Item 1A.

RISK FACTORS

 

In addition to the other information included in this Report, the following factors should be considered in evaluating our business and future prospects. Any of the following risks, either alone or taken together, could materially and adversely affect our business, financial position or results of operations. If one or more of these or other risks or uncertainties materialize or if our underlying assumptions prove to be incorrect, our actual results may vary materially from what we projected. There may be additional risks that we do not presently know or that we currently believe are immaterial which could also impair our business or financial position.

 

Please also see the “Special Note Regarding Forward Looking Statements” on page 4 of this Annual Report on Form 10-K.

 

Risks Related to Our Limited Sources of Revenue

 

We are dependent on Endo for future opt-in, milestone, mark-up on cost of goods sold and royalty payments.

 

Our sole source of revenue is from opt-in, milestone, mark-up on cost of goods sold and royalty payments from Endo under the License Agreement. As described in Item 1 above, under the License Agreement, in exchange for the right to receive royalties and other payments, we have granted to Endo the right to develop, manufacture, market and sell worldwide products (other than dermal formulations for topical administration) that contain collagenase for the treatment of DC, PD, frozen shoulder, cellulite, canine lipoma, plantar fibromatosis, lateral hip fat and human lipoma. However, we have no control over Endo’s ability to successfully market, sell and manufacture products for the treatment of DC and PD, or, in the case of frozen shoulder, cellulite, canine lipoma, plantar fibromatosis, lateral hip fat and human lipoma, to pursue approval and commercialization. Therefore, we may receive limited, if any, royalty payments from Endo.

 

Under the License Agreement, royalty payments are subject to set-off for certain expenses we owe Endo related to development and patent costs. While the deductions are increasing over time, we anticipate that the amount of royalties due to us will continue to exceed the amount of any set-offs.

 

In addition, we have granted to Endo an opt-in right to expand its license and development rights to one or more additional indications for injectable collagenase not currently licensed to Endo, including for the treatment of uterine fibroids. Endo may exercise its opt-in prior the Company’s submission of a clinical trial report to Endo, with the Company’s consent. Alternatively, Endo may opt-in following our submission of such a report. If Endo exercises its opt-in with respect to an additional indication, we are entitled to receive a one-time license fee for the rights to, as well as potential milestone, royalty and other payments with respect to, such new indication. If Endo does not exercise its opt-in for any additional indication, we may offer to any third party such development rights with regard to products in the Endo Territory (as defined in the License Agreement), provided that we first offer the same terms to Endo, or develop the product ourselves. Endo has no obligation to exercise its opt-in with respect to any such additional indication, and its decision to do so is in its complete discretion. Clinical trials can be expensive and the results are subject to different interpretations, and therefore, there is no assurance that after conducting Phase 2 clinical trials on any additional indication, and incurring the associated expenses, Endo will exercise its opt-in or we will receive any revenue from it. Under the License Agreement, we may only offer to a third party development rights with regard to products in the Endo Territory and not in Europe and certain Eurasian countries. Even if Endo exercises its opt-in as to any additional indication, its obligations to develop the product for such indication are limited to initiating Stage II Development (as defined in the License Agreement) for such additional indication within one year of exercising the opt-in as to such indication.

 

As there is uncertainty surrounding Endo’s plans for licensed indications, decisions made by Endo may negatively impact our financial position.

 

We have no control over Endo’s future plans for any licensed indications. We have received in the past, and are entitled to receive in the future, certain milestone payments from Endo in respect of its efforts to commercialize products, but we have no control over Endo’s ability to achieve the milestones. Endo is in the process of terminating their partnership agreements with Sobi, Asahi, and Actelion, which will reduce the amount of royalty revenues (in the form of sublicense income) received by us.

 

Even if Endo or its sublicensees pursues development and commercialization, there is no guarantee that the FDA or equivalent foreign regulatory body will approve XIAFLEX® for a given indication or that commercialization will be successful. Moreover, Endo’s review of pipeline indications has been ongoing since 2015; since that time, only the indication for cellulite has advanced in development.

 

Endo’s ongoing commercial review of the XIAFLEX® exercised but non-marketed indications are uncertain.

 

There is no guarantee that Endo will pursue the commercialization of XIAFLEX® exercised but non-marketed indications, including cellulite, frozen shoulder and plantar fibromatosis, nor that it will exercise its rights to opt in for any additional indications, including uterine fibroid.

 

Due to our dependence on Endo, Endo’s failure to achieve projected revenues could have a material adverse effect on our business.

 

As discussed above, our performance is substantially dependent on Endo’s performance, stability and success. Endo’s operations are substantially dependent on the continued services and performance of its senior management and other key personnel as well as the stability and performance of its various business units. The on-going reshaping of Endo’s business to deliver, the restructuring of the generics business, and litigation and associated legal reserves  could have the effect of distracting the attention of management and other resources away from the commercialization and further development of XIAFLEX®, thereby materially and adversely impacting our financial condition by slowing down the growth of, or reducing, XIAFLEX® sales and development and payments by Endo to us for royalties, cost of goods sold, milestones, and sublicense income.

 

Our dependence upon revenue from Endo makes us subject to the commercialization and other risk factors affecting Endo over which we have limited or no control, including those risk factors identified by Endo in its Form 10-K for the fiscal year ended December 31, 2019, filed on February 26, 2020.

 

Risks Related to Our Dependence on Endo

 

We are dependent upon revenue from Endo and Endo’s operating success or failure has a significant impact on our potential royalty stream and other payment rights. The risk factors affecting Endo and, consequently, us, include the following.  Moreover, to the extent that we are independently developing product candidates and indications, we will also be subject to the below risks:

 

Endo is subject to various regulations pertaining to the marketing of their products and services.

 

Endo is subject to various federal and state laws pertaining to healthcare fraud and abuse, including prohibitions on the offer of payment or acceptance of kickbacks or other remuneration for the purchase of Endo’s products and services, including inducements to potential patients to request Endo’s products and services and inducements to healthcare professionals to prescribe and use Endo’s products. Additionally, product promotion, educational activities, support of continuing medical education programs, and other interactions with healthcare professionals and patients must be conducted in a manner consistent with the FDA regulations and the Anti-Kickback Statute. The Anti-Kickback Statute, with certain statutory exemptions and safe harbor regulations as interpreted through opinions published by the Office of the Inspector General of the Department of Health and Human Services (“HHS-OIG”), prohibits persons or entities from knowingly and willfully soliciting, receiving, offering or providing remuneration, directly or indirectly, to induce either the referral of an individual, or the furnishing, recommending, or arranging for a good or service, for which payment may be made under federal healthcare programs, such as the Medicare and Medicaid programs. Violations of the Anti-Kickback Statute also carry potential federal False Claims Act liability. Additionally, many states have adopted laws similar to the Anti-Kickback Statute, without identical exceptions or exemptions. Some of these state prohibitions apply to referral of patients for healthcare items or services reimbursed by any third-party payer, not only the Medicare and Medicaid programs. Endo is also required to report pricing information and provide rebates to federal programs and discounts to federal purchasers as conditions of payment by Medicaid and Medicare.  Noncompliance with these requirements subjects a company to potential False Claims Act liability and criminal, civil and administrative sanctions.  Some states, such as California, also have their own price reporting obligations subject to state law.  Any such new regulations or requirements may be difficult and expensive for Endo to comply with, may delay Endo’s introduction of new products, may adversely affect Endo’s total revenues and may have a material adverse effect on Endo’s business, results of operations, financial condition and cash flows.

 

Sanctions for violating these laws include criminal penalties and civil sanctions and possible exclusion from federal funded healthcare programs such as Medicare and Medicaid as well as potential liability under the False Claims Act and applicable state false claims acts. There can be no assurance that Endo’s practices will not be challenged under these laws in the future or that such a challenge would not have a material adverse effect on their business and Endo’s business or results of operations.

 

In addition, Endo is subject to statutory and regulatory restrictions on the promotion of uses of prescription drugs that are not approved by the FDA. Although the FDA does not regulate a physician’s choice of medications or treatments, the FDCA and FDA regulations and guidance significantly restrict the ability of pharmaceutical companies to communicate with patients, physicians, and other third-parties about unapproved product uses. FDA, Federal Trade Commission (“FTC”), the HHS-OIG, the Department of Justice (“DOJ”) and various state Attorneys General actively enforce state and federal prohibitions on the promotion of unapproved uses, as well as prohibitions against promotional practices deemed false or misleading. A company that is found to have improperly promoted its products under these laws may be subject to significant liability, including significant administrative, civil, and criminal sanctions, including but not limited to, significant civil damages, criminal fines, and exclusion from participation in Medicare, Medicaid, and other federal healthcare programs. Applicable laws governing product promotion also provide for administrative, civil, and criminal liability for individuals, including, in some circumstances, potential strict vicarious liability. Conduct giving rise to such liability could also form the basis for private civil litigation by third-party payers or other persons allegedly harmed by such conduct, as well as qui tam actions under the federal False Claims Act in which the government could chose to intervene.

 

Endo has endeavored to establish and implement a corporate compliance program designed to prevent, detect, and correct violations of state and federal healthcare laws, including laws related to advertising and promotion of Endo’s drugs. Nonetheless, the FDA, FTC, HHS-OIG, the DOJ and/or the state Attorneys General, and qui tam relators may take the position that Endo is not in compliance with such requirements, and, if such non-compliance is proven, Endo and, in some cases, individual employees, may be subject to significant liability, including the aforementioned administrative, civil, and criminal sanctions.  This could have a material adverse effect on Endo’s business and financial operations.  For instance, while not related to XIAFLEX® or any of our product candidates, in 2014, Endo entered into a settlement and corporate integrity agreement to resolve criminal and civil liability arising from its marketing of an unrelated drug.

 

The pharmaceutical industry is heavily regulated, which creates uncertainty about Endo’s ability to bring CCH products to market and imposes substantial compliance costs on their business.

 

Governmental authorities such as the FDA impose substantial requirements on the development, manufacture, holding, labeling, marketing, advertising, promotion, distribution and sale of therapeutic pharmaceutical products.  Product candidates may not be marketed until completion of lengthy and detailed laboratory and clinical testing and other costly and time-consuming procedures, as well as the approval of marketing applications by regulatory authorities.  A failure to obtain satisfactory results in required pre-marketing trials may prevent Endo from obtaining required regulatory approvals.  The FDA may also require companies to conduct post-approval studies and post-approval surveillance regarding their drug products and does require companies to report adverse events and certain manufacturing issues.

 

Before obtaining regulatory approvals for the sale of any of Endo’s new product candidates, Endo must demonstrate through preclinical studies and clinical trials that the product is safe, pure and potent for each intended use. Preclinical and clinical studies may fail to demonstrate the safety and effectiveness of a product.  Likewise, Endo may not be able to demonstrate through clinical trials that a product candidate’s therapeutic benefits outweigh its risks. Even promising results from preclinical and early clinical studies do not always accurately predict results in later, large scale trials.  A failure to demonstrate safety and efficacy could or would result in Endo’s failure to obtain regulatory approvals. Clinical trials can be delayed for reasons outside of Endo’s control, which can lead to increased development costs and delays in regulatory approval.  For example, there is substantial competition to enroll patients in clinical trials and such competition has delayed clinical development of Endo’s products in the past.  For example, patients may not enroll in clinical trials at the rate expected or patients may drop out after enrolling in the trials or during the trials.  In addition, Endo relies on collaboration partners that may control or make changes in trial protocol and design enhancements, or encounter clinical trial compliance-related issues, which may also delay clinical trials or require that clinical trials be suspended or terminated. Product supplies may be delayed or be insufficient to treat the patients participating in the clinical trials, or Endo, manufacturers, suppliers or other third parties may not meet the requirements of the FDA or foreign regulatory authorities, such as those relating to cGMP or GCPs.  To the extent that changes are made to a product during clinical or preclinical trials, studies may need to be repeated or additional studies may need to be conducted.  Such noncompliance may result in regulatory enforcement action and a regulatory authority’s determination that a product candidate is not approvable.  Endo also may experience delays in obtaining, or Endo may not obtain, required initial and continuing approval of Endo’s clinical trials from institutional review boards and regulatory authorities.  There may also be issues with study design and conduct that do not become apparent until a study is underway or completed. Endo cannot confirm that it will not experience delays or undesired results their clinical trials.

 

Endo cannot confirm that the FDA or foreign regulatory agencies will approve, clear for marketing or certify any products developed by Endo or that such approval will not subject the marketing of Endo’s products to certain limits, such as limits on indicated use.  The FDA or foreign regulatory authorities may not agree with Endo’s study design, or assessment of the clinical data or they may interpret it differently. Such regulatory authorities may require additional or expanded clinical trials. Any limitation on use imposed by the FDA or delay in or failure to obtain FDA approvals or clearances of products developed by Endo would adversely affect the marketing of these products and Endo’s ability to generate product revenue, which would adversely affect Endo’s financial condition and results of operations.

 

In addition, with respect specifically to pharmaceutical products, the submission of a marketing application to the FDA with supporting clinical safety and efficacy data, for example, does not guarantee that the FDA will grant approval to market the product. Meeting the FDA’s regulatory requirements to obtain approval to market a drug product, which varies substantially based on the type, complexity and novelty of the pharmaceutical product, typically takes years and is subject to uncertainty. The approval process for a new product varies in time. Approvals, if granted, may not include all uses (known as indications) for which a company may seek to market a product.

 

Further, during product development and once a product is approved for marketing, failure to comply with applicable regulatory requirements can result in regulatory enforcement actions, such as, but not limited to, warning, untitled, or cyber letters, suspensions or withdrawals of approvals or clearances, refusals to approve pending applications or supplements, seizures or recalls of products, injunctions against or other restrictions on the manufacture, holding, distribution, marketing and sale of a product, import or export refusals, product detention, promotional piece modifications and the issuance of corrective information, adverse publicity, regulatory authority issuance of public communications regarding products, holds or terminations on pre- or post-market studies, liability for harm cause to patients, reputational harm, civil and criminal sanctions, and FDA debarment, suspension and debarment from government contracts, and refusal of orders under existing government contracts, exclusion from federal healthcare programs, consent decrees, or corporate integrity agreements. Furthermore, changes in existing regulations or the adoption of new regulations could prevent Endo from obtaining, or affect the timing of, future regulatory approvals or clearances. Meeting regulatory requirements and evolving government standards may delay marketing of Endo’s new products for a considerable period of time, impose costly procedures upon Endo’s activities and result in a competitive advantage to larger companies that compete against Endo.

 

Based on scientific developments, post-market experience, or other legislative or regulatory changes, the current FDA standards of review for approving new pharmaceutical products, or new indications or uses for approved products, are sometimes more stringent than those that were applied in the past.

 

The FDA has the authority to require companies to undertake additional post-approval studies to assess known or signaled safety risks and to make any labeling changes to address those risks. The FDA also can require companies to formulate approved REMS to ensure a drug’s benefits outweigh its risks either for approval or following approval. Moreover, following approval, discovery of new product issues could also result in the withdrawal of product approval, refusal to approve new product indications or similar products, holds or suspension of clinical studies, labeling restrictions, product recalls, changes in the way that the product is administered, produced or distributed, adverse publicity, public statements by regulators, post-approval study or REMS requirements liability for harm cause to patients, or the product becoming less competitive, among other consequences.  The FDA’s exercise of its authority under the FDCA could result in delays or increased costs during product development, clinical trials and regulatory review, increased costs to comply with additional post-approval regulatory requirements and potential restrictions on sales of approved products. Foreign regulatory agencies often have similar authority and may impose comparable requirements and costs. Post-marketing studies and other emerging data about marketed products, such as adverse event reports, may also adversely affect sales of Endo’s products or prompt regulatory authorities to take regulatory actions with regard to the product. Furthermore, the discovery of significant safety or efficacy concerns or problems with a product in the same therapeutic class as one of Endo’s products that implicate or appear to implicate the entire class of products could have an adverse effect on sales of Endo’s product or, in some cases, result in product withdrawals or other regulatory action. Furthermore, new data and information, including information about product misuse or abuse at the user level, may lead government agencies, professional societies, practice management groups or patient or trade organizations to recommend or publish guidance or guidelines related to the use of Endo’s products, which may lead to reduced sales of Endo’s products.

 

The FDA regulates and monitors the quality of drug clinical trials to provide human subject protection and to support marketing applications. The FDA may place a hold on a clinical trial and may cause a suspension or withdrawal of product approvals if regulatory standards are not maintained. The FDA also regulates the facilities, processes, and procedures used to manufacture and market pharmaceutical products in the U.S. both for clinical supply and marketed products. Manufacturing facilities must be registered with the FDA and all commercially distributed products made in such facilities must be manufactured in accordance with the latest cGMP regulations, which are enforced by the FDA. Changes to manufacturers or the manufacturing process for commercially distributed products may require that the product sponsor conduct supporting studies, provide FDA with notification of the change, and/or obtain FDA’s approval before implementing the change.  Compliance with clinical trial requirements and cGMP regulations requires the dedication of substantial resources and requires significant expenditures. In the event an approved manufacturing facility for a particular drug is required by the FDA to curtail or cease operations, cannot produce products or product candidates in accordance with regulatory requirements, or otherwise becomes inoperable, or a third-party contract manufacturing facility faces manufacturing problems, the implementation of corrective actions, or obtaining the required FDA authorization to manufacture at the same or a different manufacturing site could be costly, and could result in production delays, which could adversely affect Endo’s business, results of operations, financial condition and cash flow.  Failure to abide by manufacturing requirements may also result in regulatory enforcement action, adverse publicity, and product recalls, among other consequences.  Moreover, manufacturing challenges may also be faced as product development and approval progresses, such as challenges related to manufacturing scale up, qualification, and validation.  In the event Endo or its manufacturers cannot successfully meet all manufacturing regulatory requirements, Endo’s business may be adversely impacted.

 

The FDA is authorized to perform inspections of U.S. and foreign manufacturing facilities and clinical trial sites under the FDCA. Following such inspections, the FDA may issue a Form 483 Notice of Inspectional Observations.  FDA may also issue an untitled letter that cites violations that do not meet the threshold of regulatory significance of a Warning Letter. FDA guidelines also provide for the issuance of Warning Letters for violations of “regulatory significance” for which the failure to adequately and promptly achieve correction may be expected to result in an enforcement action. FDA also may issue Warning Letters and untitled letters in connection with events or circumstances unrelated to an FDA inspection.  Any of these may require Endo to modify certain activities identified by FDA.

 

Endo cannot determine what effect changes in regulations or legal interpretations or requirements by the FDA or the courts, when and if promulgated or issued, may have on Endo’s business in the future. Changes could, among other things, require different labeling, monitoring of patients, interaction with physicians, education programs for patients or physicians, curtailment of necessary supplies, or limitations on product distribution. These changes, or others required by the FDA could have an adverse effect on the sales of these products. The evolving and complex nature of regulatory science and regulatory requirements, the broad authority and discretion of the FDA and the generally high level of regulatory oversight results in a continuing possibility that, from time to time, Endo will be adversely affected by regulatory actions despite Endo’s ongoing efforts and commitment to achieve and maintain full compliance with all regulatory requirements.

 

Any issues that Endo or any other companies to which we grant licensing rights experience concerning regulatory and legal compliance generally, as well as the development, manufacturing, approval, sale, marketing, promotion, and distribution specifically of our products and/or product candidates may limit the opt-in, mark up on cost of goods sold, milestone and/or royalty payments that we are due under our agreements.

 

The availability of third-party reimbursement for XIAFLEX® products is uncertain, and thus Endo may find it difficult to maintain current price levels. Additionally, the market may not accept those products for which third-party reimbursement is not adequately provided.

 

Endo’s ability to commercialize products depends, in part, on the extent to which reimbursement for the costs of these products is available from government healthcare programs, such as Medicaid and Medicare, private health insurers and others.  Endo cannot be certain that, over time, third-party reimbursements for Endo’s products will be adequate for Endo to maintain price levels sufficient for realization of an appropriate return on Endo’s investment.  Government payers, private insurers and other third-party payers are increasingly attempting to contain healthcare costs by (1) limiting both coverage and the level of reimbursement (including adjusting co-pays) for products approved for marketing by the FDA, (2) refusing, in some cases, to provide any coverage for uses of approved products for indications for which the FDA has not granted marketing approval and (3) requiring or encouraging, through more favorable reimbursement levels or otherwise, preferred therapeutically equivalent branded products and the substitution of generic alternatives to branded products.

 

Endo may experience pricing pressure on the price of XIAFLEX® products due to social or political pressure to lower the cost of drugs, which would reduce our revenue and future profitability.

 

Federal and state health care programs are increasingly focused on the price of prescription drugs, including the expanded use of mandatory rebates and discounts and measures that penalize or prohibit price increases over inflation rates.  Endo may experience downward pricing pressure on the price of Endo’s products due to social or political pressure to lower the cost of drugs, which would reduce Endo’s revenue and future profitability. Recent events have resulted in increased public and governmental scrutiny of the cost of drugs, especially in connection with price increases following companies’ acquisitions of the rights to certain drug products.  In particular, U.S. federal prosecutors recently issued subpoenas to a pharmaceutical company seeking information about its drug pricing practices, among other issues, and members of the U.S. Congress have sought information from certain pharmaceutical companies relating to post-acquisition drug-price increases. Endo’s revenue and future profitability could be negatively affected if these inquiries were to result in legislative or regulatory proposals that limit Endo’s ability to increase the prices of Endo’s products.

 

Pressure from social activist groups and future government regulations may also put downward pressure on the price of drugs, which could result in downward pressure on the prices of Endo’s products in the future.

 

If Endo’s manufacturing facilities are unable to manufacture XIAFLEX® products or the manufacturing process is interrupted due to failure to comply with regulations or for other reasons, it could have a material adverse impact on our business.

 

If any of Endo’s manufacturing facilities or its third party manufacturing facilities fail to comply with regulatory requirements or encounter other manufacturing difficulties, it could adversely affect Endo’s ability to supply products.  All facilities and manufacturing processes used for the manufacture of pharmaceutical products are subject to inspection by regulatory agencies at any time and must be operated in conformity with cGMP. Compliance with the FDA’s cGMP requirements applies to both drug products seeking regulatory approval and to approved drug products.  In complying with cGMP requirements, pharmaceutical manufacturing facilities must continually expend significant time, money and effort in production, recordkeeping, quality assurance and quality control so that their products meet applicable specifications and other requirements for product safety, efficacy and quality.  Failure to comply with applicable legal requirements subjects Endo and its third party manufacturing facilities to possible legal or regulatory action, including shutdown, which may adversely affect Endo’s ability to supply the product.  Additionally, Endo’s or its third party manufacturing facilities may face other significant disruptions due to labor strikes, failure to reach acceptable agreement with labor unions, infringement of intellectual property rights, vandalism, natural disaster, storm or other environmental damage, civil or political unrest, export or import restrictions or other events.  If Endo is unable to manufacture products at its or its third party manufacturing facilities because of regulatory, business or any other reasons, the manufacture and marketing of these products would be interrupted.  This could have a material adverse impact on Endo’s business, results of operation, financial condition, cash flows and competitive position, which could, in turn, materially impact our business.

 

For example, the manufacturing facilities that are qualified to manufacture CCH, which Endo sells under the trademark XIAFLEX® and may use from time to time in the research and development of CCH for other investigational indications, such as for cellulite, are subject to such regulatory requirements and oversight.  If such facilities fail to comply with cGMP requirements, Endo may not be permitted to sell products or may be limited in the jurisdictions in which it is permitted to sell them. Further, if an inspection by regulatory authorities indicates that there are deficiencies, including non-compliance with regulatory requirements, Endo could be required to take remedial actions, stop production or close its facilities, which would disrupt the manufacturing processes, limit the supply of CCH and delay clinical trials and subsequent licensure and/or limit the sale of commercial supplies.  In addition, future noncompliance with any applicable regulatory requirements may result in refusal by regulatory authorities to allow use of CCH in clinical trials, refusal of the government to allow distribution of CCH within the U.S. or other jurisdictions, criminal prosecution, fines, recall or seizure of products, total or partial suspension of production, prohibitions or limitations on the commercial sale of products, refusal to allow the entering into of federal and state supply contracts and follow-on civil litigation.  Noncompliance with manufacturing requirements may also impede Endo’s ability to obtain marketing approval for future indications.

 

As Endo has limited experience in manufacturing biologic products and may encounter difficulties in its manufacturing processes, which could materially adversely affect or delay or disrupt manufacture of those products reliant upon our manufacturing operations.

 

The manufacture of biologic products requires significant expertise and capital investment.  Although Endo manufactures CCH, which is included in its current XIAFLEX® product and in certain product candidates under development, including for the treatment of cellulite, in its Horsham, Pennsylvania facility, Endo has limited experience in manufacturing CCH or any other biologic products.  Biologics such as CCH require processing steps that are highly complex and generally more difficult than those required for most chemical pharmaceuticals.  If the manufacturing processes are disrupted at the facilities where its biologic products are manufactured, it may be difficult to find alternate manufacturing sites.  Endo may encounter difficulties with the manufacture of CCH, which could delay, disrupt or halt the manufacture of such products and/or product candidates, result in product recalls or product liability claims, require write-offs or otherwise have a material adverse effect on its business, financial condition, results of operations and cash flows.

 

The regulatory approval process outside the U.S. varies depending on foreign regulatory requirements, and failure to obtain regulatory approval in foreign jurisdictions would prevent the marketing of Endo’s products in those jurisdictions.

 

Endo has worldwide intellectual property rights to market many of Endo’s products and product candidates and intends to seek approval to market certain of Endo’s products outside of the U.S.  Approval of a product by the regulatory authorities of foreign countries must be obtained prior to manufacturing or marketing that product in those countries.  The approval procedure varies among countries and can involve additional testing and the time required to obtain such approval may differ from that required to obtain FDA approval.  The non-U.S. regulatory approval process includes all of the risks associated with obtaining FDA approval set forth herein.  Approval by the FDA does not secure approval by the regulatory authorities of any other country, nor does the approval by foreign regulatory authorities in one country secure approval by regulatory authorities in other foreign countries or the FDA.  Moreover, the failure to obtain approval in one jurisdiction may compromise our or our partner’s ability obtain approval elsewhere.  If Endo fails to comply with these regulatory requirements or fails to obtain and maintain required approvals, Endo’s target market will be reduced and Endo’s ability to generate revenue from abroad will be adversely affected.

 

The expanding nature of Endo’s business in global markets exposes Endo to risks associated with adapting to emerging markets and taking advantage of growth opportunities.

 

The globalization of Endo’s business may expose Endo to increased risks associated with conducting business in emerging markets.  Any difficulties in adapting to emerging markets could impair Endo’s ability to take advantage of growth opportunities in these regions and a decline in the growth of emerging markets could negatively affect Endo’s business, results of operations or financial condition.

 

The expansion of Endo’s activities in emerging markets may further expose Endo to more volatile economic conditions and political instability. Endo also faces competition from companies that are already well established in these markets. Endo’s inability to respond adequately to the unique characteristics of these markets, particularly with respect to their regulatory frameworks, the difficulties in recruiting qualified personnel, potential exchange controls, weaker intellectual property protection, higher crime levels and corruption and fraud, could have a material adverse effect on Endo’s business.

 

Endo’s policies and procedures, which are designed to help Endo, Endo’s employees and agents comply with various laws and regulations regarding corrupt practices and anti-bribery, cannot guarantee protection against liability for actions taken by businesses in which Endo invests. Failure to comply with domestic or international laws could result in various adverse consequences, including possible delay in the approval or refusal to approve a product, recalls, seizures, withdrawal of an approved product from the market, or the imposition of criminal or civil sanctions, including substantial monetary penalties.

 

In addition, differences in banking systems and business cultures could have an adverse effect on the efficiency of internal controls over financial reporting matters. Given the significant learning curve to fully understand the emerging markets’ business, operating environment and the quality of controls in place, Endo may not be able to adequately assess the efficiency of internal controls over financial reporting or the effects of the laws and requirements of the local business jurisdictions.

 

Many jurisdictions require specific permits or business licenses, particularly if the business is considered foreign.  These requirements may affect Endo’s ability to carry out Endo’s business operations in emerging markets.

 

Endo has been, continues to be and may be the subject of lawsuits, product liability claims, other significant legal proceedings, government investigations or product recalls for which it may be unable to obtain or maintain insurance adequate to cover potential liabilities.

 

Endo’s business exposes it to significant potential risks from lawsuits, product liability claims, other significant legal proceedings, government investigations or product recalls, including, but not limited to, such matters associated with the testing, manufacturing, marketing and sale of our products. Some plaintiffs have received substantial damage awards in some jurisdictions against healthcare companies based upon various legal theories, including without limitation claims for injuries allegedly caused by the use of their products. Endo has been, continues to be and may be subject to various product liability cases, as well as other significant legal proceedings and government investigations.

 

For example, Endo and its subsidiaries, along with other manufacturers of prescription opioid medications, are the subject of lawsuits and have received subpoenas and other requests for information from various state and local government agencies regarding the sale, marketing and/or distribution of prescription opioid medications.  Numerous claims against opioid manufacturers have been and may continue to be filed by or on behalf of states, counties, cities, Native American tribes, other government-related persons or entities, hospitals, health systems, unions, health and welfare funds, other third-party payers and/or individuals. In these cases, plaintiffs seek various remedies, including without limitation, declaratory and/or injunctive relief; compensatory, punitive and/or treble damages; restitution, disgorgement, civil penalties, abatement, attorneys’ fees, costs and/or other relief. In addition to direct expenditures for damages, settlement and defense costs in connection with these claims, proceedings and investigations, there is a possibility of loss of revenues, injunctions and disruption of business. Furthermore, Endo and other manufacturers of prescription opioid medications have been, and will likely continue to be, subject to negative publicity and press, which could harm its brand and the demand for its products. There are also regulatory and legislative proposals being made that could impact Endo and other manufacturers of prescription opioid medications.

 

If Endo found liable in any lawsuits, including those related to sales, marketing or pricing practices, government investigations, product recalls or the sale, marketing and/or distribution of prescription opioid medications, it could result in the imposition of damages, including punitive damages, substantial fines, significant reputational harm, civil lawsuits and criminal penalties, interruptions of business, modification of business practices, equitable remedies and other sanctions against Endo or its personnel as well as significant legal and other costs. Endo may also voluntarily settle cases even if it believes that it has meritorious defenses because of the significant legal and other costs that may be required to defend such actions. As a result, Endo may experience significant negative impacts on its operations. Any of the risks above could materially and adversely impact Endo’s business, financial condition, results of operations, liquidity and cash flows.

 

If physicians do not prescribe XIAFLEX® or the medical profession or patients do not accept XIAFLEX®, our ability to grow or maintain revenues will be limited.

 

Our revenues are dependent on market acceptance of XIAFLEX®. Physician willingness to prescribe and patients’ willingness to accept, as well as the ultimate profitability of XIAFLEX® depend on many factors, including:

 

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perceived safety and efficacy;

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convenience and ease of administration;

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incidence and severity of adverse side effects in both clinical trials and commercial use;

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the information in the approval product label, including the indications and any limitations and warnings;

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distribution and user restrictions;

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current standard of care;

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availability of alternative treatments or products, including biosimilars;

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cost effectiveness and pricing;

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the adequacy and effectiveness of Endo’s sales force and that of any partner’s sales force;

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Endo’s ability to establish and maintain agreements with wholesalers, distributors, group purchasing organizations, pharmacy benefit managers, and similar organizations on commercially reasonable terms;

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the adequacy and effectiveness of Endo’s production, distribution and marketing capabilities and those of Endo’s international partners;

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publicity concerning Endo’s products or competing products; and

•

existence and level of third-party or government coverage or reimbursement for XIAFLEX® for the treatment of DC and PD and the price concessions required to obtain coverage.

Even though there is regulatory approval for XIAFLEX®, physicians may not prescribe, and patients may not accept, XIAFLEX® if Endo or its partners do not promote it effectively. If market acceptance of XIAFLEX® falters or fails , Endo may not be able to continue market and sell XIAFLEX® successfully, which would limit our ability to receive revenue and could harm our business.

 

A condition for approval of XIAFLEX® for DC and for PD, Endo is required to comply with post-marketing requirements.  Failure to comply with these requirements or any future post-marketing requirements may harm our business.

 

The FDA can establish requirements for XIAFLEX® with which Endo must comply.  Data from preclinical testing and clinical trials are submitted to the FDA in a BLA for marketing approval and to foreign government health authorities in a marketing authorization application, consistent with each health authority’s specific regulatory requirements.  The process of completing clinical trials for a new drug may take many years and require the expenditures of substantial resources.  As a condition of approval, the FDA or foreign regulatory authorities may require further studies, including Phase 4 post-marketing studies and pediatric studies, to provide additional data. In September 2007, Congress passed legislation authorizing the FDA to require companies to undertake such studies to assess the risks of drugs known or signaling potential to have serious safety issues.  For some drugs, the FDA may require a REMS, which could include medication guides, physician communication plans, or restrictions on distribution and use, such as limitations on who may prescribe the drug or where it may be dispensed or administered.  Other post-marketing studies could be used to gain approval for the use of a product as a treatment for clinical indications other than those for which the product was initially tested.  Also, the FDA or foreign government regulatory authorities require post-marketing reporting to monitor the adverse effects of drugs. Results of post-marketing programs may limit or expand the further marketing of the products. Failure to report or conduct the studies is considered a violation and can result in enforcement action.  These studies or clinical trials could be time-consuming and costly and the results could have negative effects on Endo’s ability to market the product.

 

Should FDA license a biosimilar product to XIAFLEX® we and/or Endo may face increased competition sooner than otherwise anticipated.

 

XIAFLEX® is regulated and marketed as biologic products pursuant to BLAs. XIAFLEX® is licensed based on a determination by the FDA of safety, purity, and potency as required under the PHSA. In 2010, Congress enacted the BPCIA as part of the Patient Protection and Affordable Care Act, which amended the PHSA to create an abbreviated licensure pathway for products deemed to be biosimilar to or interchangeable with FDA-licensed reference biological products. Under the BPCIA, an approval for a biosimilar product cannot be made effective by the FDA until 12 years after the original branded product was approved under a BLA. Certain changes, however, and supplements to an approved BLA, and subsequent applications filed by the same sponsor, manufacturer, licensor, predecessor in interest, or other related entity do not qualify for the 12-year exclusivity period.  Moreover, there have been efforts to decrease this period of exclusivity to a shorter timeframe.  Future proposed budgets, international trade agreements and other arrangements or proposals may affect periods of exclusivity.

 

Under the BPCIA, following the expiration of a 12-year reference exclusivity period, FDA may license a product under section 351(k) of the PHSA that it determines is biosimilar to or interchangeable with a reference product licensed under section 351(a) of the PHSA. Biosimilarity is defined to mean that the section 351(k) product is highly similar to the reference product notwithstanding minor differences in clinically inactive components and that there are no clinically meaningful differences between the section 351(k) product and the reference product in terms of the safety, purity, and potency of the product. To be considered interchangeable, a product must be biosimilar to the reference product, be expected to produce the same clinical result as the reference product in any given patient, and, if administered more than once to an individual, the risks in terms of safety or diminished efficacy of alternating or switching between use of the product and its reference product is not greater than the risk of using the reference product without such alternation or switch. Per FDA draft guidance, sponsors of biosimilar and interchangeable products are not required to seek FDA licensure for all of the indications for which the reference product has approval, though interchangeable product sponsors are encouraged to do so.

 

Once any reference exclusivity period for a BLA-licensed biologics expires, FDA may make an approval under section 351(k) effective for another company’s BLA for a biosimilar or interchangeable version of our product. Although licensure of a biosimilar or interchangeable under section 351(k) is generally expected to require less than the full complement of product-specific preclinical and clinical data required for innovator products licensed under section 351(a), FDA has considerable discretion over the kind and amount of scientific evidence required to demonstrate biosimilarity and interchangeability.

 

The FDA could determine that XIAFLEX® does not have exclusivity protection under the BPCIA.

 

We believe that XIAFLEX®, which was initially approved in 2010, would have exclusivity protection under the BPCIA through 2022. However, there is a risk that the FDA will not consider our products to be reference a product for competing products, potentially creating the opportunity for biosimilar competition sooner than anticipated. Additionally, this period of regulatory exclusivity does not apply to companies pursuing regulatory approval via their own traditional BLA, rather than via the abbreviated pathway. Moreover, the extent to which a biosimilar, once approved, will be substituted for any one of our reference products in a way that is similar to traditional generic substitution for non-biological products is not yet clear, and will depend on a number of marketplace and regulatory factors that are still developing. It is possible that payers will give reimbursement preference to biosimilars even over reference biologics absent a determination of interchangeability.  Moreover, the FDA and Congress are taking steps to decrease drug prices and facilitate biosimilar development and approval.  For instance, in 2019 FDA introduced a draft guidance to facilitate biologic importation. Congress also passed a bill requiring sponsors of BLA approved products to provide sufficient quantities of biologic product on commercially reasonable market based terms to entities developing biosimilar products. Accordingly, we or our partners may face biosimilar competition sooner than expected.

 

For XIAFLEX® for PD, Endo is required to implement a REMS. Failure to comply, or the cost of compliance with such REMS or other programs, may harm our business.

 

The FDA is authorized to require Endo as the sponsor of an approved or unapproved marketing application to submit a proposed REMS if the FDA determines that a REMS is necessary to ensure that the benefits of a drug outweigh the risks of the drug. Failure to comply with the requirements of the approved REMS can render the drug misbranded. A violation of a REMS requirement is subject to civil penalties. Complying with the requirements of a REMS can be costly and time-consuming and adversely affect Endo’s operations.

 

Because of the risks of corporal rupture (penile fracture) or other serious penile injury in the treatment of PD, XIAFLEX® is available only through the XIAFLEX® REMS Program.  The required components of the XIAFLEX® REMS Program include healthcare provider training and certification, healthcare provider risk education, certification of dispensing pharmacies and healthcare settings, dispenser confirmation that the prescribing physician is certified under the REMS, Endo auditing of certified pharmacies and healthcare settings, and patient risk education.  Because REMS can be burdensome and costly for sponsors to implement, and burdensome for healthcare providers, patients, and dispensers to follow, a REMS, such as the one for XIAFLEX®, can materially limit a product’s commercial prospects.

 

If we are unable to obtain opt-in, milestone, mark-up on cost of goods sold and royalty payments from Endo or meet our needs for additional funding from other sources, we may be required to limit, scale back or cease our operations.

 

Our business strategy contains elements that we will not be able to implement if we do not receive the anticipated opt-in, milestone, royalty or mark-up on cost of goods sold payments from Endo, or secure additional funding from other sources. While we anticipate being profitable on an ongoing, annual basis, our future funding requirements will depend on many factors, including:

 

•

Endo’s ability to manufacture and commercialize XIAFLEX® for which we would receive milestone, mark-up on cost of goods sold and royalty payments;

•

The ability of Endo’s sublicensees to commercialize XIAFLEX® in their respective territories;

•

the amount actually owed by us to Endo for certain patent costs;

•

Endo’s ability to successfully develop and receive regulatory approval for indications that it has exercised its opt-in rights for;

•

the scope, rate of progress, cost and results of our clinical trials on additional indications, including uterine fibroids, for which Endo could exercise its opt-in to acquire its rights;

•

Endo’s ability to abide by and ensure third party compliance with the many regulatory requirements applicable to pharmaceutical products;

•

the terms and timing of any future collaborative, licensing, co-promotion and other arrangements that we may establish;

•

the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights or defending against any other litigation; and

•

the extent to which Endo may reallocate priority away from XIAFLEX®.

These factors could result in variations from our currently projected operating requirements. If our existing resources are insufficient to satisfy our operating requirements, we may need to limit, scale back or cease operations or, in the alternative, borrow money. Given our operations and history, we may not be able to borrow money on commercially reasonable terms, if at all. If we issue any equity or debt securities, the terms of such issuance may not be acceptable to us and would likely result in substantial dilution of our stockholders’ investment. If we do not receive revenues from Endo, and are unable to secure additional financing, we may be required to cease operations.

 

We depend on Endo for the determination of royalty payments and cost of goods sold. While we have rights to audit Endo, the independent auditors may have difficulty determining the correct royalty and cost of goods sold calculations, we may not be able to detect errors and payment calculations may call for retroactive adjustments. We may have to exercise legal remedies to resolve any disputes resulting from the audit.

 

The royalty payments we receive are determined by Endo based on reported sales. Endo’s calculation of the royalty payments is subject to and dependent upon the adequacy and accuracy of its sales and accounting functions. Endo’s calculation of cost of goods sold are subject to and dependent upon the adequacy and accuracy of its internal accounting of costs. Errors may occur from time to time in these calculations.  The License Agreement provides us the right to audit the calculations and sales data for the associated royalty payments. Although we may exercise our audit rights, such audits may occur many months following our recognition of the royalty revenue, may require us to adjust our royalty revenues in later periods and may require expense on the part of the Company.  Further, Endo may be uncooperative or have insufficient records, which may complicate and delay the audit process.  Although we may exercise our audit rights, we rely in the first instance on Endo to accurately report sales and calculate and pay applicable royalties. Such audits may occur many months following our recognition of the royalty revenue, may require us to adjust our royalty revenues in later periods and may require expense on the part of the Company.  We also rely on Endo’s cooperation and maintenance of sufficient records in performing such audits.  If Endo is uncooperative or has insufficient records, it may complicate and delay the audit process. In the absence of such cooperation, we may be forced to exercise legal remedies to enforce our rights.

 

Our royalty revenue recognition is dependent upon the receipt of preliminary data from Endo.

 

We receive royalty revenues on net sales under our License Agreement with Endo. These are presented in “Royalties” in our consolidated statements of income.  In accordance with Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers,” we record these revenues based on estimates of the net sales that occurred during the relevant period.  The relevant period estimates of these royalties are based on preliminary data provided by Endo and analysis of historical gross-to-net deductions, adjusted for any changes in facts and circumstances, as appropriate.  Differences between actual and estimated royalty revenues are adjusted for in the period in which they become known, typically the following quarter.  While Endo is required (pursuant to the terms of the Second Amendment to the License Agreement) to provide us with timely estimates of royalties in order to assist us in complying with our financial reporting obligations, there is no guarantee that they will do so in a timely fashion, or at all.

 

In order to finance and to secure the rights to conduct clinical trials for products we have licensed to Endo, we have granted to third parties significant rights to share in royalty payments received by us and, in some case, milestone payments to be received by us.

 

To finance and secure the rights to conduct clinical trials for products we have licensed to Endo, we have granted to third parties certain rights to share in royalty payments and, in some cases milestone payments, received by us from Endo under the License Agreement. Consequently, we will be required to share a significant portion of the payments due to us from Endo under the Agreement.

 

If we breach our agreements with third parties or if there is a dispute concerning any of our agreements with third parties, our business could be materially harmed.

 

Our agreements with third parties impose on us various obligations, such as those related to intellectual property rights, non-competition, and development of products, as described throughout Item 1 of this Report. If we fail to comply with such obligations, or a counterparty to our agreements believes that we have failed to comply with such obligations, we may be sued and the costs of the resulting litigation could materially harm our business. Additionally, disputes may arise under these agreements, including with respect to the interpretation of such agreements and fee redeterminations or renegotiations thereof. These disputes may lead to litigation, termination of the agreement, or amendments that change our rights under the agreement, which could materially affect our financial position and materially harm our business. We agreed, for example, to resolve a dispute with Endo, to grant Endo an early opt-in to indications which may, if we consent, limit our ability to conduct clinical trials pursuant to the First Amendment which is described more fully in Item 1 above.

 

Our results of operations and financial position could be negatively impacted if our tax positions are challenged by tax authorities.

 

We are a U.S.-based company subject to taxes in certain U.S. jurisdictions. U.S. federal, state and local tax laws and regulations are extremely complex and subject to varying interpretations. Although we believe that our tax estimates and tax positions are reasonable, there can be no assurance that our tax positions will not be challenged by relevant tax authorities or that we would be successful in any such challenge. If we are unsuccessful in such a challenge, the relevant tax authorities may assess additional taxes, which could result in adjustments to, or impact the timing or amount of, taxable income, deductions or other tax allocations, which may adversely affect our results of operations and financial position.

 

Risks Related to Clinical Trials and Development of Drug Candidates

 

Our ability to conduct future clinical trials and develop products for injectable administration of collagenase may be limited by the License Agreement.

 

Under the License Agreement, we have the right to conduct trials, studies or development work for uterine fibroids, and, upon approval by the parties’ joint development committee (the “JDC”), additional indications. Endo will need to approve our protocol for further clinical trials with uterine fibroids. In addition, the JDC has the right to stop our study or trial in uterine fibroids if the rate of serious adverse events exceeds certain thresholds. If the JDC fails to approve our protocol for uterine fibroids or if the JDC stops our studies or trials in uterine fibroids due to safety concerns, our ability to obtain milestones and royalty payments with respect to this indication would be limited. We may only conduct in vivo trials, studies or development work for additional indications beyond the pre-approved indications upon submission to and approval by the JDC of our development plan.

 

Additionally, under the License Agreement, we have licensed or granted options to certain of our rights to conduct clinical trials and develop products for injectable administration of collagenase. We agreed, for example, to certain non-competition provisions, which may limit our clinical development activities.

 

We are dependent on Endo for access to XIAFLEX®, which may limit our ability to conduct future clinical trials and to obtain the associated opt-in, milestone, mark-up on cost of goods sold payments and royalty payments under the License Agreement.

 

Under the License Agreement, we have agreed to buy at cost plus a mark-up XIAFLEX® from Endo for conducting our trials, studies and development work. If Endo does not supply XIAFLEX® to us, or supply XIAFLEX® that meets regulatory qualify standards, our ability to conduct clinical trials using XIAFLEX® would be limited because we do not have the right to make XIAFLEX® or to purchase it from third parties. Similarly, any interruptions in Endo’s manufacturing as a result of regulatory issues or noncompliance would limit our ability to conduct our trials. We may also be held responsible for any Endo departures from the applicable regulatory manufacturing requirements, to the extent it impacts our clinical supply. Moreover, our ability to use our own clinical material may be limited both by lack of availability and by certain potential regulatory restrictions.

 

If clinical trials for our potential new indications are delayed, we may not be able to obtain opt-in, milestone or royalty payments under the License Agreement for new indications. The regulatory approval of such new indications would also be delayed or may never be received.

 

Clinical trials that we, Endo, or our or their investigators may conduct may not begin on time or may need to be restructured or temporarily suspended after they have begun. Flaws in a clinical trial’s design or conduct, may also not become apparent until the clinical trial is underway or complete, which may prevent regulatory approval, or require that clinical trials be modified or repeated.  Clinical trials may be delayed, may never be completed or may need to be restructured for a variety of reasons, including delays, impediments or restructuring related to:

 

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changes to the regulatory approval process for product candidates;

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obtaining regulatory approval to commence or continue a clinical trial;

•

timing of responses required from regulatory authorities;

•

negotiating acceptable clinical trial agreement terms with prospective contract research organizations, investigators or trial sites;

•

obtaining institutional review board, or equivalent, approval to conduct or continue a clinical trial at a prospective site;

•

recruiting subjects to participate in a clinical trial and retaining subjects in the study;

•

competition in recruiting clinical investigators;

•

shortage or lack of availability of clinical trial supplies from external and internal sources;

•

the need to repeat clinical trials as a result of inconclusive results or poorly executed testing, or to conduct additional clinical or preclinical trials or analyses;

•

Clinical or pre-clinical trials, as well as commercial experience with similar products, may reveal undesirable side effects, which may require that clinical trials be halted or modified;

•

failure to validate a patient-reported outcome questionnaire;

•

the placement of a clinical hold on a study by regulatory authorities, the suspension of a study by an institutional review board, or a decision to suspend or terminate a study by us or our partners;

•

the failure of third parties conducting and overseeing the operations of our clinical trials to perform their contractual or regulatory obligations in a timely fashion;

•

exposure of clinical trial subjects to unexpected and unacceptable health risks or noncompliance with regulatory requirements, which may result in suspension of the trial; and

•

manufacturing and/or distribution issues associated with clinical supplies.

Completion of clinical trials for each indication is required before commercialization. If we or Endo experience delays in, or termination of, clinical trials, or fails to enroll patients in clinical trials in a timely manner, or if the cost or timing of the regulatory approval process increases, our financial results and the commercial prospects for product candidates for new indications will be adversely impacted.  Significant delays relating to development programs also could shorten any periods during which we or our partners may have the exclusive right to commercialize a product or allow competitors to bring products to market before we or our partners, potentially blocking our or our partner’s ability to receive marketing approval.  In addition, many of the factors that cause, or lead to, delays in clinical trials may ultimately lead to the denial of marketing approval.

 

The process of conducting clinical trials and developing product candidates involves a high degree of risk, may take several years, and may ultimately not be successful.

 

Product candidates that appear promising in the early phases of development may fail to reach the market for several reasons, including:

 

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clinical trials may show product candidates to be ineffective or not as effective as anticipated or to have harmful side effects or unforeseen results;

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experience with marketed versions of product candidates may reveal harmful side effects or other unforeseen results;

•

regulatory authorities may disagree with study design, conduct, and/or data interpretation from preclinical and clinical trials, or may find that a product candidate’s benefits do not outweigh its risks;

•

regulatory authorities may take longer than anticipated to make a decision on the product candidates;

•

regulatory authorities may require that we or our partners perform additional clinical or pre-clinical trials, or gather additional manufacturing information;

•

our, our partners, or third party contractor failures to abide by the applicable regulatory requirements or study protocol;

•

regulatory authorities may fail to approve or subsequently find fault with the product candidate manufacturing processes or the contract manufacturer’s manufacturing facility for clinical and future commercial supplies;

•

regulatory authorities may require that we or our partners undertake post-market testing, surveillance, or implement a REMS to maintain regulatory approval;

•

product candidates may fail to receive regulatory approvals required to bring the products to market;

•

manufacturing costs, the inability to scale up to produce supplies for clinical trials meeting the necessary quality standards, or other factors may make our product candidates uneconomical;

•

changes in approval policies, data standards, statutes, and regulations; and

•

the proprietary rights of others and their competing products and technologies may prevent product candidates from being effectively commercialized or from obtaining exclusivity.

Success in preclinical and early clinical trials does not ensure that large-scale clinical trials will be successful. Clinical results are frequently susceptible to varying interpretations that may delay, limit or prevent regulatory approvals. The length of time necessary to complete clinical trials and to submit an application for marketing approval for a final decision by a regulatory authority varies significantly and may be difficult to predict. Any changes to the U.S. regulatory approval process could significantly increase the timing or cost of regulatory approval for product candidates making further development uneconomical or impossible. In addition, once Endo exercises its opt-in with respect to an additional indication, further clinical trials, development, manufacturing, marketing and selling of such product are out of our control. Our interest is limited to receiving opt-in, milestone, mark-up on cost of goods sold payments and royalty payments.

 

Successful development of drug candidates is inherently difficult and uncertain, and our long-term prospects depend upon our ability and the ability of our partners, particularly with respect to XIAFLEX®, to continue to successfully commercialize these drug candidates.

 

Successful development of drugs is inherently difficult and uncertain. Our business requires investments in R&D over many years, often for drug candidates that may fail during the R&D process. Even if we are able to successfully complete the development of our drug candidates, our long-term prospects depend upon our ability and the ability of our partners, particularly with respect to XIAFLEX®, to continue to successfully commercialize these drug candidates.

 

There is significant uncertainty regarding our and our partners’ ability to successfully develop drug candidates in other indications. These risks include the uncertainty of:

 

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the nature, timing and estimated costs of the efforts necessary to complete the development of our drug candidate projects and submit marketing applications;

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the anticipated completion dates for our drug candidate projects;

•

the scope, rate of progress and cost of our clinical trials that we are currently running or may commence in the future with respect to our drug candidate projects;

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the scope, rate of progress of our preclinical studies and other R&D activities related to our drug candidate projects;

•

clinical trial results for our drug candidate projects;

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the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights relating to our drug candidate projects;

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the terms and timing of any strategic alliance, licensing and other arrangements that we have or may establish in the future relating to our drug candidate projects;

•

the cost and timing of regulatory approvals with respect to our drug candidate projects; and

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the cost of establishing clinical supplies for our drug candidate projects.

Even if we or our partners were to obtain approval, regulatory authorities may approve product candidates for fewer or more limited indications, populations, or uses, product candidates may contain significant safety warnings, including black box warnings, contraindications, and precautions, regulatory authorities may grant approval contingent on the performance of costly post-marketing clinical trials, surveillance, or other requirements, including REMS to monitor the safety or efficacy of the product, or regulatory authorities may approve a product candidate with a label that does not include the labeling claims necessary or desirable for the successful commercialization of that product candidate.  Any of these scenarios could compromise the product candidate’s commercial prospects.

 

Risks Related to Regulatory Requirements

 

We are subject to numerous complex regulatory requirements and failure to comply with these regulations, or the cost of compliance with these regulations, may harm our business.

 

Conducting clinical trials for human drugs and, in certain circumstances, veterinarian trials for animal drugs, and the testing, development and manufacturing and distribution of product candidates are subject to regulation by numerous governmental authorities in the U.S. and other jurisdictions, if we desire to export the resulting products to such other jurisdictions. These regulations govern or affect the testing, manufacture, safety, labeling, storage, record-keeping, approval, distribution, advertising and promotion of product candidates, as well as safe working conditions. Even after a product candidate has been approved, the FDA and comparable governmental authorities subject such product to continuing review and regulatory requirements including, for example, requiring the conducting and reporting of the results of certain clinical studies or trials and commitments to voluntarily conduct additional clinical trials. Noncompliance with any applicable regulatory requirements can result in warning, untitled, or cyber letters, suspensions or withdrawals of approvals or clearances, refusals to approve pending applications or supplements, seizures or recalls of products, injunctions against or other restrictions on the manufacture, holding, distribution, marketing and sale of a product, import or export refusals, product detention, promotional piece modifications and the issuance of corrective information, adverse publicity, regulatory authority issuance of public communications regarding products, holds or terminations on pre- or post-market studies, liability for harm cause to patients, reputational harm, civil and criminal sanctions, and FDA debarment, suspension and debarment from government contracts, and refusal of orders under existing government contracts, exclusion from federal healthcare programs, consent decrees, or corporate integrity agreements, among other consequences.  In addition, regulatory approval could impose limitations on the indicated or intended uses for which product candidates may be marketed, and impose post-approval requirements. The REMS program is no longer an FDA requirement for DC only. With respect to its approval of XIAFLEX® for PD, Auxilium, and now Endo, has further collaborated with the FDA for a REMS for XIAFLEX® for the treatment of PD in men with a palpable plaque and curvature deformity of 30 degrees or greater at the start of therapy. The required components of the XIAFLEX® REMS Program include healthcare provider training and certification, healthcare provider risk education, certification of dispensing pharmacies and healthcare settings, dispenser confirmation that the prescribing physician is certified under the REMS, Endo auditing of certified pharmacies and healthcare settings, and patient risk education.

 

Currently, there is a substantial amount of congressional and administrative review of the FDA and the regulatory approval process for drug candidates in the U.S. As a result, there may be significant changes made to the regulatory approval process in the U.S. In addition, the regulatory requirements relating to the development, manufacturing, testing, promotion, marketing and distribution of product candidates may change in the U.S. Such changes may increase our costs and adversely affect our operations.

 

Failure to comply with, or changes to applicable regulatory requirements may result in a variety of consequences, including the following:

 

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restrictions on our products or the manufacturing processes of such products;

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warning letters, untitled letters and cyber letters;

•

withdrawal of a product from the market;

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voluntary or mandatory recall of a product;

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fines;

•

suspension or withdrawal of regulatory approvals for a product;

•

refusal to permit the import or export of our products;

•

refusal to approve pending applications or supplements to approved applications that we submit;

•

denial of permission to file an application or supplement in a jurisdiction;

•

debarment, exclusion from participation in federal healthcare programs, exclusion or debarment from government contracting, consent decrees, or corporate integrity agreements;

•

product seizure; and

•

injunctions or the imposition of civil or criminal penalties against us.

To the extent that we or our partners do not perform particular regulated functions ourselves but contract out to third parties, including contract manufacturers, contract research organizations, clinical trial sites, and laboratories, we or our partners may be held responsible for such third parties’ failure to follow the applicable regulatory requirements.

 

Our corporate compliance program cannot guarantee that we are in compliance with all potentially applicable laws and regulations and we have incurred and will continue to incur costs relating to compliance with applicable laws and regulations.

 

As a biopharmaceutical company, we are subject to a large body of legal and regulatory requirements. In addition, as a publicly-traded company we are subject to significant regulations, including the Sarbanes-Oxley Act of 2002 (“SOX”), some of which have only recently been revised or adopted. We cannot assure you that we are or will be in compliance with all potentially applicable laws and regulations. Failure to comply with all potentially applicable laws and regulations could lead to the imposition of fines, cause the value of our common stock to decline, and impede our ability to raise capital or list our securities on certain securities exchanges. New rules could make it more difficult or costlier for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our Board, our committees and as executive officers. We cannot predict or estimate the amount of the additional costs we may incur or the timing of such costs to comply with these rules and regulations.

 

We may fail to maintain effective internal controls over external financial reporting or such controls may fail or be circumvented.

 

SOX requires us to report annually on our internal controls over financial reporting, and our business and financial results could be adversely affected if we, or our independent registered public accounting firm, determine that these controls are not effective. In addition, any failure or circumvention of our internal controls and procedures or failure to comply with regulations concerning controls and procedures could have a material effect on our business, results of operation and financial condition. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our Board, our committees and as executive officers.

 

Risks Related to Our Industry and Growth

 

Adverse events or lack of efficacy in clinical trials may force us and/or our partners upon whom we are wholly dependent to stop development of our product candidates or prevent regulatory approval of our product candidates or significant safety issues could arise after regulatory approval of our products, any of which could materially harm our business.

 

The prescribing information for XIAFLEX® contains a Boxed Warning regarding penile fracture (corporal rupture) and other serious injuries to the penis, such as hematoma. The Boxed Warning also advises prescribers that, for PD, XIAFLEX® is only available through a REMS program. XIAFLEX® is contraindicated in Peyronie’s plaques that involve the penile urethra and in patients with a history of hypersensitivity to XIAFLEX® or to collagenase used in other therapeutic applications.  The XIAFLEX® FDA approved label also contains certain warnings and precautions, including “tendon ruptures or serious injury to the injected finger/hand,” “corporal rupture (penile fracture) and other serious injury to the penis,” “hypersensitivity reactions, including anaphylaxis,” and with respect to use in patients with abnormal coagulation.  Per the FDA approved label, the most common adverse reactions reported in ≥ 25% of patients treated with XIAFLEX® for DC and at an incidence greater than placebo were edema peripheral (e.g., swelling of the injected hand), contusion, injection site hemorrhage, injection site reaction, and pain in the injected extremity. The most frequently reported adverse drug reactions in ≥ 25% of patients treated with XIAFLEX® for PD and at an incidence greater than placebo were penile hematoma, penile swelling and penile pain. Additional safety information is also included in the XIAFLEX® FDA approved label.

 

Adverse events or lack of efficacy may force us to stop development of our product candidates or prevent or limit regulatory approval of our product candidates, which could materially harm our business. In addition, any adverse events or lack of efficacy may force Endo to stop development of the products we have licensed to it or prevent or limit regulatory approval of such products, which could materially impair all or a material part of the future revenue we hope to receive from Endo. Even if our product candidates receive regulatory approval, new safety issues may be reported and we or our partners may be required to amend the conditions of use for a product and may make it difficult to obtain product liability insurance for clinical trials.  New safety issues following approval may also result in regulatory action, such as withdrawal of product approval, refusal to approve new product indications or similar products, holds or suspension of clinical studies, labeling restrictions, product recalls, changes in the way that the product is administered, produced or distributed, adverse publicity, public statements by regulators, post-approval study or REMS requirements, liability for harm cause to patients, or the product becoming less competitive, among other consequences.

 

We and our licensees face competition in our product development and marketing efforts from pharmaceutical and biotechnology companies, universities and other not-for-profit institutions.

 

We and our licensees face competition in our product development and marketing efforts from entities that have substantially greater research and product development capabilities and greater financial, scientific, marketing and human resources. These entities include pharmaceutical and biotechnology companies, as well as universities and not-for-profit institutions. Our and our licensees’ competitors may succeed in developing products or intellectual property earlier than we or our licensees do, entering into successful collaborations before us or our licensees, obtaining approvals from the FDA or other regulatory agencies for such products before us or our licensees, or developing or marketing products that are more effective than those we or our licensees could develop or market. The success of any one competitor in these or other respects will have a material adverse effect on our business, our ability to receive opt-in payments from Endo or our ability to generate revenues from third-party arrangements with respect to additional indications for which Endo does not exercise its opt-in.

 

We may face financial pressures because of our lack of diversity in our research and product development.

 

All of our income is derived from products marketed by Endo and Endo has the right under the License Agreement to opt-in to all work we do in the Field (as defined in the License Agreement). Therefore, with respect to those products for which Endo opts-in, our upside is limited by the License Agreement. For example, Endo may opt-in to an indication and then choose not to pursue vigorously the development of that indication which may result in us negotiating with Endo for repurchase rights to the indication. In order to eliminate this financial pressure and diversify our portfolio, we may choose to acquire or in-license non-collagenase opportunities.

 

Our strategy of generating growth through acquisitions and in-licensing deals may not be successful.

 

Because of limits in the License Agreement, our business strategy may include growing our business through acquisition and in-licensing transactions. We may not be successful in identifying, effectively evaluating, acquiring or in-licensing, and developing and commercializing additional products on favorable terms, or at all. Competition for attractive product opportunities is intense and may require us to devote substantial resources, both managerial and financial, to an acquisition or in-licensing opportunity.

 

Acquisition and in-licensing efforts can consume significant management attention and require substantial expenditures, which could detract from our other programs. In addition, we may devote significant resources to potential deals that are never completed. Even if we are successful in acquiring a product or company or obtaining licensing terms favorable to us, it may not result in a successfully developed or commercialized product or, even if an acquired product is commercialized, competing products or technologies could render a product noncompetitive, uneconomical or obsolete. There may be risks associated with an acquired or in-licensed asset which may expose us to regulatory or legal action or which may prevent us from ultimately receiving approval for or successfully commercializing the product.  Moreover, the cost of acquiring other companies or in-licensing products could be substantial. If we are unsuccessful in our efforts to acquire other companies or in-license and develop additional products, or if we acquire or in-license unproductive assets, it could have a material adverse effect on the growth of our business.

 

We may face pressure from activist stockholders to declare dividends which may negatively affect our business.

 

Campaigns by stockholders to effect changes at publicly-listed companies are sometimes led by investors seeking to increase short-term stockholder value by advocating corporate actions including special dividends. We have a substantial amount of cash reserves. Given our stockholder composition and other factors, it is possible such stockholder or future activist stockholders may attempt to effect a distribution of this cash. Responding to actions by such activist stockholders or others in the future would be costly and time-consuming, disrupt our operations and divert the attention of our Board and senior management from the pursuit of business strategies, including new collagenase or non-collagenase opportunities, acquisitions or in-licenses of other indications or technologies, which could adversely affect our results of operations and financial condition. Furthermore, if faced with actions by activist stockholders, we may not be able to respond effectively to such actions, which could be disruptive to our business.

 

If product liability lawsuits are brought against us or our partners, we may incur substantial liabilities.

 

Our business exposes us to potential liability risks that arise from the clinical testing and, if approved, the commercialization of our and our partners’ products. We continue to have product liability exposure for topical products sold by us prior to the sale of our topical business. In addition to direct expenditures for damages, settlement and defense costs, there is a possibility of adverse publicity and loss of revenues as a result of product liability claims. Product liability claims can also result in regulatory consequences, such as the withdrawal of clinical trial participants, termination of clinical trials or programs, governmental authority investigations and enforcement actions, product recalls and withdrawals of approval, as well as labeling revisions.  Product liability is a significant commercial risk for us. Plaintiffs have received substantial damage awards in some jurisdictions against pharmaceutical companies based upon claims for injuries allegedly caused by the use of their products. In addition, in the age of social media, plaintiffs’ counsel now has a wide variety of tools to advertise their services and solicit new clients for litigation. Thus, any significant product liability litigation or mass tort in which we are a defendant may have a larger number of plaintiffs than such actions have seen historically because of the increasing use of widespread and media-varied advertising.

 

In addition, under the License Agreement, we are obligated to indemnify Endo and its affiliates for any harm or losses they suffer relating to any personal injury and other product liability resulting from our development, manufacture or commercialization of any injectable collagenase product. We have clinical trial and product liability insurance in the aggregate amount of $5.0 million dollars. We believe this is adequate in both scope and amount and has been placed with what we believe are reputable insurers. However, we may not be able to maintain our clinical trial and product liability insurance at an acceptable cost, if at all, and this insurance may not provide adequate coverage against potential claims or losses. If losses from product liability claims exceed our insurance coverage, we may incur substantial liabilities that exceed our financial resources, and our business and results of operations may be harmed. Whether or not we are ultimately successful in product liability litigation, such litigation could consume substantial amounts of our financial and managerial resources, and might result in adverse publicity, all of which could impair our business

 

In addition, it may be necessary for us to recall or withdraw, either voluntarily or mandatorily, products that do not meet approved specifications or which subsequent data demonstrate may be unsafe or ineffective, which would also result in adverse publicity as well as in costs connected to the recall and loss of revenue.

 

Risks Related to Personnel

 

The loss of key personnel, including our principal executive officer and principal financial officer, could delay or prevent us from achieving our objectives.

 

Our business efforts could be affected adversely by the loss of one or more key members of our personnel, particularly J. Kevin Buchi, our principal executive officer, and Patrick Hutchison, our principal financial officer, Mr. Buchi and Mr. Hutchison were only recently elevated to their respective positions following the chief executive officer search as a result of the death of our President, Mr. Wegman. We currently do not have key person insurance on any of our employees or key personnel.

 

Because we are a small biopharmaceutical-focused company with limited resources, we may be unable to attract and retain qualified personnel; the termination of relationships with key management, consulting and scientific personnel or the inability to recruit and retain additional personnel could prevent us from developing our technologies, conducting clinical trials and/or obtaining financing.

 

We are a small company and we rely heavily on third parties and outside consultants to conduct many important functions. As of December 31, 2019, we had seven full-time employees and two independent consultants. We may require additional experienced executive, accounting, legal, administrative and other personnel from time to time in the future. Also, because of the specialized scientific nature of our business, our ability to develop products and to compete with our current and future competitors largely depends upon our ability to attract, retain and motivate highly-qualified managerial, consulting and scientific personnel. If we are unable to retain the services of one or more of the principal members of senior management, consultants or other key employees, our ability to implement our business strategy could be materially harmed. We face intense competition for qualified employees and consultants from biopharmaceutical companies, research organizations and academic institutions. Attracting, retaining or replacing these personnel on acceptable terms may be difficult and time-consuming given the high demand in our industry for similar personnel. There is intense competition for qualified personnel in the areas of our activities, and we cannot assure you that we will be able to continue to attract and retain the qualified personnel necessary for the development of our business.

 

Risks Related to Intellectual Property Rights

 

If we are unable to obtain, maintain and enforce intellectual property protection covering our products, others may be able to make, use or sell products substantially similar to ours, which could adversely affect our ability to compete in the market.

 

Our commercial success depends, in part, on our ability to obtain, maintain and enforce patents, trade secrets, trademarks and other intellectual property rights and to operate without having third parties infringe, misappropriate or circumvent the rights that we own or license. If we are unable to obtain, maintain and enforce intellectual property protection covering our products, others may be able to make, use or sell products that are substantially similar to ours without incurring the sizeable development and licensing costs that we have incurred, which would adversely affect our ability to compete in the market. Our ability to stop third parties from making, using, selling, offering to sell or importing our product candidates is dependent upon the extent to which we have rights under valid and enforceable patents or trade secrets that cover these activities. However, the patent positions of biopharmaceutical companies, including ours, can be highly uncertain and involve complex legal and factual questions for which important legal principles remain unresolved. Therefore, there is no assurance that our pending patent applications will result in the issuance of patents or that we will develop additional proprietary products which are patentable. Moreover, patents issued or to be issued to us may not provide us with any competitive advantage. Our patent position is subject to numerous additional risks, including the following:

 

•

we may fail to seek patent protection for inventions that are important to our success;

•

our pending patent applications may not result in issued patents;

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we cannot be certain that we were the first to invent the inventions covered by pending pre-America Invents Act patent applications or that we were the first to file such applications and, if we are not, we may be subject to priority disputes;

•

we may be required to disclaim part or all of the term of certain patents or all of the term of certain patent applications;

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we may file patent applications but have claims restricted or we may not be able to supply sufficient data to support our claims and, as a result, may not obtain the original claims desired or we may receive restricted claims. Alternatively, it is possible that we may not receive any patent protection from an application;

•

we could inadvertently abandon a patent or patent application, resulting in the loss of protection of certain intellectual property rights in a certain country. We, our collaborators or our patent counsel may take action resulting in a patent or patent application becoming abandoned which may not be able to be reinstated or if reinstated, may suffer patent term adjustments;

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the claims of our issued patents or patent applications when issued may not cover our products;

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no assurance can be given that our patents would be declared by a court to be valid or enforceable or that a competitor’s technology or product would be found by a court to infringe our patents. Our patents or patent applications may be challenged by third parties in patent litigation or in proceedings before the USPTO or its foreign counterparts, and may ultimately be declared invalid or unenforceable, or narrowed in scope;

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there may be prior art of which we are not aware that may affect the validity or enforceability of a patent claim. There also may be prior art of which we are aware, but which we do not believe affects the validity or enforceability of a claim, which may, nonetheless, ultimately be found to affect the validity or enforceability of a claim;

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third parties may develop products which have the same or similar effect as our products without infringing our patents. Such third parties may also intentionally circumvent our patents by means of alternate designs or processes or file applications or be granted patents that would block or hurt our efforts;

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there may be dominating patents relevant to our product candidates of which we are not aware;

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our patent counsel, lawyers or advisors may have given us, or may in the future give us incorrect advice or counsel. Opinions from such patent counsel or lawyers may not be correct or may be based on incomplete facts;

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obtaining regulatory approval for biopharmaceutical products is a lengthy and complex process, and as a result, any patents covering our product candidates may expire before, or shortly after such product candidates are approved and commercialized;

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the patent and patent enforcement laws of some foreign jurisdictions do not protect intellectual property rights to the same extent as laws in the U.S., and many companies have encountered significant difficulties in protecting and defending such rights in foreign jurisdictions. If we encounter such difficulties or we are otherwise precluded from effectively protecting our intellectual property rights in foreign jurisdictions, our business prospects could be substantially harmed; and

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we may not develop additional proprietary technologies that are patentable.

Any of these factors could hurt our ability to gain full patent protection for our products. Registered trademarks and trademark applications in the U.S. and other countries are subject to similar risks as described above for patents and patent applications.

 

Moreover, we may be subject to a third-party pre-issuance submission of prior art to the USPTO, or become involved in opposition, nullity, derivation, reexamination, inter partes review, post-grant review or interference proceedings challenging our patent rights or the patent rights of others. An adverse determination in any such submission, proceeding or litigation could reduce the scope of, or invalidate, our patent rights, allow third parties to commercialize our technology or drugs and compete directly with us, without payment to us or result in our inability to manufacture or commercialize drugs without infringing third-party patent rights. In addition, if the breadth or strength of protection provided by our patents and patent applications is threatened, it could dissuade companies from collaborating with us to seek patent protection or to license, develop or commercialize current or future product candidates.

 

Developments in patent law could have a negative impact on our business.

 

From time to time, the United States Supreme Court (the “Supreme Court”), other federal courts, the United States Congress, or the USPTO, may change the standards of patentability and any such changes could have a negative impact on our business.

 

Two cases involving diagnostic method claims and “gene patents” have been decided by the Supreme Court. On March 20, 2012, the Supreme Court issued a decision in Mayo Collaborative v. Prometheus Laboratories (“Prometheus”), a case involving patent claims directed to optimizing the amount of drug administered to a specific patient. According to that decision, Prometheus’ claims failed to incorporate sufficient inventive content above and beyond mere underlying natural correlations to allow the claimed processes to qualify as patent-eligible processes that apply natural laws. On June 13, 2013, the Supreme Court subsequently decided Association for Molecular Pathology v. Myriad Genetics (“Myriad’), a case brought by multiple plaintiffs challenging the validity of patent claims held by Myriad Genetics, Inc. relating to the breast cancer susceptibility genes BRCA1 and BRCA2, holding that genomic DNA that exists in nature, even if isolated, such as the DNA constituting the BRCA1 and BRCA2 genes, is not patentable subject matter under 35 U.S.C. §101.

 

On March 4, 2014, the USPTO issued a memorandum to patent examiners providing guidance for examining claims reciting laws of nature/natural principles, natural phenomena, and/or natural products for patent eligibility in view of the Supreme Court decisions in Prometheus and Myriad.  The guidance indicates that claims reciting such natural products, even in combination, that do not significantly differ from such natural products could be rejected as directed to non-statutory subject matter. That guidance was replaced by a memorandum issued December 15, 2014, that modified some of the earlier guidance, but a number of the aspects have not substantially changed, and it is too soon to determine how the revised guidance will be applied. These guidelines, and the Myriad discussion that isolation of natural products may not confer eligibility under 35 U.S.C. §101, are relevant to our patent portfolio and thus enforcement of these patents.

 

A further case relevant to these issues was decided by the Supreme Court on June 19, 2014, in Alice Corp. v. CLS Bank International, 573 U.S. 208, 134 S. Ct. 2347 (2014) (“Alice”). While the Alice case related to computer-implemented inventions, the holding in that case, which also related to natural laws or “abstract ideas” has been used to reject claims in applications directed to other technologies. As a result of the Alice case, the March guidance issued by the USPTO was replaced by the memorandum issued December 15, 2014, that modified some of the earlier guidance. In June of 2015, an additional case was decided by the Federal Circuit, namely, Ariosa Diagnostics, Inc. v. Sequenom, Inc., 788 F.3d 1371 (Fed. Cir. 2015) (“Sequenom”). The Federal Circuit affirmed the district court, finding that methods of detecting paternally inherited nucleic acids were not patent eligible. Sequenom’s petition for rehearing en banc and its petition for certiorari to the Supreme Court were both denied.

 

On July 30, 2015, the USPTO issued a “July 2015 Update on Subject Matter Eligibility,” which provided further guidance, as well as examples of patent-eligible and patent-ineligible subject matter, which was largely directed to computer-implemented inventions. However, in May of 2016, the USPTO issued an additional “Subject Matter Eligibility Update,” as well as “Subject Matter Eligibility Examples: Life Sciences,” which included examples of eligible and non-eligible claims relating to vaccines, diagnosis and treatment of disease, dietary sweeteners, screening for gene alterations, a paper-making machine, and a process for hydrolysis of fat. Additional business method examples were issued in December of 2016. These examples are useful guidance for drafting eligible claims in the chemical and biological arts. In addition, the USPTO provided an additional memorandum in November of 2016, summarizing more recent decisions by the Federal Circuit in the area of software claim eligibility.

 

In 2018, the USPTO provided additional guidance by issuing charts and Quick Reference Sheets (March 14, 2018 and May 3, 2018) that list various subject matter eligibility decisions, including those identifying abstract ideas; memoranda on various subject matter eligibility decisions (April 2, 2018 Finjan Inc. v. Blue Coat Systems, Inc., 879 F.3d 1299 (Fed. Cir. 2018) and Core Wireless Licensing S.A.R.L., v. LG Electronics, Inc., 880 F.3d 1356 (Fed. Cir. 2018), April 19, 2018 Berkheimer v. HP Inc., 881F.3d 1360 (Fed. Cir. 2018) and Aatrix Software, Inc. v. Green Shades Software, Inc., 882 F.3d 1121 (Fed. Cir. 2018), June 7, 2018 Vanda Pharmaceuticals Inc. v. West-Ward Pharmaceuticals, 887 F.3d 1117 (Fed. Cir. 2018); and training materials on what constitutes a “well-understood, routine, conventional activity” (May 7, 2018).  In addition, the Manual of Patent Examining Procedure was amended in 2018 (Chapter 2106) to incorporate this information.

 

On January 7, 2019, along with providing additional Examples 37-42, the USPTO issued its “2019 Revised Patent Subject Matter Eligibility Guidance” (“Guidance”) in an effort to provide more consistency and predictability in the analysis of whether subject matter is patent eligible under 35 U.S.C. § 101.  84 Fed. Reg. 50.  This Guidance made changes to what is recognized as Step 2A of the eligibility test, to include a “Prong One” that provides grouping of abstract idea exceptions, and a “Prong Two,” that requires an examiner to “evaluate whether the claim as a whole integrates the recited judicial exception into a practical application of the exception.” Updated Guidance in October of 2019 further clarified the eligibility test. However, the Federal Circuit has held that they are not obliged to follow the USPTO guidance. See, Cleveland Clinic Foundation v. True Health Diagnostics, LLC, 859 F.3d 1352 (Fed. Cir. 2017), cert. denied, 138 S. Ct. 2621 (2018) and ChargePoint, Inc. v. SemaConnect, Inc. 920 F.3d 759 (Fed. Cir. 2019), cert. denied, 2020 WL 411896 (U.S. Jan. 27, 2020) (No. 19-521). The Senate Judiciary Subcommittee on Intellectual Property has held hearings on proposed legislation to deal with the § 101 uncertainty, but the fate of such legislative fixes is uncertain. In addition, the Supreme Court has recently denied certiorari in the appeal of Athena Diagnostics, Inc. v. Mayo Collaborative Servs., LLC, 915 F.3d 743 (Fed. Cir. 2019), cert. denied, 2020 WL 129579 (U.S. Jan. 13, 2020) (No. 19-430), as well as at least seven other appeals, which many practitioners believed would clarify the situation.

 

In light of the developing case law and guidance from the USPTO on subject matter eligibility, we cannot assure you that our efforts to seek patent protection for our technology and products will not be negatively impacted by the guidance issued by the USPTO, the decisions described above, rulings in other cases, or changes in guidance or procedures issued by the USPTO, or changes in statutes implemented by Congress.

 

Furthermore, we cannot fully predict what impact the Supreme Court’s decisions in Prometheus, Myriad, Alice and subsequent cases may have on the ability of biopharmaceutical companies or other entities to obtain or enforce patents relating to purified natural products in the future. The Prometheus, Myriad and Alice decisions are relatively recent, and the contours of when claims to laws of nature, natural phenomena or natural products meet the patent eligibility requirements are not clear and may take many years to develop via interpretation in the courts. Thus, we may not be able to defend successfully the validity of our patents if challenged.

 

In addition, the Leahy-Smith America Invents Act (the “America Invents Act”), which was signed into law in 2011, included a number of significant changes to U.S. patent law. These changes include a transition from a “first-to-invent” system to a “first-to-file” system, changes to the way issued patents are challenged, and changes to the way patent applications are disputed during the examination process. These changes may favor larger and more established companies that have greater resources to devote to patent application filing and prosecution. The USPTO has developed new regulations and procedures to govern the full implementation of the America Invents Act, and many of the substantive changes to patent law associated with the America Invents Act. Ongoing substantive changes to patent law associated with the America Invents Act may affect our ability to obtain patents, and, if obtained, to enforce or defend them. Accordingly, it is not clear what, if any, impact the America Invents Act will ultimately have on the cost of prosecuting our patent applications, our ability to obtain patents based on our discoveries and our ability to enforce or defend any patents that may issue from our patent applications, all of which could have a material adverse effect on our business.

 

The laws of foreign countries may not protect our rights to the same extent as the laws of the U.S. or vice-versa. For example, European patent law restricts the patentability of methods of treatment of the human body more than U.S. law. Publications of discoveries in the scientific literature often lag behind the actual discoveries, and utility, or equivalent, patent applications in the U.S. and other jurisdictions are typically not published until 18 months after the filing date of such patent applications, or in some cases, not at all. Therefore, we cannot know with certainty whether we were the first to make the inventions claimed in our owned or licensed patents or pending patent applications, or that we were the first to file for patent protection of such inventions. As a result, the issuance, scope, validity, enforceability and commercial value of our patent rights are highly uncertain. Our pending and future patent applications may not result in patents being issued that protect our product candidates, in whole or in part, or which effectively prevent others from commercializing competitive technologies and drugs. Changes in either the patent laws or interpretation of the patent laws in the U.S. and other countries may diminish the value of our patents or narrow the scope of our patent protection.

 

If we breach any of the agreements under which we license rights to products or technology from others, we could lose license rights that are critical to our business and our business could be harmed.

 

We are a party to a number of license agreements by which we have acquired rights to use the intellectual property of third parties that are necessary for us to operate our business. If a third party terminates its agreement, whether by its terms or due to our breach, our right to use such third party’s intellectual property may negatively affect our licenses to Endo, and, in turn, their obligation to make opt-in, milestone, mark-up on cost of goods sold, royalty or other payments to us.

 

Our ability and the ability of our licensees and collaborators to develop and license products based on our patents may be impaired by the intellectual property of third parties.

 

Endo’s and our commercial success in developing and manufacturing collagenase products is partially dependent on the products not infringing the patents or proprietary rights of third parties. While we currently believe that we and our licensees and collaborators have freedom to operate in the collagenase market, others may challenge that position in the future. There has been, and we believe that there will continue to be, significant litigation in the pharmaceutical industry regarding patent and other intellectual property rights.

 

Third parties could bring legal actions against us, our licensees, licensors or collaborators claiming damages and seeking to enjoin clinical testing, manufacturing and marketing of the affected product or products. A third party might request a court to rule that the patents we in-licensed or licensed to others, or those we may in-license in the future, are invalid or unenforceable. In such a case, even if the validity or enforceability of those patents were upheld, a court might hold that the third party’s actions do not infringe the patent we license to others, which could, in effect, limit the scope of our patent rights and those of our licensees or collaborators.

 

Our agreement with Endo requires us to indemnify them against any claims for infringement based on the use of our technology. If we become involved in any litigation, it could consume a substantial portion of our resources, regardless of the outcome of the litigation. If Endo becomes involved in such litigation, it could also consume a substantial portion of their resources, regardless of the outcome of the litigation, thereby jeopardizing their ability to commercialize candidate products and/or their ability to make opt-in, milestone, mark-up on cost of goods sold or royalty payments to us. If any of these actions are successful, in addition to any potential liability for damages, we could be required to obtain a license to permit ourselves and our licensees, licensors or collaborators to conduct clinical trials, manufacture or market the affected product, in which case we may be required to pay substantial royalties or grant cross-licenses to our patents. However, there can be no assurance that any such license will be available on commercially acceptable terms or at all. Ultimately, we and our licensees or collaborators could be prevented from commercializing a product, or forced to cease some aspect of their or our business, as a result of patent infringement claims, which could harm our business or right to receive opt-in, milestone, markup on cost of goods sold and royalty payments.

 

Our intellectual property may be infringed by a third party.

 

Third parties may infringe one or more of our issued patents or trademarks. We cannot predict if, when or where a third party may infringe one or more of our issued patents or trademarks. To counter infringement, we may be required to file infringement claims, which can be expensive and time-consuming. Moreover, there is no assurance that we would be successful in a court of law in proving that a third party is infringing one or more of our issued patents or trademarks. Any claims we assert against perceived infringers could also provoke these parties to assert counterclaims against us, alleging that we infringe their intellectual property. In addition, in a patent infringement proceeding, a court may decide that a patent of ours is invalid or unenforceable, in whole or in part, construe the patent’s claims narrowly and/or refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover the technology in question, any of which may adversely affect our business. Even if we are successful in proving in a court of law that a third party is infringing one or more of our issued patents or trademarks there can be no assurance that we would be successful in halting their infringing activities, for example, through a permanent injunction, or that we would be fully or even partially financially compensated for any harm to our business. We may be forced to enter into a license or other agreement with the infringing third party at terms less profitable or otherwise commercially acceptable to us than if the license or agreement were negotiated under conditions between those of a willing licensee and a willing licensor.

 

Additionally, we may not become aware of a third-party infringer within legal timeframes for compensation or at all, thereby possibly losing the ability to be compensated for any harm to our business. Such a third party may be operating in a foreign country where the infringer is difficult to locate and/or the intellectual property laws may be more difficult to enforce. Some third-party infringers may be able to sustain the costs of complex infringement litigation more effectively than we can because they have substantially greater resources. Any inability to stop third-party infringement could result in loss in market share of some of our products or even lead to a delay, reduction and/or inhibition of the development, manufacture or sale of certain products by us. There is no assurance that a product produced and sold by a third-party infringer would meet our or other regulatory standards or would be safe for use. Such third‑party infringer products could irreparably harm the reputation of our products thereby resulting in substantial loss in market share and profits.

 

We may be subject to claims that our employees, consultants or independent contractors have wrongfully used or disclosed confidential information of third parties.

 

We employ individuals who were previously employed at other biotechnology or pharmaceutical companies. We may be subject to claims that the we or our employees, consultants or independent contractors have inadvertently or otherwise used or disclosed confidential information of our employees’ former employers or other third parties. We may also be subject to claims that former employers or other third parties have an ownership interest in our patents. Litigation may be necessary to defend against these claims. There is no guarantee of success in defending these claims, and if we do not prevail, we could be required to pay substantial damages and could lose rights to important intellectual property. Even if we are successful, litigation could result in substantial cost and be a distraction to our management and other employees.

 

Risks Related to our Common Stock

 

We have no current plan to pay dividends on our common stock and investors must rely on an increase in stock price for any return on their investment.

 

We retain the earnings that we generate. Currently, we do not have any plans to pay dividends on our common stock. Because we historically have not declared dividends, stockholders must rely on an increase in the stock price for any return on their investment in us. Investors will not receive any funds absent a sale of their shares. We cannot assure investors of a positive return on their investment when they sell their shares.

 

Our stock price has, in the past, been volatile, and the market price of our common stock may drop below the current price.

 

Our stock price has, at times, been volatile. Currently, our common stock is traded on The Nasdaq Global Market (“Nasdaq”), and is thinly traded.

 

Market prices for securities of pharmaceutical, biotechnology and specialty pharmaceutical companies have been particularly volatile. Some of the factors that may cause the market price of our common stock to fluctuate include:

 

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results of our clinical trials;

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failure of any product candidates we have licensed to Endo to achieve commercial success;

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failure of Endo to exercise any opt in rights to new indications;

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regulatory developments in the U.S. and foreign countries;

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developments or disputes concerning patents or other proprietary rights;

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litigation involving us or our general industry, or both;

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future sales of our common stock by the estate of our former Chairman and Chief Executive Officer, directors, officers, or others;

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changes in the structure of healthcare payment systems, including developments in price control legislation;

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departure of key personnel;

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termination of agreements with our licensees or their sublicensees;

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announcements of material events by those companies that are our competitors or perceived to be similar to us;

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changes in estimates of our financial results;

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investors’ general perception of us;

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general economic, industry and market conditions; and

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the reallocation by Endo of its priorities away from XIAFLEX®.

If any of these risks occurs, or continues to occur, it could cause our stock price to fall and may expose us to class action lawsuits that, even if unsuccessful, could be costly to defend and a distraction to management.

 

We cannot guarantee that we will repurchase our common stock pursuant to our stock repurchase program or that our stock repurchase program will enhance long-term stockholder value. Stock repurchases could also increase the volatility of the price of our common stock and could diminish our cash reserves.

 

In May 2019, our Board authorized an increase in the repurchase amount of our stock repurchase program under which we are authorized to repurchase shares of our common stock for an aggregate purchase price not to exceed $4.0 million in open market transactions in compliance with SEC Rule 10b-18. Although our Board has authorized the stock repurchase program, the stock repurchase program does not obligate us to repurchase any specific dollar amount or to acquire any specific number of shares. Stock will be purchased from time to time, in the open market in compliance with SEC Rule 10b-18, subject to market conditions and applicable state and federal securities laws. The timing and amount of repurchases, if any, will depend upon several factors, including market and business conditions, the trading price of our common stock and the nature of other investment opportunities. In addition, repurchases of our common stock pursuant to our stock repurchase program could affect the market price of our common stock or increase its volatility. For example, the existence of a stock repurchase program could cause our stock price to be higher than it would be in the absence of such a program and could potentially reduce the market liquidity for our stock. Additionally, our stock repurchase program could diminish our cash reserves, which may impact our ability to finance future growth and to pursue possible future strategic opportunities and acquisitions. There can be no assurance that any stock repurchases will enhance stockholder value because the market price of our common stock may decline below the levels at which we determine to repurchase our stock. Although our stock repurchase program is intended to enhance long-term stockholder value, there is no assurance that it will do so and short-term stock price fluctuations could reduce the program’s effectiveness.

 

Actual or potential sales of our common stock by our directors, employees and consultants, during open trading windows and pursuant to pre-arranged stock trading plans, could cause our stock price to fall or prevent it from increasing for numerous reasons, and actual or potential sales by such persons could be viewed negatively by other investors.

 

We have a number of insiders that own significant blocks of our common stock. If one or more of these stockholders sell large portions of their holdings in a relatively short time, for liquidity, tax, or other reasons, the prevailing market price of our common stock could be negatively affected. In addition, it is possible that our executive officers, consultants, or non-employee members of our Board could sell shares of our common stock during an open trading window under our Insider Trading Policy. These transactions and the perceived reasons for these transactions could be viewed negatively by other investors and could have a negative effect on the prevailing market price of our common stock.

 

In accordance with the guidelines specified under Rule 10b5-1 of the Exchange Act, and our policies regarding stock transactions, certain of our directors and consultants have adopted and may continue to adopt stock trading plans pursuant to which they have arranged to sell shares of our common stock from time to time in the future. Generally, sales under such plans by our directors require public filings. Actual or potential sales of our common stock by such persons could cause the price of our common stock to fall or prevent it from increasing for numerous reasons. For example, a substantial number of shares of our common stock becoming available (or being perceived to become available) for sale in the public market could cause the market price of our common stock to fall or prevent it from increasing.

 

Our outstanding options to purchase shares of common stock could have a possible dilutive effect.

 

As of December 31, 2019, options to purchase 189,187 shares of common stock were outstanding. In addition, as of December 31, 2019, a total of 1,147,148 options were available for grant under our stock option plans. The issuance of common stock upon the exercise of these options could adversely affect the market price of the common stock or result in substantial dilution to our existing stockholders.

 

If securities analysts do not publish research reports about Our or Endo’s business or if they downgrade the Our, Endo or our sector, the price of our common stock could decline.

 

The trading market for our common stock will depend in part on research reports that industry or financial analysts publish about us and our business and about Endo. If analysts downgrade us or any of our licensees, including Endo, or other research analysts downgrade the industry in which we operate or the stock of any of our competitors or licensees, the price of our common stock may decline. Additionally, we currently only have one analyst covering our stock. We lack the potential benefit that coverage by other analysts may provide.

 

Provisions in our certificate of incorporation and bylaws may prevent or frustrate a change in control.

 

Provisions of our certificate of incorporation and bylaws may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. These provisions:

 

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provide for a classified Board;

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give our Board the ability to designate the terms of and issue new series of preferred stock without stockholder approval, commonly referred to as “blank check” preferred stock, with rights senior to those of our common stock;

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limit the ability of the stockholders to call special meetings; and

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impose advance notice requirements on stockholders concerning the election of directors and other proposals to be presented at stockholder meetings.

In addition, in May 2002, the Board implemented a rights agreement, commonly known as a Poison Pill, which effectively discourages or prevents acquisitions of more than 15% of our common stock in transactions (mergers, consolidations, tender offer, etc.) that have not been approved by our Board. The rights agreement has since been amended as follows:

 

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In February 2011 to increase the threshold from 15% to 18% and extend the expiration date for an additional two years, to May 31, 2014.

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In February 2014, to extend the term for an additional two years, to May 31, 2016.

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In May 2016, to extend the term for an additional two years, to May 31, 2018.

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In May 2018, to extend the term for an additional two years, to May 31, 2020.

These provisions could make it more difficult for common stockholders to replace members of the Board. Because our Board is responsible for appointing the members of our management team, these provisions could in turn affect any attempt to replace the current management team.

 

If our principal stockholders, executive officers and directors choose to act together, they may be able to control our operations, acting in their own best interests and not necessarily in the interest of other stockholders.

 

As of March 13, 2020 our executive officers and directors, and their affiliates, in the aggregate, beneficially owned shares representing approximately 15.9% of our common stock. Beneficial ownership includes shares over which an individual or entity has investment or voting power and includes shares that could be issued upon the exercise of options within 60 days. As a result, if these stockholders were to choose to act together, they may be able to control all matters submitted to our stockholders for approval, as well as our management and affairs. For example, they could control the election of directors and approval of any merger, consolidation or sale of all or substantially all of our assets. This concentration of ownership could have the effect of delaying, deferring or preventing a change in control or impeding a merger or consolidation, takeover or other business combination that could be favorable to other stockholders.

 

This significant concentration of share ownership may adversely affect the trading price for our common stock because investors often perceive disadvantages in owning stock in companies with controlling stockholders.