests to demonstrate the safety of our product candidates in animals, and clinical trials to demonstrate the safety and efficacy of our product candidates in humans.   We initiated a phase 2 NTM study in the US, fully enrolled patients in a phase 3 trial for CF patients with Pseudomonas lung infection in Europe and Canada, and initiated a two-year CF extension study in Europe and Canada.  In addition, as discussed below, in 2011 the FDA requested that we conduct a 9-month dog inhalation toxicity study to determine if the findings of the long-term rat inhalation carcinogenicity study with ARIKACE are observed in a non-rodent model.

 

 

   Preclinical and clinical testing is expensive, difficult to design and implement and can take many years to complete.  A failure of one or more of our preclinical studies or clinical trials can occur at any stage of testing. We may experience numerous unforeseen events during, or as a result of, preclinical testing and the clinical trial process that could delay or prevent our ability to obtain regulatory approval or commercialize our product candidates, including:

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Our preclinical tests or clinical trials may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional preclinical testing or clinical trials or we may abandon projects that we expect to be promising;

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Regulators or institutional review boards may prevent us from commencing a clinical trial or conducting a clinical trial at a prospective trial site;

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Enrollment in the clinical trials may take longer than expected or the clinical trials as designed may not allow for sufficient patient accrual to complete enrollment of the trial;

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We may decide to limit or abandon our commercial development program;

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Conditions imposed on us by the FDA or any non-US regulatory authority regarding the scope or design of our clinical trials may require us to collect and submit information to regulatory authorities, Ethics Committees, institutional review boards or others for review and approval;

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The number of patients required for our clinical trials may be larger than we anticipate or participants may drop out of our clinical trials at a higher rate than we anticipate;

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Our third party contractors, contract research organizations, which we refer to as CROs, or clinical investigators may fail to comply with regulatory requirements or fail to meet their contractual obligations to us in a timely manner;

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We may have to suspend or terminate one or more of our clinical trials if we, the regulators or the institutional review boards determine that the participants are being exposed to unacceptable health risks or for other reasons;

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We may not be able to claim that a product candidate provides an advantage over current standard of care or future competitive therapies in development because our clinical studies may not have been designed to support such claims;

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Regulators or institutional review boards may require that we hold, suspend or terminate clinical research for various reasons, including potential safety concerns or noncompliance with regulatory requirements;

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The cost of our clinical trials may be greater than we anticipate;

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The supply or quality of product used in clinical trials or other materials necessary to conduct our clinical trials may be insufficient or inadequate or we may not be able to reach agreements on acceptable terms with prospective contract manufacturers or CROs; and

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The effects of our product candidates may not be the desired effects or may include undesirable side effects or the product candidates may have other unexpected characteristics.

 

If we are required to conduct additional clinical trials or other testing of our product candidates beyond those that we currently contemplate, if we are unable to successfully complete our clinical trials or other testing, if the results of these trials or tests are not positive or are only modestly positive or if there are safety concerns, we may:

 

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Be delayed in obtaining, or may not be able to obtain, marketing approval for one or more of our product candidates;

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Obtain approval for indications that are not as broad as intended or entirely different than those indications for which we sought approval; or

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Have the product removed from the market after obtaining marketing approval.

 

For example, results from our rodent carcinogenicity study showed that when rats were given ARIKACE daily by inhalation for two years, 2 of the 120 rats receiving the highest dose had a single lung tumor. These rats received ARIKACE doses that were within two-fold of those in clinical studies (normalized on a body surface area basis or a lung weight basis).  .  Based on these results, in 2011 the FDA placed clinical holds on our phase 3 clinical trials for ARIKACE, which holds were lifted in 2012.  While we are conducting a dog toxicology study to better understand the impact of ARIKACE on another animal model to satisfy the FDA’s request, approvability or labeling of ARIKACE may be negatively affected by these results.  In late January 2013, we concluded the 9 month dosing phase of the dog inhalation toxicity study.  Consistent with the design of the study, a review of the lung and kidney tissues was conducted following the completion of the 9 month dosing and an unaudited interim report was prepared setting forth the findings of this review.  We recently submitted this unaudited interim report to the FDA  While we await final results from ongoing studies and trials, we do not know whether we will proceed with our clinical program for ARIKACE for the treatment of Pseudomonas lung infections in CF patients in the US.  In addition, we do not know whether any additional preclinical tests, other than the dog inhalation toxicity study or clinical trials, will be required or otherwise initiated, will need to be restructured or will be completed on schedule, if at all.  Significant preclinical or clinical trial delays also could shorten the patent protection period during which we may have the exclusive right to commercialize our product candidates.  Such delays could allow our competitors to bring products to market before we do and impair our ability to commercialize our products or product candidates.  Our product development costs have and may continue to increase if we experience further delays in testing or approvals.

 

 

We may not have, or may be unable to obtain, sufficient quantities of our product candidates to meet our required supply for clinical studies or commercialization requirements.

 

We do not have any in-house manufacturing capability other than for development and characterization and depend completely on a small number of third-party manufacturers and suppliers for the manufacture of our product candidates on a clinical or commercial scale. ARIKACE and the nebulizer each are supplied by a sole manufacturer.  We are dependent on Althea Technologies for the production of ARIKACE.  We are dependent upon PARI for the production and supply of the eFlow Nebulizer System.  The inability of a supplier to fulfill our supply requirements could materially adversely affect our ability to obtain and maintain regulatory approvals and future operating results. A change in the relationship with any supplier, or an adverse change in their business, could materially adversely affect future operating results.

We are dependent upon PARI being able to provide an adequate supply of nebulizers both for our clinical trials and for commercial sale in the event ARIKACE receives marketing approval.  These nebulizers must be in good working order and meet specific performance characteristics. We intend to work closely with PARI to coordinate efforts regarding regulatory requirements.

We are dependent upon Althea being able to provide an adequate supply of ARIKACE both for our clinical trials and for commercial sale in the event ARIKACE receives marketing approval.  Althea currently manufactures ARIKACE at a relatively small scale.  In order to meet potential commercial demand if ARIKACE is approved, we will need to work with Althea and others to increase the scale of our manufacturing activities.  We intend to work closely with Althea to coordinate efforts regarding regulatory requirements and our supply needs.

We do not have long-term commercial agreements with all of our suppliers, and if any of our suppliers are unable or unwilling to perform for any reason, we may not be able to locate suppliers or enter into favorable agreements with them. Any inability to acquire sufficient quantities of our components in a timely manner from these third parties could delay clinical trials or commercialization and prevent us from developing and distributing our products in a cost-effective manner or on a timely basis.

In addition, manufacturers of our components are subject to cGMP and similar foreign standards and we do not have control over compliance with these regulations by our manufacturers. If one of our contract manufacturers fails to maintain compliance, the production of our products could be interrupted, resulting in delays and additional costs. In addition, if the facilities of such manufacturers do not pass a pre-approval or post-approval plant inspection, the FDA as well as other regulatory authorities in jurisdictions outside the US will not grant approval and may institute restrictions on the marketing or sale of our products.  We are reliant on third-party manufacturers and suppliers to meet our clinical supply demands and any future commercial products.  Delays in receipt of materials, scheduling, release, custom’s control and regulatory compliance issues may adversely impact our ability to initiate, maintain or complete clinical trials that we are sponsoring or may adversely impact commercialization.  Commercial manufacturing and supply agreements have not been established.  Issues arising from scale-up, facility construction, environmental controls, equipment requirements, local and federal permits and allowances or other factors may have an adverse impact on our ability to manufacture our product candidates.

We have limited experience in conducting and managing the preclinical development activities and clinical trials necessary to obtain regulatory approvals, including approval by the FDA and EMA.

 

We have limited experience in conducting and managing the preclinical development activities and clinical trials necessary to obtain regulatory approvals, including approval by the FDA and EMA. Since our merger with Transave, we have not completed a phase 3 clinical trial for, obtained regulatory approval of or commercialized any of our product candidates. Our limited experience might prevent us from successfully designing, implementing, or completing a clinical trial. We have limited experience in conducting and managing the application process necessary to obtain regulatory approvals and we might not be able to demonstrate that our product candidates meet the appropriate standards for regulatory approval. If we are not successful in conducting and managing our preclinical development activities or clinical trials or obtaining regulatory approvals, we might not be able to commercialize ARIKACE, or might be significantly delayed in doing so, which may materially harm our business.

 

 

We may not be able to enroll enough patients to complete our clinical trials.

 

The completion rate of clinical studies of our products is dependent on, among other factors, the patient enrollment rate.  Patient enrollment is a function of many factors, including:

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Investigator identification and recruitment;

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Regulatory approvals to initiate study sites;

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Patient population size;

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The nature of the protocol to be used in the trial;

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Patient proximity to clinical sites;

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Eligibility criteria for the study;

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The patients’ willingness to participate in the study;

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Competition from other companies’ clinical studies for the same patient population; and

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Ability to obtain any necessary comparator drug or medical device.

 

We believe our procedures for enrolling patients to date have been appropriate. However, delays in patient enrollment would increase costs and delay ultimate commercialization and sales, if any, of our products.

 

The commercial success of ARIKACE or any other product candidates that we may develop will depend upon the degree of market acceptance by physicians, patients, third-party payors and others in the medical community.

 

Even if we are able to successfully complete development of, obtain regulatory approval for, and bring ARIKACE to market, ARIKACE may not gain market acceptance by physicians, patients, third-party payors and others in the medical community. If ARIKACE or any other products we bring to market do not achieve an adequate level of acceptance, we may not generate significant product revenue and we may not become profitable. The degree of market acceptance of ARIKACE and any other product candidates, if approved for commercial sale, will depend on a number of factors, including:

 

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The prevalence and severity of any side effects, including any limitations or warnings contained in a product’s approved labeling;

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The efficacy and potential advantages over alternative treatments;

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The pricing of our product candidates;

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Relative convenience and ease of administration;

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The willingness of the target patient population to try new therapies and of physicians to prescribe these therapies;

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The strength of marketing and distribution support and timing of market introduction of competitive products;

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Publicity concerning our products or competing products and treatments, including competing products becoming subject to generic pricing; and

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Sufficient third party insurance coverage or reimbursement.

 

Even if a potential product displays a favorable efficacy and safety profile in preclinical and clinical trials, market acceptance of the product will not be known until after it is launched. For example, if a clinical trial is not designed to demonstrate advantages over alternative treatments, we may be prohibited from promoting our product candidates on any such advantages.  Our efforts to educate the medical community and third-party payors on the benefits of our product candidates may require significant resources and may never be successful. Such efforts to educate the marketplace may require more resources than are required by more established technologies marketed by our competitors.

We do not have a sales organization for the marketing, sales and distribution of any drug products.  In order to commercialize ARIKACE or any other product candidates, we must develop these capabilities on our own or make arrangements with third parties for the marketing, sales and distribution of our products.  The establishment and development of our own sales force would be expensive and time consuming and could delay any product launch, and we cannot be certain that we would be able to successfully develop this capability.  As a result, we may seek one or more partners to handle some or all of the sales and marketing of ARIKACE.  However, we may not be able to enter into arrangements with third parties to sell ARIKACE on favorable terms or at all.  In the event we are unable to develop our own marketing and sales force or collaborate with a third-party marketing and sales organization, we may not be able to successfully commercialize ARIKACE or any other product candidates that we develop, which would adversely affect our ability to generate product revenues.  Further, whether we commercialize products on our own or rely on a third party to do so, our ability to generate revenue will be dependent on the effectiveness of the sales force.

Risks Related to Our Reliance on Third Parties

We rely on third parties including clinical research organizations, or CROs, for many services.  If we are unable to form and sustain these relationships, or if any third-party arrangements that we may enter into are unsuccessful, our ability to develop and commercialize our products may be materially adversely affected.

 

We currently rely, and expect that we will in the future rely, on third parties for significant research, analytical services, preclinical development and clinical development.  For example, almost all of our clinical trial work is done by CROs.  Reliance on these third parties poses a number of risks, including the following:

 

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We may face significant competition in seeking appropriate partners;

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These arrangements are complex and time consuming to negotiate, document and implement;

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We may not be successful in our efforts to establish and implement collaborations or other alternative arrangements that we might pursue on favorable terms;

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We may not be able to effectively control whether the CROs or other third parties will devote sufficient resources to our programs or products;

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We are not able to control the regulatory compliance of CROs, third-party suppliers, contractors and collaborators;

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Disagreements with third parties and CROs may be difficult to resolve and could result in a dispute over and loss of intellectual property rights, delay or termination of the research, development, or commercialization of product candidates or result in litigation or arbitration;

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Contracts with our collaborators may fail to provide sufficient protection of our intellectual property; and

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We may have difficulty enforcing the contracts if one of these collaborators fails to perform.

 

A great deal of uncertainty exists regarding the success of any current and future third-party efforts on which we might depend.  Failure of these efforts could delay, impair, or prevent the development and commercialization of our products and adversely affect our business, financial condition, results of operations and prospects.

We rely on PARI, a third party manufacturer, to supply the nebulizer that is exclusively used for ARIKACE. Any disruption in supply of the nebulizer will have a material adverse effect on our business.

We are dependent upon PARI being able to provide an adequate supply of nebulizers both for our clinical trials and for commercial sale in the event ARIKACE receives marketing approval.  These nebulizers must be in good working order, meet specific performance characteristics and be approved by FDA along with ARIKACE. We have no alternative supplier for the nebulizer and we do not intend to seek an alternative or secondary supplier of nebulizers.  We do not have a long-term supply agreement with PARI.   PARI has the right to terminate this agreement upon written notice for our uncured material breach, if we are the subject of specified bankruptcy or liquidation events, if we assign or otherwise transfer the agreement to a third party that does not agree to assume all of our rights and obligations set forth in the agreement, or if we fail to reach certain specified milestones, including the requirement that we use commercially reasonable efforts to develop, commercialize, market, and sell ARIKACE for use in CF indications in one or more countries (and at least in the US).   A disruption in the supply of nebulizers could delay, impair, or prevent the development and commercialization of our products and adversely affect our business, financial condition, results of operations and prospects.

 

 

We rely on Althea, a third party manufacturer, to supply ARIKACE. Any disruption in the supply of ARIKACE could have a material adverse effect on our business.

We are dependent upon Althea being able to provide an adequate supply of ARIKACE both for our clinical trials and for commercial sale in the event ARIKACE receives marketing approval.  Althea currently manufactures ARIKACE at a relatively small scale.  In order to meet potential commercial demand if ARIKACE is approved, we will need to work with Althea to increase the scale of our manufacturing activities.  We do not have a long term supply agreement with Althea.  Althea recently announced that it had entered into an agreement to be acquired by Ajinomoto Co., a global manufacturing company based in Japan.  We do not know at this point how this contemplated acquisition might affect our relationship with Althea, if at all.

We intend to identify other third parties to manufacture ARIKACE.  We also intend to have ARIKACE manufactured at a larger scale in order to meet potential demand if ARIKACE is approved for sale.  We may not be able to identify or secure an alternative source of ARIKCACE at an adequate scale of production.

We currently depend on third parties to conduct the operations of our clinical trials.

We rely on third parties, such as CROs, medical institutions, clinical investigators and contract laboratories to oversee some of the operations of our clinical trials and to perform data collection and analysis. As a result, we may face additional delays outside of our control if these parties do not perform their obligations in a timely fashion or in accordance with regulatory requirements.  If these third parties do not successfully carry out their contractual duties or obligations and meet expected deadlines, if they need to be replaced, or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols or for other reasons, our financial results and the commercial prospects for ARIKACE or our other potential product candidates could be materially harmed, our costs could increase and our ability to obtain regulatory approval and commence product sales could be delayed.

Risks Related to Our Financial Condition and Capital Requirements

 

We have a history of operating losses. We expect to incur operating losses for the foreseeable future and may never achieve or maintain profitability.

 

We are a biopharmaceutical company focused on the development of innovative inhaled pharmaceuticals for the site-specific treatment of serious lung diseases.  We have incurred losses each previous year of our operation, except in 2009, when we sold our manufacturing facility and certain other assets to Merck.  We expect to continue incurring operating losses for the foreseeable future.  The process of developing and commercializing our products requires significant pre-clinical and clinical testing as well as regulatory approvals for commercialization and marketing before we are allowed to begin product sales.  In addition, commercialization of our drug candidates likely would require us to establish a sales and marketing organization and contractual relationships to enable product manufacturing and other related activities.  We expect that our activities, together with our general and administrative expenses, will continue to result in substantial operating losses for the foreseeable future.  As of December 31, 2012, our accumulated deficit was $335.5 million.  For the year ended December 31, 2012, our consolidated net loss was $41.4 million.

 

To achieve and maintain profitability, we need to generate significant revenues from future product sales. This will require us to be successful in a range of challenging activities, including:

 

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Successfully completing development of and obtaining regulatory approval for the marketing of ARIKACE and possibly other product candidates which have yet to be developed and which would also require marketing approval;

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Commercializing ARIKACE and any other product candidates for which we obtain marketing approval; and

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Achieving market acceptance and reimbursement of ARIKACE and any other product candidates for which we obtain marketing approval in the medical community and with patients and third-party payors.

 

    

       ARIKACE will require marketing approval and significant investment in commercial capabilities, including manufacturing and sales and marketing efforts, before its product sales can generate any revenues for us.  Because of the numerous risks and uncertainties associated with drug development and commercialization, we are unable to predict the extent of any future losses.  We may never successfully commercialize ARIKACE or any other products, generate significant future revenues or achieve and sustain profitability.

 

We expect that we will need additional funds in the future to continue our operations, but we face uncertainties with respect to our ability to access capital.

 

Our operations have consumed substantial amounts of cash since our inception. We expect to continue to incur substantial research and development expenses, and we expect to expend substantial financial resources to complete development of, seek regulatory approval for, and prepare for commercialization of ARIKACE. We may need to seek additional funding in order to complete any clinical trials related to ARIKACE, seek regulatory approvals of ARIKACE, and commercially launch ARIKACE. We also may require additional future capital in order to continue our other research and development activities or to acquire complementary technology.  As of December 31, 2012, we had $92.9 million of cash and cash equivalents and a certificate of deposit on hand. If adequate funds are not available to us when needed, we may be required to reduce or eliminate research and development programs or commercial efforts.

 

Our future capital requirements will depend on many factors, including factors associated with:

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Phase 2 and phase 3 clinical trials and commercialization of ARIKACE;

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Non-clinical and clinical testing;

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Process development and scale up for manufacturing;

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Manufacturing;

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Performance of our third-party suppliers and manufacturers;

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Obtaining marketing, sales and distribution capabilities;

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Obtaining regulatory approvals;

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Research and development, including formulation development;

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Retaining employees and consultants;

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Filing and prosecuting patent applications and enforcing patent claims;

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Establishing strategic alliances and collaborations with third-parties; and

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Current and potential future litigation.

 

We also may need to spend more funds than currently expected because we may further change or alter drug development plans, acquire additional drugs or drug candidates or we may misjudge our costs.  As of December 31, 2012, we had no committed sources of capital and do not know whether additional financing will be available when needed, or, if available, that the terms will be favorable.  We cannot assure that our cash reserves together with any subsequent funding will be sufficient for our capital requirements.  The failure to satisfy our capital requirements will adversely affect our business, financial condition, results of operations and prospects.

 

We may seek additional funding through strategic alliances, private or public sales of our securities, debt financing or licensing all or a portion of our technology or through other means.  Such funding may significantly dilute existing shareholders, subject us to contractual restrictions such as operating or financial covenants or limit our rights to our technology.

 

We currently have no meaningful source of revenue.

 

We generated no revenue in 2012.  Our revenue from our expanded access program, or EAP, and the sale of IPLEX were our only material sources of operating revenue prior to 2012.  Unless we can execute one or more revenue generating transactions or successfully obtain regulatory approval for and commercialize ARIKACE, we will have no material sources of operating revenue. We expect to continue to incur substantial additional operating losses for at least the next several years as we continue to develop and seek to commercialize ARIKACE.

 

 

If we are not successful in our efforts to evaluate potential future IPLEX initiatives and to identify and engage in possible out- licensing opportunities for IPLEX, we may not derive any future revenues from IPLEX.

 

We continue to evaluate possible out-licensing opportunities for IPLEX. We may have difficulty identifying possible markets and prospective partners for out-licensing. Even if we are able to enter into out-licensing arrangements, we may not derive any revenue from those arrangements.

In process research and development (IPRD) currently comprises over 37% of our total assets.  A reduction in the value of our IPRD could impact our results of operations.

             As a result of the merger with Transave we recorded an intangible IPRD asset of $77.9 million and goodwill of $6.9 million on our balance sheet.  As a result of our clinical hold announced in late 2011 we recorded a charge of $26.0 million in the fourth quarter of 2011 and reduced the value of IPRD to $58.2 million and reduced goodwill to zero.  Other potential future activities or results could result in additional write-downs of IPRD, which would adversely affect our results of operations.

We may be unable to use our net operating losses.

We have substantial tax loss carry forwards for US federal income tax purposes.  Our ability to use such carry forwards to offset future income or tax liability may be limited under section 382 of the Internal Revenue Code of 1986, as amended.  Changes in the ownership of our stock, including those resulting from the issuance of shares of our common stock upon exercise of outstanding warrants or options, may limit or eliminate our ability to use our net operating losses.

 

Risks Related to Regulatory Matters

 

We may not be able to obtain regulatory approvals for ARIKACE or any other products we develop in the US, Europe or other countries.  If we fail to obtain such approvals, we will not be able to commercialize our products.

 

We are required to obtain various regulatory approvals prior to studying our products in humans and then again before we market and distribute our products.  The regulatory review and approval processes in both the US and Europe require evaluation of preclinical studies and clinical studies, as well as the evaluation of our manufacturing process.  These processes are complex, lengthy, expensive, resource intensive and uncertain.  Securing regulatory approval to market our products requires the submission of much more extensive preclinical and clinical data, manufacturing information regarding the process and facility, scientific data characterizing our product and other supporting data to the regulatory authorities in order to establish its safety and effectiveness.  This process also is complex, lengthy, expensive, resource intensive and uncertain.  We have limited experience in submitting and pursuing applications necessary to gain these regulatory approvals.

 

 

Data submitted to the regulators is subject to varying interpretations that could delay, limit or prevent regulatory agency approval.   We may also encounter delays or rejections based on changes in regulatory agency policies during the period in which we develop a product and the period required for review of any application for regulatory agency approval of a particular product.

 

Delays in obtaining regulatory agency approvals could adversely affect the development and marketing of any drugs that we or any third parties develop.  Resolving such delays could force us or third parties to incur significant costs, could limit our allowed activities or the allowed activities of third parties, could diminish any competitive advantages that we or our third parties may attain or could adversely affect our ability to receive royalties, any of which could materially adversely affect our business, financial condition, results of operations or prospects.

           To market our products outside of the US and, Europe, we and any potential third parties must comply with numerous and varying regulatory requirements of other countries.  The approval procedures vary among countries and can involve additional product testing and administrative review periods.  The time required to obtain approval in these other territories might differ from that required to obtain FDA or EMA approval.  The regulatory approval process in these other territories includes at least all of the risks associated with obtaining FDA and EMA approval detailed above.

 

Approval by the FDA or the EMA does not ensure approval by the regulatory authorities of other countries. Marketing approval in one country does not ensure marketing approval in another, but a failure or delay in obtaining marketing approval in one country may have a negative effect on the regulatory process in others. In addition, we may be subject to fines, suspension or withdrawal of marketing approvals, product recalls, seizure of products, operating restrictions and criminal prosecution if we fail to comply with applicable US and foreign regulatory requirements. If we fail to comply with regulatory requirements or to obtain and maintain required approvals, our target market may be reduced and our ability to realize the full market potential of our product candidates may be harmed.  The failure to obtain such approvals may materially adversely affect our business, financial condition, results of operations and our prospects.

For ARIKACE to be successfully developed and commercialized, in addition to regulatory approvals required for ARIKACE, the eFlow nebulizer system must satisfy certain regulatory requirements and must be approved for use in any market in which we intend to commercialize ARIKACE.

Although the optimized eFlow Nebulizer System is CE marked by PARI outside of North America, within North America it is labeled as investigational for use in our clinical trials in the US and Canada.  The optimized eFlow Nebulizer System is not approved for commercial use in the US, Canada or certain other markets in which we may choose to commercialize ARIKACE if approved. The eFlow Nebulizer System must receive regulatory approval before we can market ARIKACE. We will continue to work closely with PARI to coordinate efforts regarding regulatory requirements, including our proposed filings for a drug and device.

Even if we obtain marketing approval for ARIKACE or any of our other product candidates, we will continue to face extensive regulatory requirements and our products may face future development and regulatory difficulties.

 

Even if marketing approval in the US is obtained, the FDA may still impose significant restrictions on a product’s indicated uses or marketing, including risk evaluation and mitigation strategies, or may impose ongoing requirements on us, including with respect to:

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Labeling, such as black box or other warnings or contraindications;

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Post-market surveillance, post-market studies or post-market clinical trials;

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Packaging, storage, distribution, safety surveillance, advertising, promotion, recordkeeping and reporting of safety and other post-market information;

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Monitoring and reporting adverse events and instances of the failure of a product to meet the specifications in the NDA;

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Changes to the approved product, product labeling or manufacturing process;

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Advertising and other promotional material; and

·

Disclosure of clinical trial results on publicly available databases.

 

           In addition, the third-party manufacturers of our products and their facilities are and will be subject to continual review and periodic inspections by the FDA and other regulatory authorities.  The distribution, sale and marketing of our products are subject to a number of additional requirements, including:

·

State wholesale drug distribution laws and the distribution of our product samples to physicians must comply with the requirements of the Prescription Drug Marketing Act;

·

Sales, marketing and scientific or educational grant programs must comply with the anti-kickback and fraud and abuse provisions of the Social Security Act, the transparency provision of the Patient Protection and Affordable Care Act and an associated reconciliation bill that became law in March 2010, which we refer to collectively as the Health Care Reform Law, the False Claims Act and similar state laws; and

·

Pricing and rebate programs must comply with the Medicaid rebate requirements of the Omnibus Budget Reconciliation Act of 1990 and the Veteran’s Health Care Act of 1992, and if products are made available to authorized users of the Federal Supply Schedule of the General Services Administration, additional laws and requirements apply.

 

All of these activities also may be subject to federal and state consumer protection and unfair competition laws.

 

We also are subject to changes or revisions to these laws and regulations that may make gaining regulatory approval, reimbursement and pricing more difficult or at least subject to different criteria and standards.

 

If we or any third party involved in our manufacturing or commercialization efforts fail to comply with applicable regulatory requirements, a regulatory agency may:

 

·

Issue warning letters or untitled letters asserting that we are in violation of the law;

·

Seek an injunction or impose civil or criminal penalties or monetary fines;

·

Suspend or withdraw marketing approval;

·

Suspend any ongoing clinical trials;

·

Refuse to approve pending applications or supplements to applications submitted by us;

·

Suspend or impose restrictions on operations, including costly new manufacturing requirements;

·

Seize or detain products, refuse to permit the import or export of products, or require us to initiate a product recall;

·

Refuse to allow us to enter into supply contracts, including government contracts;

·

Impose civil monetary penalties; or

·

Pursue civil or criminal prosecutions and fines against our company or responsible officers.

 

Any government investigation of alleged violations of law could require us to expend significant time and resources in response, and could generate negative publicity. The occurrence of any event or penalty described above may inhibit our ability to commercialize our product candidates and generate revenues.

 

Even if we obtain marketing approval for ARIKACE or any of our other product candidates, adverse effects discovered after approval could limit the commercial profile of any approved product.

 

If we obtain marketing approval for ARIKACE or any other product candidate that we develop, such products will be used by a larger number of patients and for longer periods of time than they were used in clinical trials.  For these reasons or other reasons, we or others may later discover that our products have adverse effect profiles that limit their usefulness or require their withdrawal. This discovery could have a number of potentially significant negative consequences, including:

 

·

Regulatory authorities may withdraw their approval of the product;

·

Regulatory authorities may require the addition of labeling statements, such as black box or other warnings or contraindications;

·

Regulatory authorities may require us to issue specific communications to healthcare professionals, such as “Dear Doctor Letters;”

·

Regulatory authorities may impose additional restrictions on marketing and distribution of the products;

·

Regulatory authorities may issue negative publicity regarding the product, including safety communications;

·

We may be required to change the way the product is administered, conduct additional clinical studies or restrict the distribution of the product;

·

We could be sued and held liable for harm caused to subjects;

·

We could be subject to negative publicity; and

·

Our reputation may suffer.

 

Any of these events could prevent us from maintaining market acceptance of the affected product candidate, could cause substantial reduction of sales, could substantially increase the costs of commercializing our product candidates, and could cause significant financial losses.

 

If we are unable to obtain adequate reimbursement from governments or third-party payors for ARIKACE or any other products that we may develop or if we are unable to obtain acceptable prices for those products, our prospects for generating revenue and achieving profitability may be materially adversely affected.

 

Our prospects for generating revenue and achieving profitability depend heavily upon the availability of adequate reimbursement for the use of our approved product candidates from governmental and other third-party payors, both in the US and in other markets. Reimbursement by a third party payor may depend upon a number of factors, including the third party payor’s determination that use of a product is:

 

·

A covered benefit under its health plan;

·

Safe, effective and medically necessary;

·

Appropriate for the specific patient;

·

Cost-effective; and

·

Neither experimental nor investigational.

 

Obtaining reimbursement approval for a product from each government or other third-party payor is a time consuming and costly process that could require us to provide supporting scientific, clinical and cost effectiveness data for the use of our products to each payor. We may not be able to provide data sufficient to gain acceptance with respect to reimbursement or we might need to conduct post-marketing studies in order to demonstrate the cost-effectiveness of any future products to such payors’ satisfaction. Such studies might require us to commit a significant amount of management time and financial and other resources. Even when a payor determines that a product is eligible for reimbursement, the payor may impose coverage limitations that preclude payment for some uses that are approved by the FDA or non-US regulatory authorities. In addition, there is a risk that full reimbursement may not be available for high priced products. Moreover, eligibility for coverage does not imply that any product will be reimbursed in all cases or at a rate that allows us to make a profit or even cover our costs. Interim payments for new products, if applicable, also may not be sufficient to cover our costs and may not be made permanent. Subsequent approvals of competitive products could result in a detrimental change to the reimbursement of our products.

 

There is a significant focus in the US healthcare industry and elsewhere on cost containment.  We expect changes in the Medicare program and state Medicaid programs, as well as managed care organizations and other third-party payors to continue to put pressure on pharmaceutical product pricing.  In the United States, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, or the MMA, changed the way Medicare covers and pays for pharmaceutical products.  The legislation expanded Medicare coverage for drug purchases by the elderly and introduced a new reimbursement methodology based on average sales prices for drugs.  In addition, this legislation authorized Medicare Part D prescription drug plans to use formularies where they can limit the number of drugs that will be covered in any therapeutic class.  As a result of this legislation and the expansion of federal coverage of drug products, we expect that there will be additional pressure to contain and reduce costs.  These cost reduction initiatives and other provisions of this legislation could decrease the coverage and price that we receive for any approved products and could seriously harm our business.  Although the MMA applies only to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy and payment limitations when setting their own reimbursement rates, and any reimbursement reduction resulting from the MMA may result in a similar reduction in payments from private payors.

 

In March 2010, the Patient Protection and Affordable Care Act, or PPACA, which was intended to broaden access to health insurance, constrain and reduce the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for healthcare and health insurance industries, impose new taxes and fees on the health industry and impose additional health policy reforms, was passed into law.  Effective in October 2010, the PPACA revised the definition of “average manufacturer price” for reporting purposes, which could increase the amount of Medicaid drug rebates to states.  Further, beginning in 2011, the new law imposed a significant annual fee on companies that manufacture or import branded prescription drug products.  We do not know the full effects that the PPACA will have on our commercialization efforts.  Although it is too early to determine the effect of the PPACA, we believe it is likely that the law will continue the pressure on pharmaceutical pricing, especially under the Medicare program, and also may increase our regulatory burdens and operating costs.  If one or more of our product candidates reaches commercialization, such changes may have a significant impact on our ability to set a price we believe is fair for our products and may adversely affect our ability to generate revenue and achieve or maintain profitability.  We expect further federal and state proposals and health care reforms to continue to be proposed by legislators, which could limit the prices that can be charged for the products we develop and may limit our commercial opportunity.

Moreover, in markets outside the US, including Canada and the countries in the EU, pricing of pharmaceutical products is subject to governmental control.  Evaluation criteria used by many EU government agencies for the purposes of pricing and reimbursement typically focus on a product’s degree of innovation and its ability to meet a clinical need unfulfilled by currently available therapies.  The decisions of such governmental agencies could affect our ability to sell our products profitably.

 

Government health care reform could increase our costs, and could adversely affect our revenue and results of operations.

Our industry is highly regulated and changes in law may adversely impact our business, operations or financial results.  Substantial new requirements affecting compliance were enacted as part of PPACA, which may require us to modify our business practices with health care practitioners.  For example, beginning in 2013, drug manufacturers will be required to report information on payments or transfers of value to physicians and teaching hospitals as well as investment interests held by physicians and their immediate family members during the preceding calendar year.  Failure to submit required information may result in civil monetary penalties.  Although the statute requires reporting by March 31, 2013 of payments and other transfers of value made in calendar year 2012, the Centers for Medicare & Medicaid Services, or CMS has issued a final rule that will go into effect in April 2013 and will require manufacturers to begin collecting required information on August 1, 2013, with the first reports due March 31, 2014.  The reported data will be posted in searchable form on a public website beginning September 30, 2014.

The reforms imposed by the new law will significantly impact the pharmaceutical industry; however, the full effects cannot be known until these provisions are implemented and CMS and other federal and state agencies issue applicable regulations or guidance.  Moreover, in the coming years, additional changes could be made to governmental healthcare programs that could significantly impact the success of our products or product candidates.  We will continue to evaluate the PPACA, as amended, the implementation of regulations or guidance related to various provisions of the PPACA by federal agencies, as well as trends and changes that may be encouraged by the legislation and that may potentially have an impact on our business over time.  The cost of implementing more detailed record keeping systems and otherwise complying with these requirements could substantially increase our costs.

 We will need approval from the FDA and other regulatory authorities in jurisdictions outside the US for our proposed trade names.  Any failure or delay associated with such approvals may delay the commercialization of our products.

 

 Any trade name we intend to use for our product candidates will require approval from the FDA regardless of whether we have secured a formal trademark registration from the US Patent and Trademark Office, or PTO. The FDA typically conducts a rigorous review of proposed trade names, including an evaluation of potential for confusion with other trade names and medication error. The FDA also may object to a trade name if it believes the name is inappropriately promotional. The FDA objected to our use of the name ARIKACE as our proposed trade name for our liposomal amakacin for inhalation product candidate.  We have not decided whether to appeal the FDA’s decision.  Even if we do appeal we may be required to adopt an alternative name for our product candidate.  Until the FDA approves a trade name or even after the FDA approves a trade name, the FDA may request that we adopt an alternative name for the product if adverse event reports indicate a potential for confusion with other trade names and medication error. If we are required to adopt an alternative name, the commercialization of ARIKACE could be delayed or interrupted, which would limit our ability to commercialize ARIKACE and generate revenues. In December 2012, we learned that the EMA had no objection to our request to use the names ARIKACE.

 

 

Our growth depends on technologies that may not be available on terms acceptable to us or at all.

 

As part of our business strategy, we may in-license new products and technologies.  Nonetheless, we cannot assure you that we will identify suitable products or enter into such license agreements on acceptable terms.

 

We may enter into collaborative relationships that would involve our collaborators conducting proprietary development programs.  Any conflict with our collaborators could limit our ability to obtain future collaboration agreements and negatively influence our relationship with existing collaborators.  Disagreements with collaborators may also develop over the rights to our intellectual property.

 

Certain of our collaborators could be or become competitors of ours.  Our collaborators could harm our product development and commercialization efforts by:

 

·

Developing competing products;

·

Precluding us from entering into collaborations with their competitors;

·

Failing to obtain regulatory approvals;

·

Terminating their agreements with us prematurely; or

·

Failing to devote sufficient resources to the development and commercialization of products.

 

 

In the United States, we are subject to various federal and state health care “fraud and abuse” laws, including anti-kickback laws, false claims laws and other laws intended to reduce fraud and abuse in federal and state health care programs.  The federal Anti-Kickback Statute makes it illegal for any person, including a prescription drug manufacturer or a party acting on its behalf, to knowingly and willfully solicit, receive, offer or pay any remuneration that is intended to induce the referral of business, including the purchase, order or prescription of a particular drug for which payment may be made under a federal health care program, such as Medicare or Medicaid.  Under federal government regulations, some arrangements, known as safe harbors, are deemed not to violate the federal Anti-Kickback Statute.  Although we seek to structure our business arrangements in compliance with all applicable requirements, these laws are broadly written, and it is often difficult to determine precisely how the law will be applied in specific circumstances.  Accordingly, it is possible that our practices may be challenged under the federal Anti-Kickback Statute.  False claims laws prohibit anyone from knowingly and willfully presenting or causing to be presented for payment to third-party payors, including government payors, claims for reimbursed drugs or services that are false or fraudulent, claims for items or services that were not provided as claimed, or claims for medically unnecessary items or services.  Cases have been brought under false claims laws alleging that off-label promotion of pharmaceutical products or the provision of kickbacks has resulted in the submission of false claims to governmental health care programs.  Under the Health Insurance Portability and Accountability Act of 1996, we are prohibited from knowingly and willfully executing a scheme to defraud any health care benefit program, including private payors, or knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for health care benefits, items or services.  Violations of fraud and abuse laws may be punishable by criminal and/or civil sanctions, including fines or exclusion or suspension from federal and state health care programs such as Medicare and Medicaid and debarment from contracting with the U.S. government.  In addition, private individuals have the ability to bring actions on behalf of the government under the federal False Claims Act as well as under the false claims laws of several states.

Risks Related to Our Intellectual Property

 

If we are unable to protect our intellectual property rights adequately, the value of our product candidates could be diminished.

 

Our success will depend in part on our ability to protect proprietary technology and to obtain patent protection for our products, prevent third parties from infringing on our patents and refrain from infringing on the patents of others, both domestically and internationally.

 

In addition, the patent situation in the field of biotechnology and pharmaceuticals generally is highly uncertain and involves complex legal, technical, scientific and factual questions.  We intend to actively pursue patent protection for products resulting from our research and development activities that have significant potential commercial value.  We may not be able to obtain additional issued patents relating to our technology or products.

 

Even if issued, patents issued to us or our licensors may be challenged, narrowed, invalidated, held to be unenforceable or circumvented, which could limit our ability to stop competitors from marketing similar products or reduce the term of patent protection we may have for our products. We cannot assure you that any patents obtained will afford us adequate protection or provide us with any meaningful competitive advantages against these competitors.

 

Changes in either patent laws or in interpretations of patent laws in the US and other countries may diminish the value of our intellectual property or narrow the scope of our patent protection.  For example, the America Invents Act was signed into law in the US in September 2011, with phased implementation through March 2013, and includes a number of changes to established practices.  These include the transition to a first-to-file system, establishment of new procedures for challenging patents and implementation of different methods for invalidating patents.  We cannot predict the impact that new laws, government rule-making, implementing regulations and applicable case law may have on the strength of our patents. Certain reforms may make it easier for competitors to challenge our patents and could have a material adverse effect on our business and prospects.  In addition, any patents we procure may require cooperation with companies holding related patents and we may have difficulty forming a successful relationship with such other companies.

If we are not able to adequately prevent disclosure of trade secrets and other proprietary information, the value of our product candidates could be significantly diminished.

We rely on trade secrets to protect our proprietary technologies, especially where we do not believe patent protection is appropriate or obtainable.  However, trade secrets are difficult to protect.  We rely in part on confidentiality agreements with our employees, consultants, advisors, collaborators, and other third parties and partners to protect our trade secrets and other proprietary information.  These agreements may not effectively prevent disclosure of confidential information or may not provide an adequate remedy in the event of unauthorized disclosure of confidential information.  In addition, third parties may independently develop or discover our trade secrets and proprietary information.  For example, the FDA, as part of its Transparency Initiative, currently is considering whether to make additional information publicly available on a routine basis, including information that we may consider to be trade secrets or other proprietary information, and it is not clear at the present time how the FDA’s disclosure policies may change in the future, if at all. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and any failure to obtain or maintain trade secret protection could adversely affect our competitive business position.

 

 

Confidentiality agreements with employees and others may not adequately prevent disclosure of trade secrets and other proprietary information.

 

In order to protect our proprietary technology and processes, we rely in part on confidentiality agreements with our corporate partners, employees, consultants, outside scientific collaborators and sponsored researchers and other advisors. These agreements may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, others may independently discover trade secrets and proprietary information. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our ability to successfully compete in the industry.

We may infringe the intellectual property rights of others, which may prevent or delay our product development efforts, prevent us from commercializing our products or increase the costs of commercializing our products.

 

Third parties may claim that we have infringed upon or misappropriated their proprietary rights.  Third parties may attempt to obtain, patent protection relating to the production and use of our product candidates.  We cannot assure you that any issued patents, or patents that may later issue to third parties, would not negatively affect our commercialization of ARIKACE or any other product.  We cannot assure you that such patents can be avoided or invalidated or would be licensed to us at commercially reasonable rates or at all.  We cannot assure you that we will be successful in any intellectual property litigation that may arise or that such litigation would not have an adverse effect on our business, financial condition, results of operation or prospects.  In the event of a successful claim against us for infringement or misappropriation of a third party’s proprietary rights, we may be required to:

 

·

Pay damages, including up to treble damages, and the other party’s attorneys’ fees, which may be substantial;

·

Cease the development, manufacture, marketing and sale of products or use of processes that infringe the proprietary rights of others;

·

Expend significant resources to redesign our products or our processes so that they do not infringe the proprietary rights of others, which may not be possible;

·

Redesign our products or processes to avoid third-party proprietary rights, which means we may suffer significant regulatory delays associated with conducting additional clinical trials or other steps to obtain regulatory approval; or

·

Obtain one or more licenses arising out of a settlement of litigation or otherwise from third parties for the infringed proprietary rights, which may not be available to us on acceptable terms or at all.

 

Furthermore, litigation with any third party, even if the allegations are without merit, would likely be expensive and time-consuming and divert management’s attention.

 

Any lawsuits relating to infringement of intellectual property rights necessary to defend ourselves or enforce our rights may be costly and time consuming.

Any conclusions we may have reached regarding non-infringement, inapplicability or invalidity of a third party’s intellectual property are based in significant part on a review of publicly available databases and other information.  There may be information not available to us or otherwise not reviewed by us that could change our conclusions.  Moreover, the scope and validity of patent claims depend significantly on facts and circumstances, and a court’s conclusions as to these matters may differ from the conclusions that we have reached.

We may have to undertake costly litigation to enforce any patents issued or licensed to us or to confirm the scope and validity of another party’s proprietary rights.  We cannot assure you that a court would validate our issued or licensed intellectual property.  An adverse outcome in litigation or interference or other proceeding in any court or patent office could materially adversely affect our ability to develop and commercialize our product candidates.

 

 

If we fail to comply with our obligations in our license agreements for our product candidates, we could lose license rights that are important to our business.

           We currently have a licensing agreement with PARI for exclusive use of the optimized eFlow Nebulizer System for delivery of ARIKACE in treating patients with CF, bronchiectasis and NTM infections.  We have rights to several US and foreign issued patents, and patent applications involving improvements to the optimized eFlow Nebulizer System.  Under the licensing agreement, PARI is entitled to receive payments either in cash, qualified stock or a combination of both, at PARI’s discretion, based on achievement of certain milestone events including phase 3 trial initiation, first acceptance of MAA submission (or equivalent) in the US of ARIKACE and the device, first receipt of marketing approval in the US for ARIKACE and the device, and first receipt of marketing approval in a major EU country for ARIKACE and the device.  We are required to use commercially reasonable efforts to pursue the clinical development of ARIKACE in one or more countries and, for CF at least in the United States, and after obtaining such marketing approval to use commercially reasonable efforts to market and sell ARIKACE in the countries in which it is approved.  If we fail to meet some or all of our obligations under the licensing agreement or choose to discontinue commercialization of ARIKACE in any indication, PARI may compete in the indication, we may lose the exclusive rights to use the PARI device with ARIKACE in the indication, and we may lose the non-exclusive right to use the PARI device with ARIKACE in the indication.  Termination of the licensing agreement or loss of exclusive rights may occur if we fail to meet our obligations, including payment of royalties to PARI, or if we do not meet certain milestones contained in the licensing agreement such as obtaining marketing approval or achieving the first commercial sale of ARIKACE.  PARI may also choose to terminate the agreement if we do not use commercially reasonable efforts over a two year period of time.

 

Risks Related to Our Industry

 

We operate in a highly competitive and changing environment, and if we are unable to adapt to our environment, we may be unable to compete successfully.

 

Biotechnology and related pharmaceutical technology have undergone and are likely to continue to experience rapid and significant change.  We expect that the technologies associated with biotechnology research and development will continue to develop rapidly.  Our future success will depend in large part on our ability to maintain a competitive position with respect to these technologies and to obtain and maintain protection for our intellectual property.  Any compounds, products or processes that we develop may become obsolete before we recover any expenses incurred in connection with their development.  Rapid technological change could make our products obsolete, and materially adversely affect our business, financial condition, results of operations or prospects.

 

           We expect that successful competition will depend, among other things, on product efficacy, safety, reliability, availability, timing and scope of regulatory approval and price.  Specifically, we expect crucial factors will include the relative speed with which we can develop products, complete the clinical testing and regulatory approval processes and supply commercial quantities of the product to the market.  We expect competition to increase as technological advances are made and commercial applications broaden.

 

In each of our potential product areas, we face substantial competition from large pharmaceutical, biotechnology and other companies, universities and research institutions.  Relative to us, most of these entities have substantially greater capital resources, research and development staffs, facilities and experience in conducting clinical studies and obtaining regulatory approvals, as well as in manufacturing and marketing pharmaceutical products.  Many of our competitors may achieve product commercialization or patent protection earlier than us.  Furthermore, we believe that our competitors have used, and may continue to use, litigation to gain a competitive advantage.  Finally, our competitors may use different technologies or approaches to the development of products similar to the products we are seeking to develop.

If ARIKACE is approved for Pseudomonas lung infections in CF patients, it will compete against Tobi, the current standard of care for the chronic management of these infections.  Tobi is marketed by Novartis.  Other competitors in this market include Gilead and Forest, and we are aware of other companies also developing products for this indication.  We cannot assure you that if ARIKACE is approved for this indication or NTM that it will be able to compete successfully in the marketplace.

 

 

Competitors could develop and obtain FDA approval of products containing amikacin, which could adversely affect our competitive position in all ARIKACE-related indications.

 

In the event there are other amikacin products approved by the FDA for any use, physicians may elect to prescribe those products rather than ARIKACE to treat the indications for which ARIKACE may receive approval, which is commonly referred to as off-label use.  Although FDA regulations prohibit a drug company from promoting off-label use of its product, the FDA does not regulate the practice of medicine and as a result cannot direct physicians as to what product to prescribe to their patients.  As a result, we would have limited ability to prevent any off-label use of a competitor’s product to treat diseases for which we have received FDA approval, even if such use violates our patents or orphan drug exclusivity for the use of amikacin to treat such diseases.  This could negatively affect our results of operations or business.

Competitors could develop and obtain FDA approval of antibiotic products that are more effective, safer, tolerable or more convenient or less expensive than our products in development or existing products, which could adversely affect our competitive position in all ARIKACE-related indications.

 

There are potential competitive products, both approved and in development, which include oral, systemic, or inhaled antibiotic products to treat chronic respiratory infections due to Pseudomonas.   If any of our competitors develops a product that is more effective, safer, tolerable or, convenient or less expensive than ARIKACE, it would adversely affect our ability to generate revenues. We also may face lower priced generic competitors if third-party payors encourage use or generic or lower-priced versions of our product or if competing products are imported into the US from Canada, Mexico or other countries.

 

FDA approval of products that treat the underlying cause of CF could reduce the market opportunity for ARIKACE.

 

In January 2012, the FDA approved Kalydeco (ivacaftor) by Vertex as the first drug approved to treat patients with the G551D mutation of CF, which affects about 4% of CF patients.  Vertex also is studying Kalydeco, in combination with another drug candidate, for a more common CF mutation.  We cannot predict the potential effects of Kalydeco or similar products approved in the future on inhaled antibiotic use in CF. It is possible that these therapies could decrease the number or proportion of CF patients who acquire Pseudomonas lung infections and thereby decrease the market for inhaled antibiotics like ARIKACE.

 

If another party obtains orphan drug exclusivity for a product that is essentially the same as a product we are developing for a particular indication, we may be precluded or delayed from commercializing the product in that indication.

 

Under the Orphan Drug Act, the FDA may grant orphan drug designation to drugs intended to treat a rare disease or condition, which is generally a disease or condition that affects fewer than 200,000 individuals in the US.  See “Business—Government Regulation—Orphan Drugs—United States.”  The company that obtains the first marketing approval from the FDA for a designated orphan drug for a rare disease receives marketing exclusivity for use of that drug for the designated condition for a period of seven years.  Similar laws exist in EU with a term of ten years.  See “Business—Government Regulation—Orphan Drugs—Europe.”  If a competitor obtains approval of the same drug for the same indication or disease before us, we would be prohibited from obtaining approval for our product for seven or more years, unless our product can be shown to be clinically superior.  In addition, more than one drug may be approved by the FDA for the same orphan indication or disease as long as the drugs are different drugs.  As a result, even if one of our products is approved and receives orphan drug exclusivity, as ARIKACE was for treating CF patients with Pseudomonas , the FDA may approve different drugs for use in treating the same indication or disease covered by our product, which could adversely affect our competitive position.

 

Our research, development and manufacturing activities used in the production of ARIKACE involve the use of hazardous materials, which could expose us to damages and materially adversely affect our results of operations and financial condition.

 

We are subject to numerous environmental, health and safety laws and regulations, including those governing laboratory procedures and the handling, use, storage, treatment and disposal of hazardous materials and wastes. Our research, development and manufacturing activities for ARIKACE involve the controlled use of hazardous materials and chemicals.  We generally contract with third parties for the disposal of these materials and wastes. We cannot eliminate the risk of contamination or injury from these materials.  In addition to any liability we could have for any use by us of hazardous materials and chemicals, we could also potentially be liable for activities of our contract manufacturers or other third parties. Any such liability, or even claims of such liability, could materially adversely affect our results of operations and financial condition.  We also could incur significant costs associated with civil or criminal fines and penalties.

 

 

In addition, we may incur substantial costs in order to comply with current or future environmental, health and safety laws and regulations. These current or future laws and regulations may impair our research, development or production efforts. Failure to comply with these laws and regulations also may result in substantial fines, penalties or other sanctions.

 

We may be subject to product liability claims, and we have only limited product liability insurance.

 

The manufacture and sale of human therapeutic products involve an inherent risk of product liability claims and associated adverse publicity.  We currently have only limited product liability insurance for our products.  We do not know if we will be able to maintain existing or obtain additional product liability insurance on acceptable terms or with adequate coverage against potential liabilities.  This type of insurance is expensive and may not be available on acceptable terms.  If we are unable to obtain or maintain sufficient insurance coverage on reasonable terms or to otherwise protect against potential product liability claims, we may be unable to commercialize our products.  A successful product liability claim brought against us in excess of our insurance coverage, if any, may require us to pay substantial amounts and may materially adversely affect our business, financial condition, results of operations or prospects.

 

Risks Related to Employee Matters and Managing Growth

 

We are dependent upon retaining and attracting key personnel, the loss of whose services could materially adversely affect our business, financial condition, results of operations and prospects.

 

We depend highly on the principal members of our scientific and management personnel, the loss of whose services might significantly delay or prevent the achievement of our research, development or business objectives.  Our success depends, in large part, on our ability to attract and retain qualified management, scientific and medical personnel, and on our ability to develop and maintain important relationships with commercial partners, leading research institutions and key distributors.  We will need to hire additional personnel in anticipation of seeking regulatory approval for and commercial launch of ARIKACE.

 Competition for skilled personnel in our industry and market is very intense because of the numerous pharmaceutical and biotechnology companies that seek similar personnel. These companies may have greater financial and other resources, offer a greater opportunity for career advancement and have a longer history in the industry than we do. We also experience competition for the hiring of our scientific and clinical personnel from universities, research institutions, and other third parties.  We cannot assure that we will attract and retain such persons or maintain such relationships.

As described under “—If we fail to meet the continued listing requirements of the Nasdaq Capital Market, our common stock may be delisted from Nasdaq and the value of our common stock may decrease,” we made equity awards to key personnel and directors and portions of certain of these equity awards were deemed to be in excess of our 2000 Stock Incentive Plan per person sub-limits.  We are requesting that our shareholders approve, at our 2013 annual meeting of shareholders, the excess portions of certain equity awards.  If our shareholders do not ratify and approve the affected portions of such awards, our current affected officers and directors agreed that such portions would be deemed forfeited.  Such forfeiture could make it difficult for us to retain the services of the affected key personnel, particularly if we are otherwise unable to provide them with equity compensation that is competitive with the market place.  In addition, such forfeitures may reduce the morale of the affected recipients and may cause a more widespread reduction in employee morale, which could make it more difficult for us to retain qualified employees and to hire qualified employees in the future.  Our inability to retain and attract qualified employees would harm our business.

We expect to expand our development, regulatory and future sales and marketing capabilities, and as a result, we may encounter difficulties in managing our growth, which could disrupt our operations.

We expect that our potential expansion into areas and activities requiring additional expertise, such as further clinical trials, governmental approvals, manufacturing, sales, marketing and distribution will place additional requirements on our management, operational and financial resources.  Future growth would impose significant added responsibilities on members of management, including the need to identify, recruit, maintain, motivate and integrate additional employees. Also, our management may need to divert a disproportionate amount of its attention away from our day-to-day activities and devote a substantial amount of time to managing these growth activities. We may not be able to effectively manage the expansion of our operations, which may result in weaknesses in our infrastructure, give rise to operational mistakes, loss of business opportunities, loss of employees and reduced productivity among remaining employees.

 

 

The anticipated commercialization of ARIKACE and the development of additional product candidates will require significant expenditures by us and place a strain on our resources.  If our management is unable to effectively manage our activities in anticipation of commercialization, as well as our development efforts, we may incur higher than expected expenditures or other expenses and our business may otherwise be adversely affected.

Risks Related to our Common Stock and Listing on the Nasdaq Capital Market

 

The market price of our stock has been and may continue to be highly volatile.

 

Our common stock is listed on the Nasdaq Capital Market under the ticker symbol INSM. The market price of our stock has been and may continue to be highly volatile, and could be subject to wide fluctuations in price in response to various factors, many of which are beyond our control. These factors may include:

 

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Our listing status on the Nasdaq Capital Market;

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Results of our clinical studies and preclinical studies, or those of our corporate partners or our competitors;

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Delays in timing of pre-clinical, clinical development and regulatory filings and delays regarding our inability to obtain potential approvals

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Strategic business decisions;

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Developments in our relationships with corporate partners;

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Developments affecting our corporate partners;

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Negative regulatory action or regulatory approval with respect to our announcement or our competitors’ announcements of new products;

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Government regulation, reimbursement changes and governmental investigation or audits related to us or to our products;

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Developments related to our patents or other proprietary rights or those of our competitors;

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Other competitive developments;

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Reports issued by and changes in the position of securities analysts with respect to our stock or changes in stock ownership by investors;

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Operating results below the expectations of securities analysts and investors; and

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The need or perceived need to raise additional capital.

 

In addition, the stock market has from time to time experienced extreme price and volume fluctuations, which have particularly affected the market prices for emerging biotechnology and pharmaceutical companies like us, and which have often been unrelated to their operating performance.  These broad market fluctuations may adversely affect the market price of our common stock.

 

            Historically, when the market price of a stock has been volatile, shareholder are more likely to institute securities and derivative class action litigation against the issuer of such stock.  If any of our shareholders were to institute a lawsuit against us, we could incur substantial costs defending the lawsuit.  Any lawsuit could divert the time and attention of our management.

 

Future sales of substantial amounts of common stock in the public market, or the possibility of such sales occurring, could also adversely affect prevailing market prices for our common stock or our future ability to raise capital through an offering of equity securities.

At the time of our merger with Transave, certain former Transave stockholders holding approximately 40% of our shares of common stock as of December 1, 2010, entered into lock-up arrangements with us in connection with the merger.  The lock-up arrangements expired on May 30, 2012, and these shareholders may now generally dispose of all their shares freely except to the extent that any such shareholder is an affiliate of the Company.  Such Transave stockholders have the benefit of a registration rights agreement dated December 1, 2010, pursuant to which the Transave stockholders may, subject to certain conditions, require us to file registration statements covering the resale of their shares of common stock or to include their shares of common stock in registration statements that we may file for ourselves or other stockholders.  We have also granted certain registration rights to Hercules in respect of the warrant issued to them in connection with our Loan Agreement.

 

 

If we fail to meet the continued listing requirements of the Nasdaq Capital Market, our common stock may be delisted from the Nasdaq Capital Market, which may cause the value of an investment in our common stock to decrease.

 

As a result of the events described below or for other reasons not currently known to us, Nasdaq may determine that we have not met the continued listing requirements of the Nasdaq Capital Market.  If a delisting from the Nasdaq Capital Market were to occur, our common stock may be eligible, upon the application of a market maker, to trade on the OTC Bulletin Board or in the “pink sheets.”  These alternative markets are generally considered to be less efficient than, and not as broad as, the Nasdaq Capital Market.  Therefore, delisting of our common stock from the Nasdaq Capital Market could adversely affect the trading price of our common stock and could limit the liquidity of our common stock and therefore could cause the value of an investment in our common stock to decrease.

On October 12, 2012, the Nasdaq staff issued a Letter of Reprimand to us pursuant to Nasdaq Listing Rule 5810(c)(4), based on its noncompliance with Nasdaq Listing Rule 5635(d).  The Letter of Reprimand related to the registered direct financing we closed on September 28, 2012.  In that financing, we issued 6,304,102 shares of common stock to three investors.  The price at which the common stock was sold in the financing was $4.07 per share, equal to the closing bid price for our common shares on the day prior to the issuance.  On October 5, 2012, we received telephonic notice from our outside counsel on the transaction that the Nasdaq staff had informed such counsel of the staff’s belief that the sale of the shares did not comply with Nasdaq Listing Rule 5365(d).  The staff’s concern was based on the fact that the shares were sold at a price that was below the book value per share of our stock as reflected in our Form 10-Q for the quarter ended June 30, 2012.  As a result, it was the staff’s belief that, pursuant to the Nasdaq Listing Rules, we were not permitted to issue 20% or more of our outstanding common shares in the financing, even though the sales price per share was equal to the market value per share on the date immediately preceding the issuance. The Staff previously informed us that, having issued the Letter of Reprimand to us, it considered the matter closed.

In connection with a recent review by us of equity compensation awards made by us under our Amended and Restated 2000 Stock Incentive Plan, as amended (the “2000 Stock Incentive Plan”), pursuant to which we may grant stock-based awards to our employees, executive officers, directors and certain of our advisors and service providers, we determined that we had inadvertently exceeded the annual per-person sub-limits set forth in the 2000 Stock Incentive Plan in connection with awards previously made to certain of our current and past officers and directors. The aggregate amount of common stock represented by these awards in excess of the per person annual sub-limits, which consisted of restricted stock, RSUs and stock options, is approximately 1.6 million shares.  The awards that we determined exceeded the per person sub-limits included certain awards issued immediately following our business combination with Transave, awards negotiated with new hires pursuant to employment agreements or offers of employment, and certain other awards made subsequent to our 2011 one-for-ten reverse stock split.  We have not exceeded the aggregate maximum share limit approved by shareholders under the 2000 Stock Incentive Plan (currently 3,925,000 shares of common stock), whether as a result of previously-issued awards or currently outstanding awards.

 

On March 12, 2013, we notified Nasdaq of the grants previously made in excess of the annual per-person sub-limits provided for by the 2000 Stock Incentive Plan.  We believe that a decision by us to increase the annual sub-limits would have constituted an immaterial amendment to the 2000 Stock Incentive Plan, which amendment would not have required shareholder approval under applicable Nasdaq guidance.  However, because the grant of certain awards exceeded the sub-limits applicable at the time the grants were made, it is possible that Nasdaq will conclude that we issued securities pursuant to the 2000 Stock Incentive Plan without shareholder approval in violation of Nasdaq Listing Rule 5635(c).

In a March 13, 2013 letter to Nasdaq, we submitted a remediation and compliance plan, which we refer to as our remediation plan, to address the grants made in excess of the 2000 Stock Incentive Plan sub-limits.  Among other items, our remediation plan conditions the continued vesting and exercise of the portion of each equity compensation award issued to our current employees and directors in excess of the 2000 Stock Incentive Plan’s sub-limits on approval by our shareholders of such portion of the affected grants.  If our shareholders do not ratify and approve the affected portions of such awards, such portions would be deemed forfeited.

 

 

We cannot assure you that Nasdaq will not determine to delist us or issue us another reprimand letter in connection with our grants of equity awards to certain employees and directors in excess of the annual per-person sub-limits provided for in our 2000 Stock Incentive Plan.  If either of these things were to occur, it could have a material adverse effect on the trading price and liquidity of our common stock.

The ownership interest of existing shareholders will be diluted by the exercise of warrants and options issued by us or to the extent that we issue additional common stock in connection with any offerings of securities, strategic transactions, or otherwise.

 

As of February 28, 2013, warrants issued by us in June 2012 to Hercules were exercisable at a price of $2.94 per share for up to approximately 329,932 shares of our common stock.  Such warrants expire on June 29, 2017.

 

As of February 28, 2013, 2,180,310 shares of our common stock are potentially issuable under outstanding restricted stock units and stock options to our employees, officers, directors and consultants.

The conversion or exercise of some or all of our warrants, restricted stock units and options will dilute the ownership interests of existing shareholders. Any sales in the public market of the common stock issuable upon such conversion or exercise could adversely affect prevailing market prices of our common stock.

 

Additionally, our Articles of Incorporation currently authorize us to issue up to 500 million common shares.  As of February 28, 2013 we had 31,563,278 shares of common stock outstanding.  To the extent that we issue additional common stock in connection with any offerings of securities, strategic transactions, or otherwise, the ownership interest of existing shareholders will be further diluted.

Historically we have not paid dividends on our common stock, and we have no plans to pay dividends in the foreseeable future.

We have never declared or paid any cash dividend on our common stock and do not currently intend to do so for the foreseeable future. We currently anticipate that we will retain any future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future.  Therefore, the success of an investment in shares of our common stock will depend upon any future appreciation in their value.  There is no guarantee that shares of our common stock will appreciate in value or even maintain the price at which our stockholders have purchased their shares.

 

Certain provisions of Virginia law and our articles of incorporation and amended and restated bylaws could hamper a third party’s acquisition of, or discourage a third party from attempting to acquire control of us.

 

Certain provisions of Virginia law and our articles of incorporation and amended and restated bylaws could hamper a third party’s acquisition of, or discourage a third party from attempting to acquire control of us or limit the price that investors might be willing to pay for shares of our common stock. These provisions include:

 

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A provision allowing us to issue preferred stock with rights senior to those of the common stock without any further vote or action by the holders of the common stock. The issuance of preferred stock could decrease the amount of earnings and assets available for distribution to the holders of common stock or could adversely affect the rights and powers, including voting rights, of the holders of the common stock. In certain circumstances, such issuance could have the effect of decreasing the market price of the common stock;

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The existence of a staggered board of directors in which there are three classes of directors serving staggered three-year terms, thus expanding the time required to change the composition of a majority of directors and perhaps discouraging someone from making an acquisition proposal for us;

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Our amended and restated bylaws’ requirement that shareholders provide advance notice when nominating director candidates to serve on our Board of Directors;

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The inability of shareholders to convene a shareholders’ meeting without the chairman of the board, the president or a majority of the board of directors first calling the meeting; and

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The application of Virginia law prohibiting us from entering into a business combination with the beneficial owner of 10% or more of our outstanding voting stock for a period of three years after the 10% or greater owner first reached that level of stock ownership, unless we meet certain criteria.

 

 

In addition, we previously had a “poison pill” shareholder rights plan, which expired in May 2011. Under Virginia law, our Board of Directors may implement a new shareholders rights plan without shareholder approval. Our Board of Directors intends to regularly consider this matter, even in the absence of specific circumstances or takeover proposals, to facilitate its future ability to quickly and effectively protect shareholder value.

Other Risks Related to our Business

On January 30, 2013, our Board received a letter purportedly on behalf of one of our shareholders who made a demand on the Board to investigate and take appropriate remedial measures in relation to our 2012 grant of stock options to Mr.  Will Lewis, our President and Chief Executive Officer.  If this purported shareholder initiates litigation against us, or if we become subject to other litigation or legal proceedings in connection with our grants of stock options in excess of our 2000 Stock Incentive Plan sub-limits, we could be required to expend significant resources in connection with defending any such litigation or other legal proceedings, and any unfavorable outcome in any such litigation or other legal proceedings could materially adversely affect our business, financial condition or results of operations.

 

On January 30, 2013, our Board received a letter purportedly   on behalf of one of our shareholders who made a demand on the Board to rescind certain stock options granted to our President and CEO, Mr. Lewis, in excess of our 2000 Stock Incentive Plan sub-limits and to adopt and implement adequate internal controls designed to prevent future issuances in excess of our 2000 Stock Incentive Plan sub-limits.  Upon receipt of the demand letter, our Board formed a special committee of independent directors, which we refer to as the Special Committee, to investigate the allegations in the letter and, if necessary, to recommend necessary and appropriate remediation measures.  The Special Committee retained counsel to assist it in its investigation.  The Special Committee determined that we had inadvertently exceeded the 2000 Stock Incentive Plan’s annual per-person sub-limit applicable to the stock options granted to Mr.  Lewis.  Separately, on its own initiative, the Special Committee investigated grants that were not addressed in the demand letter, and it determined that we had inadvertently granted certain other equity awards that exceeded annual per-person sub-limits.  Following its investigation, the Special Committee made recommendations to our Board. On March 7, 2013, our Board approved a remediation and compliance plan that provides for various remediation measures, including securing the waiver and consent agreements entered into by our current affected employees and directors, as well as obtaining shareholder approval of the affected portion of certain equity awards granted under the 2000 Stock Incentive Plan.

 

We cannot assure you that the purported shareholder who sent the demand letter, or our other shareholders or other parties, will not initiate litigation or other legal proceedings, despite our remediation efforts relating to the option grants to Mr. Lewis or the other issues relating to options described above.  Litigation and other legal proceedings can be expensive, lengthy and disruptive to normal business operations.  Moreover, the results of complex legal proceedings are difficult to predict.  Responding to lawsuits or other legal proceedings brought against us or our Board could be expensive and time-consuming.  Unfavorable outcomes from these claims or lawsuits or other legal proceedings could materially adversely affect our business financial condition or results of operations, and we could incur substantial monetary liability or be required to change our business practices, among other remedies that might be imposed.

 

We have identified a material weakness in our internal control over the administration, accounting and oversight of our 2000 Stock Incentive Plan, and our business and stock price may be materially adversely affected if we do not adequately address this material weakness or if we have other material weaknesses or significant deficiencies in our internal control over financial reporting.

 

As a public company, we are required, pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting.  In connection with our review of internal control over financial reporting as of December 31, 2012, we determined that we did not adequately implement certain controls over the administration, accounting and oversight of our 2000 Stock Incentive Plan, and we have therefore concluded that a material weakness in our internal control over financial reporting existed as of December 31, 2012.  The existence of this or one or more other material weaknesses or significant deficiencies in our internal control over financial reporting could result in errors in our financial statements, and substantial costs and resources may be required to rectify any internal control deficiencies.  Until we have been able to test the operating effectiveness of remediated internal controls and ensure the effectiveness of our disclosure controls and procedures, any material weaknesses may materially adversely affect our ability to report accurately our financial condition and results of operations in a timely and reliable manner.  In addition, although we continually review and evaluate internal control systems to allow management to report on the sufficiency of our internal controls, we cannot assure you that we will not discover additional weaknesses in our internal control over financial reporting.  Any such additional weakness or failure to remediate the existing material weakness could materially adversely affect our ability to comply with applicable financial reporting requirements and the requirements of our various agreements.  Further, if we cannot produce reliable financial reports, investors could lose confidence in our reported financial information, the market price of our stock could decline significantly, we may be unable to obtain additional financing to operate and expand our business, and our business, financial condition and results of operations could be materially harmed.