Item 1A. Risk Factors.
Set forth below and elsewhere in this report and in other documents we file with the
SEC are descriptions of risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this report. Because of the following factors, as well as other
variables affecting our operating results, past financial performance should not be considered a reliable indicator of future performance and investors should not use historical trends to anticipate results or trends in future periods. The risks and
uncertainties described below are not the only ones facing us. Other events that we do not currently anticipate or that we currently deem immaterial also affect our results of operations and financial condition.
Risks Relating to Our Business
Our product candidates are at an early stage of development, and it is possible that none of our product candidates will ever become commercial products.
Our product candidates are in relatively early stages of development. These product candidates will require significant further development, financial
resources and personnel to obtain regulatory approval and develop into commercially viable products, if at all. Currently, eteplirsen in DMD, AVI-7288 in Marburg and AVI-7100 in influenza are in active clinical development. AVI-7537 in Ebola was in
active clinical development until August 2012, when we received a stop-work order from the DoD instructing us to cease all work and ordering of supplies in support of the development of this product candidate. On October 2, 2012, we received
notice from the DoD that the program for the development of AVI-7537 was terminated for the convenience of the government due to funding constraints. The rest of our product candidates are in preclinical development. We expect that much of our
effort and many of our expenditures over the next several years will be devoted to development activities associated with eteplirsen and other exon-skipping candidates as part of our larger pan-exon strategy in DMD, our infectious disease
candidates, our proprietary chemistry, and other potential therapeutic areas that provide long-term market opportunities. With current resources, we may be restricted or delayed in our ability to develop these and other clinical and preclinical
product candidates.
Our ability to commercialize any of our product candidates, including eteplirsen, depends on first receiving required
regulatory approvals, and it is possible that we may never receive regulatory approval, including any accelerated approval by the FDA under Subpart H — Accelerated Approval of New Drugs for Serious or Life-Threatening Illnesses, or any other
designations that will expedite the review or approval process for any of our product candidates based on an inability to adequately demonstrate the safety and effectiveness of our product candidates, failure to meet other regulatory requirements,
lack of funding, changes in the regulatory landscape, manufacturing or other reasons. If we are unable to obtain regulatory approval for any of our product candidates, it could delay or eliminate any potential product revenue by delaying or
terminating the potential commercialization of our product candidates.
Even if a product candidate receives regulatory approval, the
resulting product may not gain market acceptance among physicians, patients, healthcare payers and the medical community. Assuming that any of our product candidates receives the required regulatory approvals, commercial success will depend on a
number of factors, including:
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establishment and demonstration of clinical efficacy and safety and acceptance of the same by the medical community;
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cost-effectiveness of the product;
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the availability of adequate reimbursement by third parties, including governmental payers such as the Medicare and Medicaid programs, managed care
organizations, and private health insurers;
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the product’s potential advantage over alternative treatment methods;
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whether the product can be produced in commercial quantities at acceptable costs;
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marketing and distribution support for the product; and
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any exclusivities applicable to the product.
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If we are unable to develop and commercialize any of our product candidates, if development is delayed or if
sales revenue from any product candidate that receives marketing approval is insufficient, we may never reach sustained profitability.
We
have been granted orphan disease status for certain of our product candidates, but there can be no assurance that we will be able to prevent third parties from developing and commercializing products that are competitive to these product candidates.
To date we have been granted orphan status for two of our product candidates in DMD and for AVI-6002 and AVI-7537 for the treatment of
Ebola virus and AVI-6003 and AVI-7288 for the treatment of Marburg virus. We are not guaranteed to receive orphan status for other product candidates in development or product candidates we may develop in the future and if our product candidates
were to lose orphan drug status or the marketing exclusivity that it provides, our business and results of operations could be materially adversely affected. Orphan drug exclusivity grants seven years of marketing exclusivity under the Federal Food,
Drug, and Cosmetic Act, and up to 10 years of marketing exclusivity in Europe. While orphan drug exclusivity would provide market exclusivity in the U.S., Europe and other countries, we would not be able to exclude other companies from manufacturing
and/or selling products using the same active ingredient for the same indication beyond that timeframe on the basis of orphan drug designation. Furthermore, the marketing exclusivity in Europe can be reduced from 10 years to six years if the initial
designation criteria have significantly changed since the market authorization of the orphan product. Moreover, we cannot guarantee that another company will not receive approval of products with the same active ingredient for the same indication
before we receive market approval. If that were to happen, our applications for that indication may not be approved until the competing company’s period of exclusivity has expired. Even if we are the first to obtain marketing authorization for
an orphan drug designation, there are circumstances under which a competing product may be approved for the same indication during the seven-year period of marketing exclusivity, such as if the later product is shown to be clinically superior to our
product. Further, application of the orphan drug regulations in the United States and Europe is uncertain and we cannot predict how the respective regulatory bodies will interpret and apply the regulations to our or our competitors’ product
candidates. If a competitor’s product receives orphan drug status for an indication that we are targeting, and such product is approved for commercial sales before our product, regulators may interpret our product to be the same drug as the
competing product and could prevent us from selling our product in the applicable territories for the competitor’s orphan exclusivity period. Furthermore, pediatric exclusivity only applies if the product has another form of exclusivity.
If we are unable to obtain or maintain required regulatory approvals, we will not be able to commercialize our product candidates, our
ability to generate revenue will be materially impaired and our business will not be successful.
The research, testing, manufacturing,
labeling, approval, selling, marketing and distribution of drug products are subject to extensive regulation by the FDA in the United States, and other regulatory authorities in other countries, with regulations differing from country to country.
Marketing of our product candidates in the United States or foreign countries is not permitted until we obtain marketing approval from the FDA or other foreign regulatory authorities, and we may never receive regulatory approval for the commercial
sale of any of our product candidates. Obtaining marketing approval is a lengthy, expensive and uncertain process and approval is never assured. We currently plan to submit a New Drug Application (NDA) to the FDA in the first half of 2014 for the
approval of eteplirsen for the treatment of Duchenne muscular dystrophy. We have not progressed to the point of preparing or filing the applications necessary to gain regulatory approvals of any of our other product candidates.
Further, the FDA and other foreign regulatory agencies have substantial discretion in the approval process, and the determination of when or whether
regulatory approval, of any type, will be granted for any product candidate we develop. In this regard, even if we believe data collected from clinical trials of our product candidates are promising and our chemistry, manufacturing and controls
(CMC) and related manufacturing processes are satisfactory, the FDA or foreign authorities may disagree with our interpretations and determine such data is not sufficient to accept our application or support approval. Furthermore, regulatory
agencies may approve a product candidate for fewer indications than requested or may grant approval subject to the performance of post-approval studies for a product candidate. Similarly, regulatory agencies may not approve the labeling claims that
are necessary or desirable for the successful commercialization of our product candidates.
In addition, changes in regulatory requirements
and guidance may occur and we may need to amend clinical trial protocols or other approval strategies to reflect these changes. Amendments may require us to resubmit our clinical trial protocols to institutional review boards (IRBs) or the FDA for
review, which may impact the costs, timing or successful completion of a clinical trial. Changes in the approval process may occur that require additional studies that were not originally planned. Other factors may also impact our ability to obtain
approval of our product candidates, including, for example, the fact that dystrophin has never been utilized as a surrogate endpoint and a therapeutic commercial product utilizing our RNA-based technologies and the manufacturing techniques necessary
to produce them at commercial scale have never been approved or validated by any regulatory authority. Our exon-skipping therapy uses antisense oligonucleotides and, to date, only one antisense oligonucleotide has been approved by the FDA for
systemic use and no product using antisense oligonucleotides for systemic use has been approved for sale in the European Union. We cannot be certain that our technology will meet the applicable safety and efficacy standards for regulatory
authorities and any regulatory setbacks faced by third parties developing similar compounds could affect the receptiveness of regulators to our compounds. Due to these factors, among others, our current product candidates or any of our other future
product candidates could take a significantly longer time to gain regulatory approval than we expect or may never gain regulatory approval, which could delay or eliminate any potential product revenue by delaying or terminating the potential
commercialization of our product candidates.
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For example, we are pursuing FDA approval of eteplirsen, our lead product candidate, and have reported
results from a U.S.-based Phase IIb 12-patient clinical trial for eteplirsen at 30 mg/kg and 50 mg/kg which we have followed with and are currently conducting an ongoing open label extension. On July 24, 2013 we announced our plans to
submit an NDA to the FDA in the first half of 2014 for the approval of eteplirsen for the treatment of Duchenne muscular dystrophy based on feedback we received from the FDA that it is “open to considering an NDA based on these data for
filing.” The FDA also requested additional information related to the methodology and verification of dystrophin quantification which we plan to address in the NDA submission. The FDA would not commit to declaring dystrophin an acceptable
surrogate endpoint under Subpart H — Accelerated Approval pathway prior to an NDA filing and commented that a decision by the FDA to file “the NDA would not indicate that we have accepted dystrophin expression as a biomarker reasonably
likely to predict clinical benefit. A filing would only indicate that the question merits review, and that we deem the data to be reviewable.” We will continue to evaluate the most appropriate timing and path for pursuing regulatory review and
approval of eteplirsen. Any decision will be further informed by a subsequent CMC meeting. There can be no assurance that, after our evaluation we will decide to pursue or submit an NDA for eteplirsen to the FDA nor can we have any assurance that
the FDA will decide to review any NDA submission we make under Subpart H accelerated approval or any other form of expedited development review or approval. Furthermore, there can be no assurance that any submission or application will be accepted
(
e.g.
, refusal to file) or that any expedited development, review or approval will be granted on a timely basis, or at all. The FDA or other foreign authorities could also request additional information or meetings with us or require us to
conduct further studies or CMC-related work (
e.g.
, a complete response letter) prior to considering our application or granting approval of any type. A failure to obtain accelerated approval or any other form of expedited development, review
or approval for eteplirsen or any of our other product candidates would result in a longer time period for commercialization of such product candidate, could potentially increase the cost of development of such product candidate and could harm our
competitive position in the marketplace.
Additionally, even if we receive regulatory approval for our product candidates, we will be subject
to ongoing FDA obligations and oversight, including adverse event reporting requirements, marketing restrictions and, potentially, other post-marketing obligations such as confirmatory studies, all of which may result in significant expense and
limit our ability to commercialize any such products. The FDA’s policies may also change and additional government regulations may be enacted that could further restrict or regulate post-approval activities. We cannot predict the likelihood,
nature or extent of adverse government regulation that may arise from future legislation or administrative action, either in the United States, or abroad. If we are not able to maintain regulatory compliance, we may be subject to civil and criminal
penalties, we may not be permitted to market our products and our business could suffer.
Any delay in, or failure to, receive or maintain
regulatory approval for any of our product candidates could harm our business and prevent us from ever generating meaningful revenues or achieving profitability. We will also need to obtain regulatory approval from regulatory authorities in foreign
countries to market our product candidates in those countries. We have not submitted an application for regulatory approval to market our product candidates in any foreign jurisdiction. Approval by one regulatory authority does not ensure approval
by regulatory authorities in other jurisdictions. If we fail to obtain approvals from foreign jurisdictions, the geographic market for our product candidates would be limited.
Our preclinical and clinical trials may fail to demonstrate acceptable levels of safety and efficacy of our product candidates, which could prevent or significantly delay their regulatory approval.
To obtain the requisite regulatory approvals to market and sell any of our product candidates, we must demonstrate, through extensive
preclinical and clinical studies that the product candidate is safe and effective in humans. Ongoing and future preclinical and clinical trials of our product candidates may not show sufficient safety or efficacy to obtain regulatory approvals.
For example, in 2012, we completed Study 201, a U.S.-based Phase IIb 12 person clinical trial for eteplirsen at 30 mg/kg and 50 mg/kg.
Following completion of this study, we initiated Study 202, an ongoing open label extension study with the same participants from Study 201. These trials were initiated, in part, to further demonstrate efficacy and safety, including the production
of dystrophin, and explore and identify a more consistently effective dose that may be more appropriate for future clinical trials. While Studies 201 and 202 met their primary endpoints at weeks 24 and 48 respectively, and results reported for weeks
62, 74 and 84 were positive, we cannot assure you that data from the ongoing open label extension study will be sufficient for regulatory approval or will continue to be positive through the remaining study period. If these data are not sufficient
to demonstrate safety and efficacy to regulators, do not continue to demonstrate safety and efficacy through the remainder of Study 202, or are insufficient to identify a consistently effective dose, we expect we will need to engage in discussions
with regulatory authorities about the design and subsequent execution of any further studies which may be required. Regulatory authorities might require more extensive information or preclinical or clinical trials than anticipated. Such clinical
trials might include additional open label “extension studies” for all participants, who have previously received eteplirsen, as well as other participants (
e.g.
, non-ambulatory participants), additional placebo-controlled
“pivotal” study or studies, or additional trials before conducting a pivotal trial or trials of the product candidate. Any additional studies required by regulatory authorities would increase our costs and delay commercialization of
eteplirsen. Even if we conform to any guidance regulatory authorities provide, it does not guarantee receipt of marketing approval, even if we believe our preclinical and clinical trials are successful.
Furthermore, success in preclinical and early clinical trials does not ensure that the ongoing Study 202 and later larger-scale trials will be successful
nor does it predict final results. Acceptable results in early trials may not be reproduced in the remainder of the Study 202 extension study or later trials. For example, pivotal trials for eteplirsen will likely involve a larger number of patients
to achieve statistical significance, will be expensive and will take a substantial amount of time to complete. As a result, we may conduct lengthy and expensive clinical trials of our product candidates, only to learn that the product candidate is
not an effective treatment or is not superior to existing approved therapies, or has an unacceptable safety profile, which could prevent or significantly delay regulatory approval for such product candidate.
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We currently rely on certain third-party manufacturers and other third parties for production of our
product candidates and our dependence on these manufacturers may impair the advancement of our research and development programs and the development of our product candidates.
We do not currently have the internal ability to manufacture our product candidates in the quantities that we need to conduct our clinical trials and we rely upon a limited number of manufacturers to
supply our product candidates and the components of our drug substance. We also need to rely on manufacturers for the production of our product candidates to support our research and development programs. In addition, we rely on other third parties
to perform additional steps in the manufacturing process, including filling and labeling of vials and storage of our product candidates. For the foreseeable future, we expect to continue to rely on contract manufacturers and other third parties to
produce product candidates and their components, fill vials, and store sufficient quantities of our product candidates for research and development programs, clinical trials and potential commercial supply. For each of our eteplirsen, Marburg and
other development programs, based on limited capacity for our specialized manufacturing needs we have had to enter into limited or, at times, non-exclusive sole-source agreements with multinational manufacturing firms for the production of the
active pharmaceutical ingredients (APIs) for eteplirsen, Marburg and other therapeutics. There are a limited number of companies that can produce APIs in the quantities and with the quality and purity that we require. Establishing a relationship
with alternative suppliers can be a lengthy process and might cause delays in our development efforts. If we are required to seek alternative supply arrangements, the resulting delays and potential inability to find a suitable replacement could
materially and adversely impact our business.
Our product candidates require precise, high-quality manufacturing. The failure to achieve and
maintain high quality standards, including failure to detect or control anticipated or unanticipated manufacturing errors, could result in patient injury or death or product recalls. Contract drug manufacturers often encounter difficulties involving
production yields, quality control and quality assurance and shortages of qualified personnel. If our contract manufacturers or other third parties fail to deliver our product candidates for our research and development programs, clinical use or
potential commercial supply on a timely basis, with sufficient quality, and at commercially reasonable prices, and we fail to find replacement manufacturers or to develop our own manufacturing capabilities, we may be required to delay or suspend
clinical trials, research and development programs, commercial supply or otherwise discontinue development and production of our product candidates. In addition, we currently depend on certain third-party vendors, which in some cases may be sole
sources, for the supply of raw materials used to produce our product candidates. If the third-party suppliers were to cease production or otherwise fail to supply us with sufficient quantities of quality raw materials and we are unable to contract
on acceptable terms for these raw materials with alternative suppliers, if any, our ability to have our product candidates manufactured in sufficient quantities for preclinical testing, clinical trials, and potential commercial use would be
adversely affected.
We do not yet have all of the agreements necessary for the supply of APIs and raw materials for the production of any of
our product candidates in quantities sufficient for commercial sale and we may not be able to establish or maintain sufficient commercial manufacturing arrangements on commercially reasonable terms. Securing commercial quantities of our product
candidates and their components from contract manufacturers will require us to commit significant capital and resources. We may also be required to enter into long-term manufacturing agreements that contain exclusivity provisions and/or substantial
termination penalties. In addition, contract manufacturers have a limited number of facilities in which our product candidates can be produced and any interruption of the development or operation of those facilities due to events such as order
delays for equipment or materials, equipment malfunction or failure or damage to the facility by natural disasters could result in the cancellation of shipments, loss of product in the manufacturing process or a shortfall in available product
candidates or materials.
Our contract manufacturers are required to produce our clinical product candidates under current good manufacturing
practice (cGMP) conditions in order to meet acceptable standards for our clinical trials. If such standards change, the ability of contract manufacturers to produce our product candidates on the schedule we require for our clinical trials may be
affected. In addition, contract manufacturers may not perform their agreements with us or may discontinue their business before the time required by us to successfully produce and market our product candidates. We and our contract manufacturers are
subject to periodic unannounced inspection by the FDA and corresponding state and foreign authorities to ensure strict compliance with cGMP and other applicable government regulations and corresponding foreign standards. We do not have control over
a third-party manufacturer’s compliance with these regulations and standards. Any difficulties or delays in our contractors’ manufacturing and supply of product candidates or any failure of our contractors to maintain compliance with the
applicable regulations and standards could increase our costs, make us postpone or cancel clinical trials, prevent or delay regulatory approval by the FDA and corresponding state and foreign authorities, prevent the import and/or export of our
products, cause us to lose revenue, or cause our products to be recalled or withdrawn.
We may not be able to successfully scale-up
manufacturing of our product candidates in sufficient quality and quantity, which would delay or prevent us from developing our product candidates and commercializing resulting approved drug products, if any.
To date, our product candidates have been manufactured in small quantities for preclinical studies and early stage clinical trials. As we prepare for
later stage clinical trials in eteplirsen and potential commercialization, we are working to increase the scale of production of our drug product and planning for mid-scale production by the end of 2013. During 2013, we will also evaluate whether to
increase API production capacity to a commercial scale which will depend in significant part on feedback from the FDA and our expectations regarding if and when we would commence a pivotal trial for eteplirsen and any subsequent commercialization.
In order to conduct larger or late-stage scale clinical trials for a product candidate and supply sufficient commercial quantities of the resulting drug product and its components, if that product candidate is approved for sale, we will need to
manufacture it in larger quantities. We may not be able to successfully increase the manufacturing capacity for any of our product candidates, whether in collaboration with third-party manufacturers or on our own, in a timely or cost-effective
manner or at all. If a contract manufacturer makes improvements in the manufacturing process for our product candidates, we may not own, or may have to share, the intellectual property rights to those
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improvements. Significant scale-up of manufacturing may require additional processes, technologies and validation studies, which are costly, may not be successful and which the FDA must review
and approve. In addition, quality issues may arise during those scale-up activities because of the inherent properties of a product candidate itself or of a product candidate in combination with other components added during the manufacturing and
packaging process, or during shipping and storage of the finished product or active pharmaceutical ingredients. If we are unable to successfully scale-up manufacture of any of our product candidates in sufficient quality and quantity, the
development of that product candidate and regulatory approval or commercial launch for any resulting drug products may be delayed or there may be a shortage in supply, which could significantly harm our business.
In addition, in order to release product and demonstrate stability of product candidates for use in late stage clinical trials (and any resulting drug
products for commercial use), our analytical methods must be validated in accordance with regulatory guidelines. We may not be able to successfully validate our analytical methods or demonstrate adequate stability of the product candidates in a
timely or cost-effective manner or at all. If we are unable to successfully validate our analytical methods or to demonstrate adequate stability, the development of our product candidates and regulatory approval or commercial launch for any
resulting drug products may be delayed, which could significantly harm our business.
We rely on U.S. government contracts to support
certain research and development programs and for substantially all of our revenue. If the U.S. government fails to fund such programs on a timely basis or at all, or such contracts are terminated, the results of our operations would be materially
and adversely affected.
We rely on U.S. government contracts and awards to fund and support certain development programs, including the
Marburg program which accounts for substantially all of our current revenue. The funding of U.S. government programs is subject to Congressional appropriations. Congress generally appropriates funds on a fiscal year basis even though a program may
extend over several fiscal years, as is the case with our DoD contract for the development of our Marburg product candidate. Consequently, programs are often only partially funded initially and additional funds are committed only as Congress makes
further appropriations. If appropriations for one of our programs become unavailable, or are reduced or delayed, our contracts may be terminated or adjusted by the government, which could have a negative impact on our future revenue under such
contract or subcontract. From time to time, when a formal appropriation bill has not been signed into law before the end of the U.S. government’s fiscal year, Congress may pass a continuing resolution that authorizes agencies of the U.S.
government to continue to operate, generally at the same funding levels from the prior year, but does not authorize new spending initiatives, during a certain period. During such a period, or until the regular appropriation bills are passed, delays
can occur in government procurement due to lack of funding and such delays can affect our operations during the period of delay. Currently the DOD is operating under such a continuing resolution for U.S. government fiscal year 2013. Additionally, on
March 1, 2013, a sequestration went into effect which implements across-the-board cuts to government agencies, totaling $1.2 trillion over 10 years. These cuts are to be split 50-50 between domestic and defense discretionary spending. The DoD
must make $47 billion in cuts before September 30, 2013. These cuts could have widespread ramifications including on the DoD’s procurement and research and development programs. Sequestration may result in a reduction of funds available
for new procurements, but also existing contracts may also be reduced in scope, terminated, or partially terminated. The 2004 Project BioShield Act which created the Special Reserve Fund for use by the Department of Health and Human Services (DHHS)
to purchase countermeasures over 10 years mitigates the uncertainty of the annual appropriations process and sequestration, but the $5.6 billion advanced appropriation is rapidly depleting and will expire at the end of U.S. government fiscal year
2013. Thus, the viability of the DHHS and its agencies as a continuing partner and potential customer hinges in part on Congress taking action to replenish the Special Reserve Fund.
In addition, U.S. government contracts generally also permit the government to terminate or renegotiate the contract, in whole or in part, without prior notice, at the government’s convenience or for
default based on performance. From time to time, we receive communications from the U.S. government regarding our performance, including requests for us to provide additional information and/or take certain steps to remedy noted deficiencies. While
we work closely with our contacts at the U.S. government and believe we can adequately address issues raised through such communications, there is no guarantee that we will be able to adequately respond to all requests or remedy all deficiencies
cited. If one of our contracts is terminated for convenience, we would generally be entitled to payments for our allowable costs and would receive some allowance for profit on the work performed. If one of our contracts is terminated for default, we
would generally be entitled to payments for our work that has been completed to that point. A termination arising out of our default could expose us to liability and have a negative impact on our ability to obtain future contracts. Furthermore, if
we fail to satisfy certain performance or deliverable requirements or to adhere to development timelines, revenues associated with the satisfaction of such requirements or timelines may be delayed or may not be realized.
The termination of one or more of these government contracts, whether due to lack of funding, for convenience, for our failure to perform, or otherwise,
or the occurrence of delays or product failures in connection with one or more of these contracts, could negatively impact our financial condition. For example, on October 2, 2012, we received notice from the DoD that the program for the
development of our Ebola product candidate was terminated for the convenience of the government due to funding constraints. We had previously received a stop-work order for the Ebola program which was in effect from August 2, 2012 through the
termination on October 2, 2012. If the government terminates or reduces the Marburg development program or contract, our business could be materially and adversely affected. Furthermore, we can give no assurance that we would be able to procure
new U.S. government contracts to offset the revenue lost as a result of termination of any of our existing contracts. Even if our Marburg contract is not terminated and is completed, there is no assurance that we will receive future government
contracts.
Even if we successfully complete development of our Marburg and influenza product candidates, the major, if not only, potential
purchaser is the U.S. government. The lack of a commercial market makes us reliant upon the
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U.S. government to determine and communicate the market for biodefense countermeasures and government purchasing is subject to evolving threat assessments and shifting political priorities, which
exacerbate market uncertainties. Within the DoD, the war fighter has evolving requirements specifically related to route of administration and time to treat. Until future studies are completed, it is unclear whether our product candidates will
successfully meet these requirements. If it does not, the DoD may choose to terminate the contract. With respect to the civilian sector, Marburg and influenza viruses are among the top chemical, biological, radiological and nuclear threats to
national security, yet the DHHS has not defined the civilian requirements, making the broader demand for our product candidates uncertain.
This expected dependence on government purchases presents additional challenges, since the government is incentivized to negotiate prices for
countermeasures to just above their marginal cost of production, which would severely limit our profit potential. If companies resist low prices, governments can, in extreme cases, threaten compulsory licensing or purchase patent-breaching generics.
Our U.S. government contracts may be terminated and we may be liable for penalties under a variety of procurement rules and regulations
and changes in government regulations or practices could adversely affect our profitability, cash balances or growth prospects.
We must
comply with laws and regulations relating to the formation, administration and performance of U.S. government contracts, which affect how we do business with our customers. Such laws and regulations may potentially impose added costs on our business
and our failure to comply with them may lead to penalties and the termination of our U.S. government contracts. Some significant regulations that affect us include:
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the Federal Acquisition Regulation and supplements, which regulate the formation, administration and performance of U.S. government contracts;
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the Truth in Negotiations Act, which requires certification and disclosure of cost and pricing data in connection with contract negotiations; and
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the Cost Accounting Standards, which impose accounting requirements that govern our right to reimbursement under certain cost-based government
contracts.
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Our contracts with the DoD are subject to periodic review and investigation. If such a review or investigation
identifies improper or illegal activities, we may be subject to civil or criminal penalties or administrative sanctions, including the termination of contracts, forfeiture of profits, the triggering of price reduction clauses, suspension of
payments, fines and suspension or debarment from doing business with U.S. government agencies. We could also suffer harm to our reputation if allegations of impropriety were made against us, which would impair our ability to win awards of contracts
in the future or receive renewals of existing contracts.
In addition, U.S. government agencies routinely audit and review their
contractors’ performance on contracts, cost structure, pricing practices and compliance with applicable laws, regulations and standards. They also review the adequacy of, and a contractor’s compliance with, its internal control systems and
policies, including the contractor’s purchasing, property, estimating, compensation and management information systems. Such audits may result in adjustments to our contract costs, and any costs found to be improperly allocated will not be
reimbursed. We have recorded contract revenues for the periods presented in this report based upon costs we expect to realize upon final audit; however, we do not know the outcome of any future audits and adjustments and, if future audit adjustments
exceed our estimates, our results of operations could be adversely affected. Additionally, we may be required to enter into agreements and subcontracts with third parties, including suppliers, consultants and other third party contractors in order
to satisfy our contractual obligations pursuant to our agreements with the DoD. Any such agreement also has to be compliant with the terms of our government grants. Negotiating and entering into such arrangements can be time-consuming and we may not
be able to reach agreement with such third parties. Any delay or inability to enter into such arrangements or entering into such arrangements in a manner that is non-compliant with the terms of our grants, may result in violations of our contracts
with the DoD.
Clinical trials for our product candidates are expensive and time consuming, may take longer than we expect or may not be
completed at all, and their outcomes are uncertain.
We have completed a Phase Ib/II clinical trial for eteplirsen in the UK and announced
results in October 2010, which were published in The Lancet in July 2011. We have also completed a U.S.-based Phase IIb placebo controlled trial in eteplirsen and announced results in April 2012. Following completion of this study, we initiated an
open label extension study with the same participants from the original Phase IIb placebo controlled trial and announced 48-week results on October 3, 2012, 62-week results on December 7, 2012, 74-week results on April 5, 2013 and
84-week results on June 19, 2013. We expect to commence additional trials of eteplirsen and other product candidates in the future. Each of our clinical trials requires the investment of substantial planning, expense and time, and the timing of
the commencement, continuation and completion of these clinical trials may be subject to significant delays relating to various causes. Participant enrollment is a function of many factors, including the size of the relevant population, the
proximity of participants to clinical sites, the eligibility criteria for the trial, the existence of competing clinical trials and the availability of alternative or new treatments.
We depend on medical institutions and clinical research organizations (CROs), to conduct our clinical trials in compliance with Good Clinical Practice (GCP) and to the extent they fail to enroll
participants for our clinical trials, fail to conduct the study to GCP standards or are delayed for a significant time in the execution of our trials, including achieving full enrollment, we may be affected by increased costs, program delays or
both, which may harm our business. In addition, we have in the past conducted clinical trials in foreign countries and may do so again in the future, which may subject us to further delays and expenses as a result of increased drug shipment costs,
additional regulatory requirements and the engagement of foreign CROs, as well as expose us to risks associated with less
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experienced clinical investigators who are unknown to the FDA, and different standards of medical care. Foreign currency transactions insofar as changes in the relative value of the U.S. dollar
to the foreign currency where the trial is being conducted may impact our actual costs. In addition, for some programs (e.g., DMD and Marburg infection) there are currently no approved drugs to compare against and an agreement about how to measure
efficacy has yet to be reached with the FDA and then demonstrated.
Clinical trials must be conducted in accordance with FDA or other
applicable foreign government guidelines and are subject to oversight by the FDA, other foreign governmental agencies and IRBs at the medical institutions where the clinical trials are conducted. The FDA or other foreign governmental agencies or we
ourselves could delay, suspend or halt our clinical trials of a product candidate for numerous reasons, including:
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deficiencies in the trial design;
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deficiencies in the conduct of the clinical trial including failure to conduct the clinical trial in accordance with regulatory requirements or
clinical protocols;
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deficiencies in the clinical trial operations or trial sites resulting in the imposition of a clinical hold;
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the product candidate may have unforeseen adverse side effects, including fatalities, or a determination may be made that a clinical trial presents
unacceptable health risks;
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the time required to determine whether the product candidate is effective may be longer than expected;
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fatalities or other adverse events arising during a clinical trial that may not be related to clinical trial treatments;
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the product candidate may appear to be no more effective than current therapies;
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the quality or stability of the product candidate may fail to conform to acceptable standards;
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our inability to produce or obtain sufficient quantities of the product candidate to complete the trials;
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our inability to reach agreement on acceptable terms with prospective CROs and trial sites, the terms of which can be subject to extensive negotiation
and may vary significantly among different CROs and trial sites;
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our inability to obtain IRB approval to conduct a clinical trial at a prospective site;
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our inability to obtain regulatory approval to conduct a clinical trial;
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lack of adequate funding to continue the clinical trial, including the occurrence of unforeseen costs due to enrollment delays, requirements to conduct
additional trials and studies and increased expenses associated with the services of our CROs and other third parties;
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our inability to recruit and enroll individuals to participate in clinical trials for reasons including competition from other clinical trial programs
for the same or similar indications; or
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our inability to retain participants who have initiated a clinical trial but may be prone to withdraw due to side effects from the therapy, lack of
efficacy or personal issues, or who are lost to further follow-up.
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In addition, we may experience significant setbacks in
advanced clinical trials, even after promising results in earlier trials, such as unexpected adverse events that occur when our product candidates are combined with other therapies and drugs or given to larger populations, which often occur in
later-stage clinical trials. In addition, clinical results are frequently susceptible to varying interpretations that may delay, limit or prevent regulatory approvals. Also, patient advocacy groups and parents of trial participants may demand
additional clinical trials or continued access to therapies even if our interpretation of clinical results received thus far leads us to determine that additional clinical trials or continued access are unwarranted. Any disagreement with patient
advocacy groups or parents of trial participants may require management’s time and attention and may result in legal proceedings being instituted against us, which could be expensive, time-consuming and distracting, and may result in a delay of
the program. Negative or inconclusive results or adverse medical events, including participant fatalities that may be attributable to our product candidates, during a clinical trial may necessitate that it be redesigned, repeated or terminated.
Further, some of our clinical trials may be overseen by an independent data and safety monitoring board (DSMB) and the DSMB may determine to delay or suspend one or more of these trials due to safety or futility findings based on events occurring
during a clinical trial. Any such delay, suspension, termination or request to repeat or redesign a trial could increase our costs and prevent or significantly delay our ability to commercialize our product candidates.
The Animal Rule is a seldom-used approach to seeking approval of a new drug and our infectious disease program may not meet the requirements for this
path to regulatory approval.
Clinical trials cannot be used to assess the efficacy of most biodefense countermeasures against rare and
lethal pathogens due to ethical considerations and the relative infrequency of naturally occurring cases. In the United States, we plan to develop the therapeutic product
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candidate to treat Marburg virus using the Animal Rule regulatory mechanism. Pursuant to the Animal Rule, the sponsor of a drug product must demonstrate efficacy in animal models and safety in
humans. There is no guarantee that the FDA will agree to this approach to the development of our infectious disease product candidate, considering that no validated animal model has been established as predicting human outcomes in the prevention or
treatment of any filovirus disease. Animal models represent, at best, a rough approximation of efficacy in humans, and, as such, countermeasures developed using animal models will be untested until their use in humans during an emergency. We have
yet to demonstrate the predictive value of our animal studies to the FDA’s satisfaction. If we fail to do so, we will have to demonstrate efficacy of AVI-7288 through adequate well-controlled trials in humans in order to obtain regulatory
approval of this product in the United States, which, if possible, will greatly add to the time and expense required to commercialize this product. Furthermore, the Animal Rule mechanism has been used only rarely and questions remain regarding the
FDA’s interpretation and implementation. Only one novel product has been approved using the Animal Rule. It has thus far been used to extend the indicated use of three previously approved products which had considerable prior human experience.
We do not have any experience successfully navigating this approach to drug approval. Even if the Animal Rule represents a viable approach to seeking approval of AVI-7288, it may present challenges for gaining final regulatory approval for this
product candidate, including an extended timeline to approval and less predictable study requirements. In addition, the FDA would require post-marketing human efficacy studies if the countermeasure is used in humans, which would most likely be in
the aftermath of a bioterrorist attack. The ability to reliably perform efficacy clinical trials in the midst of a national crisis is uncertain.
The timing and conduct of animal studies may be further constrained given that filoviruses are classified for use only in BSL-4 laboratories. There are limited laboratories and staff world-wide that can
work with these live viruses and companies will be competing for the limited availability of this critical infrastructure to test their countermeasures. Furthermore, we anticipate limits in conforming to good laboratory practice (GLP) requirements
given the requirement for BSL-4 containment.
We have incurred operating losses since our inception and we may not achieve or sustain
profitability.
We had an operating loss of $32.5 million for the six months ended June 30, 2013 and incurred an operating loss of
$29.7 million for the year ended December 31, 2012. As of June 30, 2013, our accumulated deficit was $492.4 million and substantially all of our revenues to date have been derived from research and development contracts with the DoD. We
have not yet generated any material revenue from product sales and have incurred expenses related to research and development of our technology and product candidates, from general and administrative expenses that we have incurred while building our
business infrastructure and acquired in-process research and development resulting from two acquisitions. We anticipate that our expenses will increase substantially if and as we:
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continue our research, preclinical and clinical development of our product candidates;
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acquire or in-license other product candidates;
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initiate additional clinical trials for our product candidates;
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seek marketing approvals for our product candidates that successfully complete clinical trials;
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ultimately establish a sales, marketing and distribution infrastructure to commercialize any products for which we may obtain marketing approval;
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maintain, expand and protect our intellectual property portfolio;
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increase manufacturing capabilities;
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hire additional clinical, quality control and scientific personnel; and
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add operational, financial and management information systems and personnel, including personnel to support our product development and planned future
commercialization efforts.
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Our ability to achieve and maintain profitability depends on our ability to raise additional
capital, partner one or more programs, complete development of our product candidates, obtain regulatory approvals and market our approved products, if any. It is uncertain when, if ever, we will become profitable and if we do achieve profitability,
we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would decrease the value of the company and could impair our ability to raise capital, maintain our research and
development efforts, expand our business or continue our operations.
We will likely need additional funds to conduct our planned research
and development efforts. If we fail to attract significant capital or fail to enter into strategic relationships, we may be unable to continue to develop our product candidates.
We will likely require additional capital from time to time in the future in order to continue the development of product candidates in our pipeline and to expand our product portfolio. The actual amount
of funds that we may need will be determined by many factors, some of which are beyond our control. These factors include the success of our research and development efforts, the status of our preclinical and clinical testing, costs and timing
relating to securing regulatory approvals and obtaining new patent rights, regulatory changes, competitive and technological developments in the market and future commercialization expenses related to any product sales, marketing, manufacturing and
distribution. An unforeseen change in these factors, or others, might increase our need for additional capital.
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We would expect to seek additional financing from the sale and issuance of equity or equity-linked or debt
securities, and we cannot predict that financing will be available when and as we need financing or that, if available, the financing terms will be commercially reasonable. If we are unable to obtain additional financing when and if we require it or
on commercially reasonable terms, it would have a material adverse effect on our business and results of operations.
If we are able to
consummate such financings, the trading price of our common stock could be adversely affected and/or the terms of such financings may adversely affect the interests of our existing stockholders. To the extent we issue additional equity securities or
convertible securities, our existing stockholders could experience substantial dilution in their economic and voting rights. For example, through August 7, 2013, we sold an aggregate of approximately 1,000,000 million shares of our common
stock in connection with our July 2013 ATM equity offering program. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making
capital expenditures or declaring dividends.
Further, we may also enter into relationships with pharmaceutical or biotechnology companies to
perform research and development with respect to our RNA-based technologies, research programs or to conduct clinical trials and to market our product candidates. Other than pre-clinical collaborations with academic/research institutions and
government entities for the development of additional exon-skipping product candidates for the treatment of DMD and a product candidate for the treatment of influenza, we currently do not have a strategic relationship with a third party to perform
research or development using our RNA-based technologies or assist us in funding the continued development and commercialization of any of our programs or product candidates other than that with the U.S. government. Such relationships may require us
to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us.
We rely on third parties to provide services in connection with our preclinical and clinical development programs. The inadequate performance by or loss of any of these service providers could affect
our product candidate development.
Several third parties provide services in connection with our preclinical and clinical development
programs, including in vitro and in vivo studies, assay and reagent development, immunohistochemistry, toxicology, pharmacokinetics, clinical assessments, data monitoring and management and statistical analysis and other outsourced activities. If
these service providers do not adequately perform the services for which we have contracted or cease to continue operations and we are not able to quickly find a replacement provider or we lose information or items associated with our product
candidates, our development programs may be delayed.
Our RNA-based, or antisense, technology has not been incorporated into a therapeutic
commercial product and is still at a relatively early stage of development.
Our RNA-based platforms, utilizing proprietary PMO-based
technology, have not been incorporated into a therapeutic commercial product and are still at a relatively early stage of development. This technology is used in all of our product candidates, including eteplirsen. We are conducting toxicology,
pharmacology, pharmacokinetics and other preclinical studies and, although we have conducted Phase I clinical trials for AVI-6003 (we are now pursuing development of AVI-7288, one of the two component oligomers in AVI-6003) and AVI-7100 and
conducted a Phase IIb clinical trial in eteplirsen, additional preclinical studies may be required for these product candidates and before other product candidates enter human clinical trials. In addition, preclinical models to study participant
toxicity and activity of compounds are not necessarily predictive of toxicity or efficacy of these compounds in the treatment of human disease and there may be substantially different results in clinical trials from the results obtained in
preclinical studies. Any failures or setbacks in utilizing our PMO-based technology, including adverse effects resulting from the use of this technology in humans, could have a detrimental impact on our product candidate pipeline and our ability to
maintain and/or enter into new corporate collaborations regarding these technologies, which would negatively affect our business and financial position.
The relocation of our selected research and development activities may create unintended negative consequences, including increased costs and loss of personnel.
We moved selected research and development activities from Bothell to our existing site in Corvallis, Oregon and will develop additional research and
development activities at a future site in Cambridge Massachusetts. We expect the transition will continue through 2013. While we believe the relocation will improve our business operations and enhance our ability to attract and retain industry
talent, this relocation may result in the following negative consequences:
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increased costs associated with the closing of our existing facility in Bothell, Washington including the moving of lab equipment to Cambridge and
Corvallis;
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increased costs associated with the relocation of personnel, including reimbursement of relocation expenses and cost of living adjustments to base
salaries;
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employee turnover due to relocation;
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increased costs associated with retention and/or severance packages for Bothell based personnel;
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business disruptions resulting from the relocation; and
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increased long-term lease costs.
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If any of these consequences occur, the negative impact may outweigh any benefits related to the relocation, which could have an adverse effect on our business.
If we fail to retain our key personnel or are unable to attract and retain additional qualified personnel, our future growth, ability to perform our
U.S. government contracts and our ability to compete would suffer.
We are highly dependent on the efforts and abilities of the principal
members of our senior management. Additionally, we have scientific personnel with significant and unique expertise in RNA-based therapeutics and related technologies and personnel with experience overseeing compliance with and execution of the terms
of our U.S. government contracts. The loss of the services of any one of the principal members of our managerial, scientific or government contract compliance staff may prevent us from achieving our business objectives.
The competition for qualified personnel in the biotechnology field and for qualified personnel with government contracting experience is intense, and our
future success depends upon our ability to attract, retain and motivate such personnel. In order to develop and commercialize our products successfully, we will be required to retain key managerial, scientific and government contract compliance
staff. In certain instances, we may also need to expand our workforce and our management ranks. We face intense competition for qualified individuals from numerous pharmaceutical and biotechnology companies, as well as academic and other research
institutions. If we are unable to attract, assimilate or retain such key personnel, our ability to advance our proprietary programs and perform our U.S. government contracts would be adversely affected. Any failure to perform under our U.S.
government contracts could result in a termination of the agreement, which would harm our business.
We may engage in future acquisitions
that increase our capital requirements, dilute our stockholders, cause us to incur debt or assume contingent liabilities and subject us to other risks.
We actively evaluate various strategic transactions on an ongoing basis, including licensing or acquiring complementary products, technologies or businesses. Any potential acquisitions may entail numerous
risks, including increased operating expenses and cash requirements, assimilation of operations and products, retention of key employees, diversion of our management’s attention and uncertainties in our ability to maintain key business
relationships of the acquired entities. In addition, if we undertake acquisitions, we may issue dilutive securities, assume or incur debt obligations, incur large one-time expenses and acquire intangible assets that could result in significant
future amortization expense.
Our success, competitive position, and future revenues, if any, depend in part on our ability and the
abilities of our licensors to obtain and maintain patent protection for our product candidates, to preserve our trade secrets, to prevent third parties from infringing on our proprietary rights, and to operate without infringing on the proprietary
rights of third parties.
We currently hold various issued patents and exclusive rights to issued patents and own and have licenses to
various patent applications, in each case in the United States as well as rights under European patents and patent applications. We anticipate filing additional patent applications both in the United States and in other countries. The patent
process, however, is subject to numerous risks and uncertainties, and we can provide no assurance that we will be successful in obtaining and defending patents or in avoiding infringement of the rights of others. The risks we face on the
intellectual property front include the following:
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our patent rights might be challenged, invalidated, or circumvented, or otherwise might not provide any competitive advantage;
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as a matter of public policy, there might be significant pressure on governmental bodies to limit the scope of patent protection for disease treatments
that prove successful; and
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jurisdictions other than the U.S. might have less restrictive patent laws than the U.S., giving foreign competitors the ability to exploit these laws
to create, develop, and market competing products.
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In addition, the USPTO and patent offices in other jurisdictions have
often required that patent applications concerning pharmaceutical and/or biotechnology-related inventions be limited or narrowed substantially to cover only the specific innovations exemplified in the patent application, thereby limiting the scope
of protection against competitive challenges. Accordingly, even if we or our licensors are able to obtain patents, the patents might be substantially narrower than anticipated.
On September 16, 2011, the Leahy-Smith America Invents Act, or the Leahy-Smith Act, was signed into law. The Leahy-Smith Act includes a number of significant changes to United States patent law,
including provisions that affect the way patent applications will be prosecuted and may also affect patent litigation. The USPTO has issued regulations and procedures to govern administration of the Leahy-Smith Act, but many of the substantive
changes to patent law associated with the Leahy-Smith Act have only recently become effective. Accordingly, it is not clear what, if any, impact the Leahy-Smith Act will have on the operation of our business. However, the Leahy-Smith Act and its
implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business and financial
condition.
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Additionally, the U.S. Supreme Court has issued decisions, the full impact of which is not yet known. For
example, on March 20, 2012 in
Mayo Collaborative Services, DBA Mayo Medical Laboratories, et al. v. Prometheus Laboratories, Inc.
, the Court held that several claims drawn to measuring drug metabolite levels from patient samples and
correlating them to drug doses were not patentable subject matter. The decision appears to impact diagnostics patents that merely apply a law of nature via a series of routine steps and it has created uncertainty around the ability to patent certain
biomarker-related method claims. Additionally, on June 13, 2013 in
Association for Molecular Pathology v. Myriad Genetics, Inc.
, the Court held that claims to isolated genomic DNA are not patentable, but claims to complementary DNA
(cDNA) molecules were held to be valid. The effect of the decision on patents for other isolated natural products is uncertain and as with the Leahy-Smith Act, these decisions could increase the uncertainties and costs surrounding the prosecution of
our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business and financial condition.
Our business prospects will be impaired if third parties successfully assert that our product candidates or technologies infringe proprietary rights of such third parties.
Our competitors may make significant investments in competing technologies, might have or obtain patents that limit, interfere with, or eliminate our
ability to make, use, and sell our product candidates in important commercial markets.
If our product candidates or technologies infringe
enforceable, proprietary rights of others, we could incur substantial costs and may have to:
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obtain rights or licenses from others, which might not be available on commercially reasonable terms or at all;
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abandon development of an infringing product candidate;
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redesign product candidates or processes to avoid infringement;
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defend litigation or administrative proceedings which might be costly whether we win or lose, and which could result in a substantial diversion of
financial and management resources.
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Any of these events could substantially harm our potential earnings, financial
condition, and operations. Prosensa, which is developing competitive pipeline products, has rights to patent claims that, absent a license, may preclude us from commercializing eteplirsen in several jurisdictions. Prosensa has rights to European
Patent No. EP 1619249, for example. We opposed this patent in the Opposition Division of the European Patent Office, and the Opposition Division maintained certain claims of this patent relating to the treatment of DMD by skipping dystrophin exons
51 and 46, which may provide a basis to maintain that commercialization of our drug eteplirsen in the European Union would infringe on such patent. Both we and Prosensa are appealing the Opposition Division decision given that the decision could
have a substantial effect on our businesses and leaves open the possibility that Prosensa or other parties that have rights to such patent could assert that our drug eteplirsen infringes on such patent. The timing and outcome of appeal cannot be
predicted or determined as of the date of this report. We are also aware of certain patent claims that Prosensa has rights to, and others that it is pursuing, in other jurisdictions, including Japan and the United States, that may provide the basis
for Prosensa or other parties that have rights to these claims to assert that commercialization of our drug eteplirsen in such other jurisdictions would infringe on such claims.
The DMD patent landscape is continually evolving and multiple parties, both commercial entities and academic institutions, may have rights to claims or may be pursuing additional claims that could provide
these parties a basis to assert that our product candidates infringe on the intellectual property rights of those parties. Similarly, we may be able to assert that certain activities engaged in by these parties infringe on our current or future
patent rights. There has been, and we believe that there will continue to be, significant litigation in the biopharmaceutical and pharmaceutical industries regarding patent and other intellectual property rights. We also cannot be certain that other
third parties will not assert patent infringement in the future with respect to any of our development program.
We face intense
competition and rapid technological change, which may result in others discovering, developing or commercializing competing products before or more successfully than we do.
The biotechnology and pharmaceutical industries are highly competitive and subject to significant and rapid technological change. We are aware of many pharmaceutical and biotechnology companies that are
actively engaged in research and development in areas related to antisense technology and other RNA technologies or that are developing alternative approaches to or therapeutics for the disease indications on which we are focused. Some of these
competitors are developing or testing product candidates that now, or may in the future, competes directly with our product candidates. For example, we believe that companies including Alnylam Pharmaceuticals, Isis Pharmaceuticals and Santaris share
a focus on RNA-based drug discovery and development. Competitors with respect to our exon-skipping DMD program, or eteplirsen, include Prosensa and GSK and other companies such as PTC Therapeutics and Summit plc have also been working on DMD
programs.
Clinical trials evaluating the systemic administration of the Prosensa/GSK lead DMD drug candidate are currently ongoing, including
a placebo-controlled global Phase III clinical trial. Two placebo-controlled Phase II clinical trials, one based in the United States and one based outside the United States have now concluded. The Prosensa/GSK drug candidate may, or may not, prove
to be safer or more efficacious than our product candidate and it could gain marketing approval before our product candidate. This might affect our ability to successfully complete a clinical development program or market eteplirsen once approved.
This competition may also extend to other exon-skipping drugs for DMD limiting our ability to gain market share.
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Other potential competitors include large, fully integrated pharmaceutical companies and more established
biotechnology companies that have significantly greater resources and expertise in research and development, manufacturing, testing, obtaining regulatory approvals and marketing. Also, academic institutions, government agencies and other public and
private research organizations conduct research, seek patent protection and establish collaborative arrangements for research, development, manufacturing and marketing. It is possible that these competitors will succeed in developing technologies
that are more effective than our product candidates or that would render our technology obsolete or noncompetitive. Our competitors may, among other things:
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develop safer or more effective products;
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implement more effective approaches to sales and marketing;
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develop less costly products;
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obtain regulatory approval more quickly;
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have access to more manufacturing capacity;
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develop products that are more convenient and easier to administer;
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form more advantageous strategic alliances; or
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establish superior intellectual property positions.
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We may be subject to clinical trial claims and our insurance may not be adequate to cover damages.
We currently have no products that have been approved for commercial sale; however, the current and future use of our product candidates by us and our collaborators in clinical trials, and the sale of any
approved products in the future, may expose us to liability claims. These claims might be made directly by consumers or healthcare providers or indirectly by pharmaceutical companies, our collaborators or others selling such products. Regardless of
merit or eventual outcome, we may experience financial losses in the future due to such product liability claims. We have obtained limited general commercial liability insurance coverage for our clinical trials. We intend to expand our insurance
coverage to include the sale of commercial products if we obtain marketing approval for any of our product candidates. However, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against all
losses. If a successful product liability claim or series of claims is brought against us for uninsured liabilities or in excess of insured liabilities, our assets may not be sufficient to cover such claims and our business operations could be
impaired.
Our operations involve the use of hazardous materials, and we must comply with environmental laws, which can be expensive, and
may affect our business and operating results.
Our research and development activities involve the use of hazardous materials, including
organic and inorganic solvents and reagents. Accordingly, we are subject to federal, state, and local laws and regulations governing the use, storage, handling, manufacturing, exposure to, and disposal of these hazardous materials. In addition, we
are subject to environmental, health and workplace safety laws and regulations, including those governing laboratory procedures, exposure to blood-borne pathogens, and the handling of biohazardous materials. Although we believe that our activities
conform in all material respects with such environmental laws, there can be no assurance that violations of these laws will not occur in the future as a result of human error, accident, equipment failure, or other causes. Liability under
environmental, health and safety laws can be joint and several and without regard to fault or negligence. The failure to comply with past, present or future laws could result in the imposition of substantial fines and penalties, remediation costs,
property damage and personal injury claims, loss of permits or a cessation of operations, and any of these events could harm our business and financial conditions. We expect that our operations will be affected by other new environmental and health
and workplace safety laws on an ongoing basis, and although we cannot predict the ultimate impact of any such new laws, they may impose greater compliance costs or result in increased risks or penalties, which could harm our business.
We rely significantly on information technology and any failure, inadequacy, interruption or security lapse of that technology, including any
cybersecurity incidents, could harm our ability to operate our business effectively.
Despite the implementation of security measures, our
internal computer systems and those of third parties with which we contract are vulnerable to damage from cyber-attacks, computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. System
failures, accidents or security breaches could cause interruptions in our operations, and could result in a material disruption of our clinical activities and business operations, in addition to possibly requiring substantial expenditures of
resources to remedy. The loss of clinical trial data could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. To the extent that any disruption or security breach were to result
in a loss of, or damage to, our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability and our research and development programs and the development of our product candidates could be
delayed.
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Risks Related to Our Common Stock
Our stock price is volatile and may fluctuate due to factors beyond our control.
The market prices for, and trading volumes of, securities of biotechnology companies, including our securities, have been historically volatile. For example, during 2012, our stock has traded from a low
of $3.30 per share to a high of $45.00 per share. As an additional example, we note that on July 24, 2013 our stock price decreased 19% on the same day that we made an announcement regarding eteplirsen and recent communications we had with the
FDA. The market has from time to time experienced significant price and volume fluctuations unrelated to the operating performance of particular companies. The market price of our common stock may fluctuate significantly due to a variety of factors,
including:
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our ability to obtain any decision to pursue Subpart — H accelerated approval for eteplirsen;
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positive or negative results of testing and clinical trials by ourselves, strategic partners, or competitors;
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delays in entering or failing to enter into strategic relationships with respect to development and/or commercialization of our product candidates or
entry into strategic relationships on terms that are not deemed to be favorable to our company;
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technological innovations or commercial product introductions by ourselves or competitors;
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changes in government regulations;
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developments concerning proprietary rights, including patents and litigation matters;
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public concern relating to the commercial value or safety of any of our products;
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financing, through the issuance of equity or equity linked securities or incurrence of debt, or other corporate transactions;
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comments by securities analysts;
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general market conditions in our industry or in the economy as a whole.
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Broad market and industry factors may seriously affect the market price of companies’ stock, including ours, regardless of actual operating performance. In addition, in the past, following periods of
volatility in the overall market and the market price of a particular company’s securities, securities class action litigation has often been instituted against these companies. Such litigation, if instituted against us, could result in
substantial costs and a diversion of our management’s attention and resources.
Provisions of our certificate of incorporation, bylaws
and Delaware law might deter acquisition bids for us that might be considered favorable and prevent or frustrate any attempt to replace or remove the then current management and board of directors.
Certain provisions of our certificate of incorporation and bylaws may make it more difficult for a third party to acquire control of us or effect a
change in our board of directors and management. These provisions include:
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when the board is comprised of six or more directors, classification of our board of directors into two classes, with one class elected each year;
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directors may only be removed for cause by the affirmative vote of majority of the voting power of all the then-outstanding shares of voting stock;
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prohibition of cumulative voting of shares in the election of directors;
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right of the board of directors to elect directors to fill a vacancy created by the expansion of the board of directors or the resignation, death,
disqualification or removal of a director;
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express authorization of the board of directors to make, alter or repeal our bylaws;
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prohibition on stockholder action by written consent;
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advance notice requirements for nominations for election to our board or for proposing matters that can be acted upon by stockholders at stockholder
meetings;
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the ability of our board of directors to authorize the issuance of undesignated preferred stock, the terms and rights of which may be established and
shares of which may be issued without stockholder approval, including rights superior to the rights of the holders of common stock; and
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a super-majority (66
2
/
3
%) of the voting power of all of the then-outstanding shares of capital stock are required to amend,
rescind, alter or repeal our bylaws and certain provisions of our certificate of incorporation.
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In addition, we are governed by the provisions of Section 203 of the Delaware General Corporation Law,
which may prohibit certain business combinations with stockholders owning 15% or more of our outstanding voting stock. These and other provisions in our certificate of incorporation and our bylaws and in the Delaware General Corporation Law
could make it more difficult for stockholders or potential acquirers to obtain control of our board of directors or initiate actions that are opposed by the then-current board of directors.
We expect our quarterly operating results to fluctuate in future periods, which may adversely affect our stock price.
Our quarterly operating results have fluctuated in the past, and we believe they will continue to do so in the future. Some of these fluctuations may be very pronounced such as in the case of our warrant
offerings in January and August 2009 of which 2.6 million remain outstanding and exercisable as of June 30, 2013. Each of these warrants is classified as a derivative liability and accordingly, the fair value of the warrants is
recorded on our condensed consolidated balance sheet as a liability, and such fair value is adjusted at each financial reporting date with the adjustment to fair value reflected in our condensed consolidated statement of operations. For example, for
the six months ended June 30, 2013, the impact of the change in fair value of these warrants resulted in a $28.9 million charge to our Unaudited Condensed Consolidated Statement of Operations and Comprehensive Loss. The fair value of the
warrants is determined using the Black-Scholes-Merton option valuation model. Fluctuations in the assumptions and factors used in the Black-Scholes-Merton model can result in adjustments to the fair value of the warrants reflected on our balance
sheet and, therefore, our statement of operations. Due to the classification of such warrants and other factors, quarterly results of operations are difficult to forecast, and period-to-period comparisons of our operating results may not be
predictive of future performance. Additionally, our quarterly operating results may fluctuate due to the variable nature of our revenue and research and development expenses. Specifically, a change in the timing of activities performed in support of
our U.S. government research contracts could either accelerate or defer anticipated revenue from period to period. Likewise, our research and development expenses may experience fluctuations as a result of the timing of activities performed in
support of our U.S. government research contracts and the timing and magnitude of expenditures incurred in support of our DMD and other proprietary drug development programs. In one or more future quarters, our results of operations may fall below
the expectations of securities analysts and investors. In that event, the market price of our common stock could decline.
A significant
number of shares of our common stock are issuable pursuant to outstanding stock awards and warrants, and we expect to issue additional stock awards and shares of common stock in the future. Exercise of these awards, and sales of shares will dilute
the interests of existing security holders and may depress the price of our common stock.
As of June 30, 2013, there were
32.4 million shares of common stock outstanding, outstanding awards to purchase 4.2 million shares of common stock under various incentive stock plans and outstanding warrants to purchase up to 2.6 million shares of common stock.
Additionally, as of June 30, 2013, there were 3.2 million shares of common stock available for future issuance under our Amended and Restated 2011 Equity Incentive Plan and 250,000 shares of common stock remain available for issuance under
the Company’s 2013 Employee Stock Purchase Plan. In addition, we may issue additional common stock and warrants from time to time to finance our operations. We may also issue additional shares to fund potential acquisitions or in connection
with additional stock options or other equity awards granted to our employees, officers, directors and consultants under our Amended and Restated 2011 Equity Incentive Plan. The issuance of additional shares of common stock or warrants to purchase
common stock, perception that such issuances may occur, or exercise of outstanding warrants or options may have a dilutive impact on other stockholders and could have a material negative effect on the market price of our common stock.
