UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the fiscal year ended December 31, 2021
or
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the transition period from ___________ to ___________
Commission File Number: 001-36152
Aerie Pharmaceuticals, Inc.
(Exact name of registrant as specified in its charter)
| Delaware | 20-3109565 | |||||||
| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) | |||||||
4301 Emperor Boulevard, Suite 400
Durham, North Carolina 27703
(919) 237-5300
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Ticker Symbol(s) | Name of Each Exchange on Which Registered | ||||||
| Common Stock, $0.001 par value per share | AERI | NASDAQ Global Market | ||||||
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files): Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☒ | Accelerated filer | ☐ | |||||||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |||||||||||||||||
| Emerging growth company | ☐ | |||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the voting stock held by non-affiliates of the registrant on June 30, 2021, based upon the closing price of $16.01 of the registrant’s common stock as reported on The NASDAQ Global Market, was $734,874,546.
As of February 18, 2022, the registrant had 48,391,874 shares of common stock, $0.001 par value, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement (the “Proxy Statement”) for the 2022 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K. The Proxy Statement will be filed with the Securities and Exchange Commission (the “SEC”) within 120 days of the registrant’s fiscal year ended December 31, 2021.
TABLE OF CONTENTS
| Page | ||||||||
| PART I | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 1B. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| PART II | ||||||||
| Item 5. | ||||||||
| Item 6. | ||||||||
| Item 7. | ||||||||
| Item 7A. | ||||||||
| Item 8. | ||||||||
| Item 9. | ||||||||
| Item 9A. | ||||||||
| Item 9B. | ||||||||
| Item 9C. | ||||||||
| PART III | ||||||||
| Item 10. | ||||||||
| Item 11. | ||||||||
| Item 12. | ||||||||
| Item 13. | ||||||||
| Item 14. | ||||||||
| PART IV | ||||||||
| Item 15. | ||||||||
| Item 16. | ||||||||
Unless otherwise indicated or the context requires, the terms “Aerie,” “Company,” “we,” “us” and “our” refer to Aerie Pharmaceuticals, Inc. and its subsidiaries. References to “products” mean products approved by the U.S. Food and Drug Administration (“FDA”) or other regulatory authorities; references to “product candidates” mean products that are in development but not yet approved by the FDA or other regulatory authorities; and references to “future product candidates” mean products that have not yet been developed.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We may, in some cases, use terms such as “predicts,” “believes,” “potential,” “proposed,” “continue,” “estimates,” “anticipates,” “expects,” “plans,” “intends,” “may,” “would,” “could,” “might,” “will,” “should,” “exploring,” “pursuing” or other words that convey uncertainty of future events or outcomes to identify these forward-looking statements.
Forward-looking statements appear in a number of places throughout this report and include statements regarding our intentions, beliefs, projections, outlook, analyses or current expectations concerning, among other things:
•the broad impact of the coronavirus (“COVID-19”) pandemic on our business;
•the sales of Rhopressa® (netarsudil ophthalmic solution) 0.02% (“Rhopressa®”) or of Rocklatan® (netarsudil and latanoprost ophthalmic solution) 0.02%/0.005% (“Rocklatan®”), in the United States, and the potential future sales in the United States of any product candidates or future product candidates, if approved;
•the potential future sales in jurisdictions outside of the United States of Rhopressa®, named Rhokiinsa® (netarsudil ophthalmic solution) 0.02% (“Rhokiinsa®”) in Europe, or Rocklatan®, named Roclanda® (netarsudil and latanoprost ophthalmic solution) 0.02%/0.005% (“Roclanda®”) in Europe, or their equivalents, and those of any product candidates or future product candidates;
•our commercialization, marketing, manufacturing and supply management capabilities and strategies in and outside of the United States;
•third-party payer coverage and reimbursement for our products, product candidates and any future product candidates, if approved;
•the glaucoma patient market size and the rate and degree of market adoption of our products, product candidates and any future product candidates, if approved, by eye-care professionals and patients;
•the timing, cost or other aspects of the commercial launch of our products, product candidates and any future product candidates, if approved;
•the success, timing and cost of our ongoing and anticipated preclinical studies and clinical trials for our product candidates and any future product candidates, including statements regarding the timing of initiation and completion of the studies and trials;
•our expectations regarding the effectiveness of our products, product candidates and any future product candidates and our expectations regarding the results of any clinical trials and preclinical studies;
•the timing of and our ability to request, obtain and maintain FDA or other regulatory authority approval of, or other action with respect to our products, product candidates and any future product candidates in the United States, Europe, Japan and elsewhere, including the expected timing of, and regulatory and/or other review of, filings for such products, product candidates and any future product candidates;
•our expectations related to the use of proceeds from our financing activities;
•our estimates regarding anticipated operating expenses and capital requirements and our needs for additional financing;
ii
•our plans to pursue development of additional product candidates and technologies in ophthalmology, including development of our products or product candidates for additional indications, and our preclinical retinal programs and other therapeutic opportunities;
•the potential advantages of our products, product candidates and any future product candidates;
•our ability to protect our proprietary technology and enforce our intellectual property rights; and
•our expectations regarding existing and future collaborations, licensing, acquisitions and strategic operations, including our ability to in-license or acquire additional ophthalmic products, product candidates or technologies.
By their nature, forward-looking statements involve risks and uncertainties because they relate to events, competitive dynamics, industry change and other factors beyond our control, and depend on regulatory approvals and economic and other environmental circumstances that may or may not occur in the future or may occur on longer or shorter timelines than anticipated. We discuss many of these risks in greater detail under the heading “Risk Factors” in Part I, Item 1A of this report and elsewhere in this report.
In particular, FDA approval of Rhopressa® and Rocklatan® does not guarantee FDA approval of our product candidates under development or any future product candidates in the United States, and there can be no assurance that we will receive FDA approval for our product candidates or any future product candidates. In addition, the European Commission (“EC”) grant of a Centralised Marketing Authorisation (“Centralised MA”) for Rhokiinsa® and Roclanda® and the receipt of marketing authorization from the Medicines and Healthcare Products Regulatory Agency (“MHRA”) for Roclanda® does not guarantee European Medicines Agency (“EMA”) or MHRA approval of our product candidates under development or any future product candidates in Europe, and there can be no assurance that we will receive EMA or MHRA approval for our product candidates or any future product candidates. FDA, EMA and MHRA approval of Rhopressa® and Rocklatan® does not guarantee regulatory approval of these products in jurisdictions outside of the United States or Europe and there is no assurance that we will receive regulatory approval for Rhopressa® and Rocklatan® in such jurisdictions. In addition, the clinical trials discussed in this report are preliminary and the outcome of such clinical trials may not be predictive of the outcome of later clinical trials. Any future clinical trial results may not demonstrate safety and efficacy sufficient to obtain regulatory approval related to the clinical trials findings discussed in this report, and we may suspend or discontinue research programs at any time for any reason.
You should not rely upon forward-looking statements as predictions of future events. Although we believe that we have a reasonable basis for each forward-looking statement contained in this report, we caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate, may differ materially from the forward-looking statements contained in this report. In addition, even if our results of operations, financial condition and liquidity, and events in the industry in which we operate, are consistent with the forward-looking statements contained in this report, they may not be predictive of results or developments in future periods.
Any forward-looking statements that we make in this report speak only as of the date of this report. Except as required by law, we are under no duty to update or revise any of the forward-looking statements, whether the result of new information, future events or otherwise, after the date of this report.
iii
PART I
ITEM 1. BUSINESS
Overview
We are a pharmaceutical company focused on the discovery, development and commercialization of first-in-class ophthalmic therapies for the treatment of patients with eye diseases and conditions including open-angle glaucoma, dry eye, diabetic macular edema (“DME”) and wet age-related macular degeneration (“AMD”).
U.S. Commercialization of the Glaucoma Franchise
Our strategy is to grow the market share of our U.S. Food and Drug Administration (“FDA”) approved glaucoma franchise products, Rhopressa® (netarsudil ophthalmic solution) 0.02% (“Rhopressa®”) and Rocklatan® (netarsudil/latanoprost ophthalmic solution) 0.02%/0.005% (“Rocklatan®”), in the United States. Both Rhopressa® and Rocklatan® are being sold to national and regional U.S. pharmaceutical distributors, and patients have access to them through pharmacies across the United States. We have obtained broad formulary coverage for Rhopressa® and Rocklatan® for the lives covered under commercial plans and Medicare Part D plans. Our commercial team responsible for sales of Rhopressa® and Rocklatan® is targeting select eye-care professionals who treat glaucoma throughout the United States.
 | Rhopressa® is a once-daily eye drop designed to reduce elevated intraocular pressure (“IOP”) in patients with open-angle glaucoma or ocular hypertension. Rhopressa® is taken in the evening and has shown in preclinical and clinical trials to be effective in reducing IOP, with a favorable safety profile. The active ingredient in Rhopressa®, netarsudil, is an Aerie-owned Rho kinase (“ROCK”) inhibitor. Rhopressa® increases the outflow of aqueous humor through the trabecular meshwork (“TM”), which accounts for approximately 80% of fluid drainage from the healthy eye and is the diseased tissue responsible for elevated IOP in glaucoma. Using this mechanism of action (“MOA”), we believe that Rhopressa® represents the first of a new drug class for reducing IOP in patients with glaucoma in over 20 years. | |||||||
 | Rocklatan® is a once-daily fixed-dose combination of Rhopressa® and latanoprost, a commonly prescribed drug for the treatment of patients with open-angle glaucoma or ocular hypertension. Rocklatan® is also taken in the evening, and similar to Rhopressa®, has shown in preclinical and clinical trials to be highly effective in reducing IOP, with a favorable safety profile. Based on our clinical data, we believe that Rocklatan® has the potential to provide a greater IOP-reducing effect than any glaucoma medication currently marketed in the United States. | |||||||
Efforts Outside the United States
In addition to growing the market share of Rhopressa® and Rocklatan® in the United States, our strategy also includes developing business opportunities outside of the United States and we continue to make progress in our efforts to commercialize Rhopressa® and Rocklatan® in Europe, Japan and other regions of the world.
We have partnered and have collaboration agreements in place with Santen Pharmaceuticals Co., Ltd. (“Santen Pharmaceuticals”) and Santen SA (“Santen SA” and, together with Santen Pharmaceuticals, “Santen”), to develop and commercialize our products in Japan and South Korea, Indonesia, Malaysia, Philippines, Singapore, Thailand, Vietnam and Taiwan (collectively, “East Asia”), as well as Europe, China, India, the Middle East, Commonwealth of Independent States (“CIS”), Africa, parts of Latin America and the Oceania countries. The initial Collaboration and License Agreement with Santen (the “First Santen Agreement”) was executed in October 2020 to advance our clinical development and ultimately commercialize Rhopressa® and Rocklatan® in Japan and East Asia. The second Collaboration and License Agreement with Santen (the “Second Santen Agreement” and, together with the First Santen Agreement, “Santen Agreements”) was executed in
1
December 2021 to develop and commercialize Rhopressa® and Rocklatan® in Europe, China, India, the Middle East, CIS, Africa, parts of Latin America and the Oceania countries.
In Europe, Rhopressa® and Rocklatan® will be marketed under the names Rhokiinsa® and Roclanda®, respectively. Rhokiinsa® and Roclanda® were granted a Centralised Marketing Authorisation (“Centralised MA”) by the European Commission (“EC”) in November 2019 and January 2021, respectively. In April 2021, Roclanda® received marketing authorisation from the Medicines and Healthcare Products Regulatory Agency (“MHRA”) in Great Britain.
In Japan, we reported positive topline results for our Phase 3 clinical trial of netarsudil ophthalmic solution 0.02% (“netarsudil 0.02%”) in October 2021, the first of three expected Phase 3 clinical trials in Japan. The results evaluated netarsudil 0.02% versus ripasudil hydrochloride hydrate ophthalmic solution 0.4% (“ripasudil 0.4%”) and showed that netarsudil 0.02% once daily was superior to ripasudil 0.4% twice daily in lowering IOP after four weeks (p<0.0001), the primary endpoint of the study. The medications were safe and well tolerated. The most common treatment emergent adverse event was conjunctival hyperemia, which is treatable. A second, confirmatory Phase 3 study, required for approval in Japan, is underway. Santen is taking the lead on next steps in preparation for registration in Japan. Clinical trials for Rocklatan® have not yet begun.
Glaucoma Product Manufacturing
We have a sterile fill production facility in Athlone, Ireland, for the production of our FDA approved products and clinical supplies, with the intent of having the Athlone manufacturing plant supply our ophthalmic products in all markets for which we received regulatory approval and are commercialized. The Athlone manufacturing plant began manufacturing commercial supplies of Rocklatan® in the first quarter of 2020 and Rhopressa® in the third quarter of 2020 for distribution to the United States. Shipments of commercial supply of Rocklatan® and Rhopressa® from the Athlone manufacturing plant to the United States commenced in the second half of 2020. In addition, the Athlone manufacturing plant has manufactured clinical supplies of Rhopressa® for the Phase 3 clinical trials in Japan as well as registration batches to support product approval in Japan. We expect to commence shipments of Rhopressa® to Santen pursuant to the Second Santen Agreement in the fourth quarter of 2022 for its sales to third parties in early 2023.
As the Athlone manufacturing plant commenced operations in early 2020, it has not reached full capacity. We expect that the Athlone manufacturing plant will have adequate capacity to produce for the markets included in the Santen Agreements, as needed, which include Europe, Japan, East Asia and certain other regions of the world, if approved for commercial distribution in those markets. The Athlone manufacturing plant manufactures most of our ongoing needs for Rhopressa® and Rocklatan® in the United States. We may continue to use contract manufacturers to produce commercial supplies of Rhopressa® and Rocklatan® for distribution in the United States, but at reduced levels as a result of the Athlone manufacturing plant commencing manufacturing operations.
Product Candidates and Pipeline
Our strategy includes enhancing our longer-term commercial potential by identifying and advancing additional product candidates through our internal discovery efforts, our entry into potential research collaborations or in-licensing arrangements or our acquisition of additional ophthalmic products, technologies or product candidates that complement our current product portfolio, as discussed in “—Our Products, Product Candidates and Pipeline” below.
Dry Eye Program
We are developing AR-15512, an ophthalmic solution for the treatment of patients with dry eye disease. The active ingredient in AR-15512 is a potent and selective agonist of the TRPM8 ion channel, a cold sensor and osmolarity sensor that regulates tear production and blink rate. In addition, activating the TRPM8 receptor may reduce ocular discomfort by promoting a cooling sensation.
In September 2021, we reported topline results of our Phase 2b clinical study, named COMET-1, for AR-15512. We completed a dose ranging study evaluating two concentrations of AR-15512 (0.0014% and 0.003%) in a 90-day trial with 369 subjects. The COMET-1 clinical study achieved statistical significance for multiple pre-specified and validated signs and symptoms. The greatest efficacy was demonstrated with the higher concentration 0.003% formulation, which we plan to advance to Phase 3 studies. The COMET-1 study showed statistically significant improvements in signs for tear production, conjunctival redness and ocular surface staining. The study also achieved statistical significance for improvement in symptoms based on Ocular Discomfort, Symptom Assessment iN Dry Eye (“SANDE”) and Eye Dryness. Efficacy was observed in both sign and symptoms as early as Day 14 and continued improvement in symptoms through Day 84. Both formulations of AR-15512 were safe and well-tolerated. The study did not achieve statistical significance at the pre-determined primary endpoints at Day 28. There were no serious or systemic adverse events related to study medication. Of the ocular adverse events, 95% were rated as
2
mild. We gained alignment with the FDA in the first quarter of 2022 on the results of the Phase 2b clinical trial and confirmed the design of the Phase 3 trials, which we currently expect to initiate in the second quarter of 2022.
Retina Program
We are currently developing two sustained-release implants focused on retinal diseases, AR-1105 and AR-14034 SR. For AR-1105, a dexamethasone steroid implant, we completed a large Phase 2 clinical trial for patients with macular edema due to retinal vein occlusion (“RVO”) in July 2020 and reported topline results indicating sustained efficacy of up to six months. We have received advice from regulatory agencies in both Europe and the United States regarding clinical and regulatory pathways for Phase 3 clinical trials. We are currently evaluating Phase 3 development options as well as partnership opportunities.
The preclinical sustained-release implant AR-14034 SR is being designed to deliver the active ingredient axitinib, a potent small molecule pan-VEGF receptor inhibitor. AR-14034 SR has the potential to provide a duration of effect of approximately one year with a once per-year injection. It may potentially be used to treat DME, wet AMD and related diseases of the retina. Investigational New Drug Application (“IND”)-enabling preclinical studies are ongoing and we anticipate filing an IND for AR-14034 SR with the FDA in the second half of 2022.
Pipeline
We own over 4,000 ROCK inhibitor molecules that provide a basis for further research and development opportunities. We discovered and developed the active ingredient in Rhopressa® and Rocklatan® and netarsudil through a rational drug design approach that coupled medicinal chemistry with high content screening of compounds in proprietary cell-based assays. We selected and formulated netarsudil for preclinical in vivo testing following a detailed characterization of over 3,000 synthesized ROCK inhibitors, a number that has since grown to approximately 4,000. We evaluate this library on an ongoing basis for additional development opportunities. Early-stage evaluations of these molecules are underway for other ophthalmic indications. We continue to evaluate external business development opportunities to provide access to technologies developed outside of Aerie to complement our internal research and development efforts.
Intellectual Property Portfolio
We own the worldwide rights for Rhopressa® and Rocklatan®. We have patent protection for Rhopressa® and Rocklatan® in the United States and internationally through early 2034 and in Japan through 2037. Furthermore, we have filed for patent protection in the United States and internationally through 2037. In addition, through the acquisition of Avizorex Pharma S.L. (“Avizorex”) in 2019, we are the exclusive licensee through 2031 of issued U.S. patents providing patent protection for pharmaceutical compositions comprising AR-15512 and methods of its use for ophthalmic uses. The Avizorex acquisition also enabled us to be the exclusive licensee of pending foreign counterparts to the issued U.S. patents regarding AR-15512. Should these foreign counterparts issue, they will provide patent protection for pharmaceutical compositions in such jurisdictions comprising AR-15512 and methods of its use, including ophthalmic uses, through 2031. Furthermore, we have issued U.S. and Japanese patents that provide patent protection for our AR-1105 implant in the United States and Japan through 2036. We also have pending foreign counterparts of these issued patents that upon issuance will provide patent protection internationally through 2036. Our intellectual property portfolio contains patents and pending patent applications related to composition of matter, pharmaceutical compositions, methods of use, synthetic methods, medical devices and designs for implants. We have also filed patent applications in the United States and internationally covering our preclinical sustained-release implant AR-14034 SR. Upon issuance, such applications would provide protection for AR-14034 SR through 2040. These product candidate and preclinical implants utilize DSM Biomedical’s (“DSM”) polyesteramide polymer technology, for which we have obtained a worldwide exclusive license for all ophthalmic indications. Our patents covering Rhopressa® and Rocklatan® may be subject to validity and enforceability challenges by competitors who file ANDAs to obtain permission to market generic versions of Rhopressa® and/or Rocklatan®. Our competitors may file such ANDAs as of December 18, 2021, if the ANDA contains a certification of patent invalidity or non-infringement, also known as a Paragraph IV Certification.
Our Strategy
Our goal is to become a leader in the discovery, development and commercialization of first-in-class therapies for the treatment of patients with eye diseases including open-angle glaucoma, dry eye, DME and wet AMD. We believe Rhopressa® and Rocklatan® have the potential to address many of the unmet medical needs in the glaucoma market. The Phase 4 Multi-center Open-label Study (“MOST”) observed Rhopressa® efficacy in various real-world clinical settings, including as an adjunctive therapy and monotherapy. The results indicated positive IOP reduction in all settings along with a favorable tolerability profile. Rocklatan® has the potential of delivering a high level of efficacy and could over time become the preferred product of choice for newly diagnosed patients who may need maximal lowering of IOP and/ or as a “first switch” bottle-for-bottle replacement
3
for patients who have not reached IOP target on a PGA. In addition, we believe there is an attractive commercial potential for AR-15512 in the dry eye market, and clinical implant AR-1105 and preclinical implant AR-14034 SR in the retinal disease market.
Key elements of our strategy are to:
•Grow the market share of Rhopressa® and Rocklatan® in the United States.
Our sales organization, along with the addition of a contract sales organization and telesales team, have driven consistent sales volumes growth since the launch of each product.
•Advance the development of Rhopressa® and Rocklatan® in jurisdictions outside the United States to regulatory approval and commercialize in Europe, Japan and other regions of the world.
We entered into the First Santen Agreement and Second Santen Agreement in October 2020 and December 2021, respectively, to advance our clinical development and ultimately commercialize Rhopressa® and Rocklatan® in Europe, Japan, East Asia and certain other regions.
In Europe, Roclanda® (marketed as Rocklatan® in the United States) was granted a Centralised MA by the EC in January 2021. In April 2021, Roclanda® received marketing authorisation from the MHRA in Great Britain.
In Japan, we reported positive topline results for our Phase 3 clinical trial of netarsudil 0.02% in October 2021, the first of three expected Phase 3 clinical trials in Japan. For additional product and trial information see “—Our Products, Product Candidates and Pipeline” below.
We continue to evaluate our product candidates and pipeline for collaboration and licensing opportunities internationally.
•Supply all clinical and commercial ophthalmic products from the Athlone manufacturing plant for all markets in which we plan to commercialize, while maintaining our secondary suppliers.
We have a sterile fill production facility in Athlone, Ireland, for the production of our FDA approved products and clinical supplies with the intent of having the Athlone manufacturing plant supply our ophthalmic products in markets for which we receive regulatory approval and are commercialized. For additional information see “—Manufacturing” below. We expect that the Athlone manufacturing plant will have adequate capacity to produce for the markets included in the Santen Agreements, as needed, which include Europe, Japan, East Asia and certain other regions of the world.
•Expand our product candidate portfolio and pipeline through internal discovery efforts, research collaboration arrangements and in-licensing or acquisitions of additional product candidates, products or technologies.
We continue to seek to discover and develop new compounds in our research laboratories focused on ophthalmic opportunities. In addition, we may enter into additional research collaborations or license arrangements or commercialization partners or complete additional acquisitions to broaden our presence in ophthalmology, as we continually explore and discuss potential additional opportunities for new ophthalmic products, delivery alternatives and new therapeutic areas.
With respect to research collaborations, in connection with entering into the Santen Agreements, we are collaborating with Santen on the clinical development and commercialization of Rhopressa® and Rocklatan® in Europe, Japan and other regions of the world. Through an asset acquisition, we acquired the clinical-stage dry eye product candidate AR-15512 from Avizorex, worldwide ophthalmic rights to a bio-erodible polymer technology from DSM and PRINT® implant manufacturing technology from Envisia Therapeutics (“Envisia”).
With respect to product candidates, we reported topline results of our Phase 2b clinical trial, named COMET-1, for AR-15512 in September 2021. We gained alignment with the FDA in the first quarter of 2022 on the results of the Phase 2b clinical trial and confirmed the design of the Phase 3 trials, which we currently expect to initiate in the second quarter of 2022. With respect to AR-1105, we successfully completed a large Phase 2 in July 2020 and received advice from regulatory agencies in both Europe and the United States regarding clinical and regulatory pathways for Phase 3 clinical trials. We are evaluating development options for Phase 3 trials. We are also working to advance our preclinical sustained-release retinal implant, AR-14034 SR, for which we anticipate filing an IND with the FDA in the second half of 2022.
4
•Continue to leverage and strengthen our intellectual property portfolio.
We believe we have a strong intellectual property position based upon issued patents and pending applications in the United States and internationally, including in Europe and Japan, relating to Rhopressa® and Rocklatan®. Regarding AR-15512, the Avizorex acquisition has provided us with patent protection in the United States through 2031, and we are pursuing international patent protection that upon issuance are expected to provide patent protection through 2031. We also continue to pursue efforts to strengthen our intellectual property portfolio regarding AR-14034 in the United States and internationally. Our intellectual property portfolio contains U.S. and foreign patents and pending U.S. and foreign patent applications related to composition of matter, pharmaceutical compositions, methods of use, synthetic methods, medical devices and designs.
Our Products, Product Candidates and Pipeline
Glaucoma Franchise
Our glaucoma franchise products consist of Rhopressa® and Rocklatan®.
Rhopressa®
Rhopressa® is the first of a new class of glaucoma drug products that was discovered by our scientists. It was approved by the FDA in December 2017 for the reduction of elevated IOP in patients with open-angle glaucoma or ocular hypertension. It was also granted a Centralised MA by the EC in November 2019. Our key target markets outside the United States include Europe and Japan and other countries in Asia.
The active ingredient in Rhopressa®, netarsudil, is an Aerie-owned ROCK inhibitor. ROCK is a protein kinase, which is an enzyme that modifies other proteins by chemically adding phosphate groups to them. Specifically, ROCK regulates actin and myosin, which are proteins that are responsible for cellular contraction. ROCK activity also promotes the production of extracellular matrix proteins. ROCK inhibitors block cell contraction in the TM outflow pathway and reduce the production of extracellular matrix, thereby improving TM fluid outflow and consequently reducing IOP.
Rhopressa® is competing primarily in the adjunctive therapy market, which represents approximately one-half of the U.S. glaucoma prescription market, which in aggregate totaled approximately 34 million prescriptions and 55 million units in 2020 according to IQVIA. Healthcare professionals most frequently prescribe Rhopressa® as a concomitant therapy to prostaglandins or non-prostaglandin analog (“PGA”) medications when additional IOP reduction is desired. We believe Rhopressa® is primarily competing with other non-PGA products, due to its targeting of the diseased TM, its demonstrated ability to reduce IOP at consistent levels across tested baselines, its preferred once-daily dosing relative to other currently marketed non-PGA products, and its favorable safety profile. Currently marketed therapies that are used adjunctively to PGAs are older generation products that are generally dosed between two and three times a day, have MOA(s) focused on reducing fluid production, often have lower efficacy levels and have systemic side effects. Rhopressa® provides eye-care professionals with a valuable alternative therapy to what has been historically available. We believe that Rhopressa® may also become a preferred therapy where PGAs are contraindicated, for patients who do not respond to PGAs and for patients who choose to avoid the cosmetic issues associated with PGA products. In November 2019, we released topline data from our Phase 4 MOST, which observed Rhopressa® efficacy in various real-world clinical settings, including as an adjunctive therapy and monotherapy. The results indicated positive IOP reduction in all settings along with a favorable tolerability profile.
Rocklatan®
Rocklatan® is a once-daily fixed-dose combination of Rhopressa® and latanoprost, a commonly prescribed drug for the treatment of patients with open-angle glaucoma or ocular hypertension and was approved by the FDA in March 2019. Based on our clinical data, we believe that Rocklatan® has the potential to provide a greater IOP-reducing effect than any glaucoma medication currently marketed in the United States. We also believe that Rocklatan® is suitable for patients requiring maximal IOP reduction, including those with higher IOPs and those who present with significant disease progression despite using currently available therapies.
5
U.S. Commercialization of the Glaucoma Franchise
Rhopressa®
We launched Rhopressa® in the United States in April 2018. It is being sold to national and regional U.S. pharmaceutical distributors, and patients have access to Rhopressa® through pharmacies across the United States. We have obtained broad formulary coverage for Rhopressa® for the lives covered under commercial and Medicare Part D plans.
Rocklatan®
We launched Rocklatan® in the United States in May 2019. Rocklatan® is now being sold to national and regional U.S. pharmaceutical distributors, and patients have access to Rocklatan® through pharmacies across the United States. We have obtained broad formulary coverage for Rocklatan® for the lives covered under commercial and Medicare Part D plans.
Efforts Outside the United States
Santen Collaboration and License Agreements
As discussed in “—Overview” above, we entered into the First Santen Agreement and Second Santen Agreement in October 2020 and December 2021, respectively, to advance our clinical development and ultimately commercialize Rhopressa® and Rocklatan® in Europe, Japan and other regions of the world. See Note 3 to our consolidated financial statements included elsewhere in this report for more information.
Rhopressa®
In Europe, the EC granted a Centralised MA for Rhokiinsa® in November 2019.
In Japan, we initiated the first Rhopressa® Phase 3 clinical trial in Japan in the fourth quarter of 2020. We expect to have three Phase 3 clinical trials, two of which will be 28-day trials and one of which will be a 12-month safety trial.
We reported positive topline results for our Phase 3 clinical trial of netarsudil 0.02% in October 2021, the first of three expected Phase 3 clinical trials in Japan. The results evaluated netarsudil 0.02% versus ripasudil 0.4% and showed that netarsudil 0.02% once daily was superior to ripasudil 0.4% twice daily in lowering IOP after four weeks (p<0.0001), the primary endpoint of the study. The medications were safe and well tolerated. The most common treatment emergent adverse event was conjunctival hyperemia, which is treatable. A second, confirmatory Phase 3 study, required for approval in Japan, is underway. Santen is taking the lead on next steps in preparation for registration in Japan. Clinical trials for Rocklatan® have not yet begun.
Rocklatan®
In Europe, Roclanda® was granted a Centralised MA by the EC in January 2021. Since Roclanda® is a fixed-dose combination product that includes Rhokiinsa®, the marketing authorisation application (“MAA”) submission for Roclanda® was predicated on the receipt of a Centralised MA for Rhokiinsa®, which the EC granted in November 2019. In April 2021, Roclanda® received marketing authorisation from the Medicines and Healthcare Products Regulatory Agency (“MHRA”) in Great Britain. In Japan, clinical trials for Rocklatan® have not yet begun.
According to IQVIA, it is estimated that the European glaucoma market for the five largest European national markets represented approximately $950 million in sales with 98 million units in 2020, compared to approximately 55 million units in the United States.
Product Candidates and Pipeline Opportunities
We obtained the clinical-stage dry eye product candidate AVX-012 (now named AR-15512) through the acquisition of Avizorex in late 2019. Furthermore, we have also acquired worldwide ophthalmic rights to a bio-erodible polymer technology from DSM and PRINT® implant manufacturing technology, which is a proprietary technology capable of creating precisely-engineered sustained-release products utilizing fully-scalable manufacturing processes, from Envisia. Using these technologies, we have created a sustained-release ophthalmology platform and are currently developing two sustained-release implants focused on retinal diseases, AR-1105 and AR-14034 SR, and in the future we believe this technology may be useful as we explore additional sustained-release applications.
6
AR-15512 (TRPM8 receptor)
In December 2019, we acquired Avizorex, a Spanish ophthalmic pharmaceutical company developing therapeutics for the treatment of dry eye disease. Avizorex completed a Phase 2a study in dry eye subjects in 2019 for its lead product candidate AVX-012 (now named AR-15512). The active ingredient in AR-15512 is a potent and selective agonist of the TRPM8 ion channel, a cold sensor and osmolarity sensor that regulates tear production and blink rate. In addition, activating the TRPM8 receptor may reduce ocular discomfort by promoting a cooling sensation. By stimulating these processes in a physiological manner, TRPM8 agonists have the potential to restore tear film stability and reduce discomfort in patients with dry eye. The IND for AR-15512 became effective in September 2020, allowing us to initiate clinical studies in the treatment of dry eye. Positive results from the Phase 2a study support the therapeutic potential of AR-15512 to treat signs and symptoms of dry eye. In September 2021, we reported topline results of our Phase 2b clinical trial, named COMET-1, for AR-15512. We completed a dose ranging study evaluating two concentrations of AR-15512 (0.0014% and 0.003%) in a 90-day trial with 369 subjects. The COMET-1 clinical study achieved statistical significance for multiple and validated pre-specified signs and symptoms. The greatest efficacy was demonstrated with the higher concentration 0.003% formulation, which we plan to advance to Phase 3 studies. The COMET-1 study showed statistically significant improvements in signs for tear production, conjunctival redness and ocular surface staining. The study also achieved statistical significance for improvement in symptoms based on Ocular Discomfort, SANDE and Eye Dryness. Efficacy was observed in both sign and symptoms as early as Day 14 and continued improvement in symptoms through Day 84. Both formulations of AR-15512 were safe and well-tolerated. The study did not achieve statistical significance at the pre-determined primary endpoints at Day 28. There were no serious or systemic adverse events related to study medication. Of the ocular adverse events, 95% were rated as mild. We gained alignment with the FDA in the first quarter of 2022 on the results of the Phase 2b clinical trial and confirmed the design of the Phase 3 trials, which we currently expect to initiate in the second quarter of 2022.
AR-1105 Implant (dexamethasone steroid)
In October 2017, we acquired the rights to use PRINT® technology in ophthalmology and certain other assets from Envisia. In addition, we acquired Envisia’s intellectual property rights relating to a preclinical dexamethasone steroid implant using a biodegradable polymer-based drug delivery system that is comprised of a blend of different polymers and PRINT® technology for the potential treatment of macular edema due to retinal vein occlusion (“RVO”) and diabetic retinopathy (“DR”), which we refer to as AR-1105. We submitted the IND for AR-1105 in December 2018 and the IND became effective in January 2019. We initiated a Phase 2 clinical trial of AR-1105 in patients with macular edema due to RVO during March 2019 and completed enrollment in October 2019. In July 2020, we reported topline results of the Phase 2 clinical trial for AR-1105 indicating sustained efficacy of up to six months, an important achievement in validating the potential capabilities of our sustained-release platform.
We have received advice from regulatory agencies in both Europe and the United States regarding clinical and regulatory pathways for Phase 3 clinical trials. We are evaluating development options for Phase 3 trials. According to IQVIA, while the market for retinal diseases therapeutics totaled nearly $7 billion in the United States and $4 billion in Europe in 2020, the injectable steroid market component, which is a smaller subset of the larger market, is currently estimated to be higher in Europe than in the United States. We believe AR-1105, with the six-month sustained-release efficacy profile demonstrated in the Phase 2 data, may be able to further expand the injectable steroid market in both the United States and Europe. The closest competitive product currently generates approximately $100 million in annual net sales in the United States and $300 million in Europe and generally in practice is injected once every two to three months. We believe that the commercial prospects for AR-1105 are attractive and as a result, we expect to develop this product candidate preferably with a partner who has a major strategic interest in Europe and in other select large geographies.
AR-14034 SR Implant (pan-VEGF receptor inhibitor)
The active ingredient in our preclinical AR-14034 sustained-release implant is axitinib, a small molecule kinase inhibitor of vascular endothelial growth factor (“VEGF”) receptors. Axitinib is currently approved by the FDA in the United States for the treatment of renal cell carcinoma. AR-14034 SR may have the potential to treat wet AMD, DME and other diseases of the retina. Unlike the anti-VEGF products currently approved for wet AMD and DME that inhibit only one or two of the four known VEGFs, studies have shown axitinib inhibits signaling from all four VEGFs by inhibiting all known VEGF receptors. Based on preclinical data, axitinib has been shown to inhibit choroidal neovascularization and to reduce vessel leakage in preclinical models of wet AMD and DME. Axitinib has been formulated with a proprietary blend of polymers to produce an injectable, bioerodible implant that, based on preclinical data, has the potential to sustain effective retinal drug concentrations for up to 12 months following a single intravitreal injection in patients.
Pending additional studies, AR-14034 SR may have the potential to provide a once per-year injection to treat DME, wet AMD and related diseases of the retina, which has the potential to greatly reduce the treatment burden for patients and their
7
physicians. We anticipate filing the IND for AR-14034 SR with the FDA in the second half of 2022, which if accepted, would allow us to initiate human studies in the treatment of wet AMD and DME.
Other Product Candidates and Pipeline
Our owned small molecule, AR-13503, is a ROCK and Protein kinase C inhibitor and is the active ingredient in our AR-13503 sustained-release implant. AR-13503 SR has potential for the treatment of DME, wet AMD and other diseases of the retina. The IND for AR-13503 SR became effective in April 2019, allowing us to initiate human studies in the treatment of wet AMD and DME. We initiated a first-in-human clinical safety study for AR-13503 SR in the third quarter of 2019, which is currently ongoing. At this time, we have placed the development on hold pending our assessment of capital allocation of our portfolio.
We are also developing AR-6121, a preclinical ROCK inhibitor-linked-steroid, which is a proprietary class of potent ocular corticosteroids linked to ROCK inhibitors. AR-6121 has the potential to leverage the anti-fibrotic and IOP-lowering activities of ROCK inhibitors to generate potent steroid effects with an improved safety profile. AR-6121 has the potential to meet an unmet need for effective and safer steroid treatment, specifically those that do not cause an increase in IOP or cataract formation. We have placed the development of AR-6121 on hold pending our assessment of the overall unmet medical need in the market, the commercial opportunity and capital allocation of our portfolio.
Pipeline Opportunities
We continue to leverage the use of the PRINT® technology platform to evaluate the sustained-release of additional small molecule therapies for other ophthalmic indications. We commenced operation of our current cGMP-validated manufacturing facility for production of ophthalmic implants using PRINT® technology in our Durham, North Carolina, research facility in October 2018.
We may continue to enter into research collaboration arrangements, license, acquire or develop additional product candidates and technologies to broaden our presence in ophthalmology, and we continually explore and discuss potential additional opportunities for new ophthalmic products, delivery alternatives and new therapeutic areas with potential partners and on our own.
We own over 4,000 ROCK inhibitor molecules that provide a basis for further research and development opportunities. We discovered and developed the active ingredient in Rhopressa® and Rocklatan® and netarsudil internally through a rational drug design approach that coupled medicinal chemistry with high content screening of compounds in proprietary cell-based assays. We selected and formulated netarsudil for preclinical in vivo testing following a detailed characterization of over 3,000 synthesized ROCK inhibitors, a number that has since grown to approximately 4,000. We evaluate this library on an ongoing basis for additional development opportunities. Early-stage evaluations of these molecules are underway for other ophthalmic indications. We continue to evaluate external business development opportunities to provide access to technologies developed outside of Aerie to complement our internal research and development efforts, and to identify partners for possible new product development.
Status, Achievements and Regulatory Approvals
The following table summarizes each of our current products and product candidates, their MOA(s) and their status.
| Region | Name and Mechanism | Key Dates | Status | |||||||||||||||||
| Glaucoma Franchise | ||||||||||||||||||||
United States | (ROCK inhibitor)(1) | April 2018 Commercial Launch | Marketed Product | |||||||||||||||||
8
| Region | Name and Mechanism | Key Dates | Status | |||||||||||||||||
United States | (ROCK inhibitor and latanoprost, a PGA)(1) | May 2019 Commercial Launch | Marketed Product | |||||||||||||||||
| Europe and Other Regions | Rhokiinsa® (ROCK inhibitor)(1) | December 2021 | Executed the second collaboration agreement with Santen SA for the development and commercialization of Rhopressa® and Rocklatan® in Europe, China, India, the Middle East, CIS, Africa, parts of Latin America and the Oceania countries | |||||||||||||||||
Roclanda® (ROCK inhibitor and latanoprost, a PGA)(1) | ||||||||||||||||||||
| Europe | Rhokiinsa® (ROCK inhibitor)(1) | November 2019 | Centralised MA granted by the EC | |||||||||||||||||
| Europe | Roclanda® (ROCK inhibitor and latanoprost, a PGA)(1) | April 2021 | Marketing authority granted by MHRA | |||||||||||||||||
| January 2021 | Centralised MA granted by the EC | |||||||||||||||||||
| Japan and Other Countries in East Asia | Rhopressa® (ROCK inhibitor)(1) | October 2020 | Executed the initial collaboration and license agreement with Santen Pharmaceuticals for the development and commercialization of Rhopressa® and Rocklatan® in Japan and in East Asia | |||||||||||||||||
Rocklatan® (ROCK inhibitor and latanoprost, a PGA)(1) | ||||||||||||||||||||
| Japan and Other Countries in East Asia | Rhopressa® (ROCK inhibitor)(1) | October 2021 | Reported positive topline results for the Phase 3 clinical trial, the first of three expected clinical trials in Japan | |||||||||||||||||
| Glaucoma Manufacturing | ||||||||||||||||||||
| Athlone, Ireland Manufacturing Plant | Rhopressa® (ROCK inhibitor)(1) | Fourth quarter of 2022 | Expect to commence shipments of Rhopressa® to Santen pursuant to the Second Santen Agreement for its sales to third parties in early 2023 | |||||||||||||||||
Athlone, Ireland Manufacturing Plant | Rhopressa® (ROCK inhibitor)(1) | Fourth quarter of 2020 | Shipments of commercial supply to the United States commenced | |||||||||||||||||
Third quarter of 2020 | Manufactured clinical supplies of Rhopressa® for the upcoming Phase 3 clinical trials in Japan | |||||||||||||||||||
September 2020 | Received FDA approval for production for commercial distribution in the United States. | |||||||||||||||||||
9
| Region | Name and Mechanism | Key Dates | Status | |||||||||||||||||
Athlone, Ireland Manufacturing Plant | Rocklatan® (ROCK inhibitor and latanoprost, a PGA)(1) | Third quarter of 2020 | Shipments of commercial supply to the United States commenced | |||||||||||||||||
January 2020 | Received FDA approval for production for commercial distribution in the United States | |||||||||||||||||||
Product Candidates and Pipeline | ||||||||||||||||||||
United States | AR-15512 (TRPM8 agonist)(2) | First quarter of 2022 | Gained alignment with FDA on the results of the Phase 2b clinical trial and confirmed the design of the Phase 3 trials, which we currently expect to initiate in the second quarter of 2022 | |||||||||||||||||
September 2021 | Reported topline results for Phase 2b clinical trial, named COMET-1 | |||||||||||||||||||
| United States | AR-1105 implant (dexamethasone steroid)(3) | July 2020 | Completed and reported topline results for Phase 2 clinical trial in patients with macular edema due to RVO, indicating 6-month efficacy. Currently evaluating Phase 3 development options as well as partnership opportunities. | |||||||||||||||||
| United States | AR-14034 SR implant (pan-VEGF-R inhibitor)(1) | Second half of 2022 | Anticipate filing of an IND for preclinical AR-14034 SR to potentially allow initiation of human studies in the treatment of wet AMD and DME | |||||||||||||||||
(1)Wholly-owned
(2)Wholly-owned; acquired from Avizorex
(3)Wholly-owned; acquired from Envisia
Glaucoma Overview
Glaucoma Market Overview
Glaucoma is one of the largest segments in the global ophthalmic market. In 2020, branded and generic glaucoma product sales were estimated to be approximately $4.8 billion in the United States, the top five national markets in Europe and Japan in aggregate, according to IQVIA. Prescription volume in 2020 for glaucoma products in the United States alone was 34 million, representing 55 million bottles, and is expected to grow, driven in large part by the aging population.
According to the National Eye Institute, it is estimated that over 2.7 million people in the United States suffer from glaucoma, a number that is expected to reach approximately 4.3 million by 2030. Furthermore, The Eye Diseases Prevalence Research Group has estimated that only half of the U.S. glaucoma sufferers know that they have the disease. Glaucoma is a progressive and highly individualized disease, in which elevated levels of IOP are associated with damage to the optic nerve, resulting in irreversible vision loss and potentially blindness. Patients may suffer the adverse effects of glaucoma across a wide range of IOP levels. There are multiple factors that can contribute to an individual developing glaucoma, including, but not limited to, age, family history and ethnicity. Glaucoma is treated by the reduction of IOP, which has been shown to slow the progression of vision loss. In a healthy eye, fluid is continuously produced and drained in order to maintain pressure equilibrium and provide nutrients to the eye tissue. The FDA recognizes sustained reduction of IOP as the primary clinical endpoint for the approval of drugs to treat patients with glaucoma or ocular hypertension. The primary drainage mechanism of the eye is the TM, which accounts for approximately 80% of fluid drainage in a healthy eye, while the secondary drainage mechanism, the uveoscleral pathway, is responsible for the remaining drainage. In glaucoma patients, damage to the TM results in insufficient drainage of fluid from the eye, which causes increased IOP and damage to the optic nerve.
Once glaucoma develops, it is a chronic condition that requires life-long treatment. The initial treatment for glaucoma patients is typically the use of prescription eye drops. PGAs have become the most widely prescribed glaucoma drug class. The current most frequently prescribed PGA is once-daily latanoprost. The most commonly prescribed non-PGA drugs belong to the beta
10
blocker class. The most frequently prescribed beta blocker is twice-daily timolol. Other non-PGA drug classes include the alpha agonists and carbonic anhydrase inhibitors. When PGA monotherapy is insufficient to control IOP or contraindicated due to concerns about side effects, non-PGA products are used either as add-on therapy to the PGA or as an alternative monotherapy. It is estimated that up to 50% of glaucoma patients receiving PGA monotherapy require add-on therapy within two years of initial prescription of such PGA monotherapy to maintain adequate control of IOP.
We believe there are significant unmet needs in the glaucoma market evidenced by the degree to which multiple therapies are used to treat patients with the disease. From this, we believe that eye-care professionals are eager for new therapy choices. This belief is supported by the sales volume growth in the United States for both Rhopressa® and Rocklatan® since their respective launch dates. PGAs have side effects, contraindications and reduced efficacy in patients with low to moderately elevated IOPs relative to patients with higher IOPs. Other currently marketed non-PGAs are less efficacious than PGAs, have more serious and a greater number of side effects and contraindications, and require multiple daily doses. As a result, we believe there is a significant unmet need in both the PGA and non-PGA market segments, each of which represents approximately one-half of the U.S. and European glaucoma market based on prescription volumes, according to IQVIA. Despite the limitations of existing glaucoma drugs, Xalatan® (latanoprost), the best-selling PGA, together with Xalacom®, its fixed-dose combination with a beta blocker, which is not available in the United States, generated peak annual global revenues of approximately $1.7 billion prior to the introduction of their generic equivalents, and the most commonly prescribed non-PGA drugs each generated peak annual global revenues of over $400 million prior to the introduction of their generic equivalents. Rhopressa® is the first of a new class of glaucoma drug products and may be prescribed by eye-care professionals as a primary therapy or as a preferred adjunctive therapy for patients taking PGA. It has demonstrated IOP-reducing ability, more convenient dosing and a better tolerability profile compared to other currently marketed non-PGA adjunctive products. Based on our clinical data, we believe that Rocklatan®, a fixed-dose combination of Rhopressa® and latanoprost, has the potential to provide a greater IOP-reducing effect than any glaucoma medication currently marketed in the United States. We also believe that Rocklatan® is suitable for patients requiring maximal IOP reduction, including those with higher IOPs and those who present with significant disease progression despite use of currently available therapies.
Glaucoma Medical Overview
Glaucoma is generally characterized by relatively high IOP as a result of impaired drainage of fluid, known as aqueous humor, from the eye. The FDA recognizes sustained reduction of IOP, measured in terms of millimeters of mercury (“mmHg”), as the primary clinical endpoint for regulatory approval, making clinical trials for this indication relatively straight-forward due to easily measured objective parameters.
In a healthy eye, aqueous humor is continuously produced and drained from the eye in order to maintain pressure equilibrium and provide micronutrients to various tissues in the eye. An insufficient drainage of fluid can increase IOP above normal levels, which can eventually cause damage to the optic nerve. The normal range of IOP is generally between 10 and 21 mmHg. Several studies have demonstrated that the significant majority of glaucoma patients have IOPs between 21 and 26 mmHg at the time of diagnosis. Once damaged, the optic nerve cannot regenerate and thus damage to vision is permanent.
The most common form of glaucoma is open-angle glaucoma, which is characterized by abnormally high IOP as a result of impaired drainage of fluid from the eye’s primary drain, the TM. Open-angle glaucoma is a progressive disease leading to vision loss and blindness for some patients as a result of irreversible damage to the optic nerve.
Studies of the disease have demonstrated that reducing IOP in patients with glaucoma can help slow or halt further damage to the optic nerve and help preserve vision. Once diagnosed, glaucoma requires life-long treatment to maintain IOP at lower levels based on the individual patient’s risk of disease progression. Ophthalmologists will routinely determine a target IOP, which represents the desired IOP level to achieve with glaucoma therapy for an individual patient. Further IOP reduction may be required to prevent additional damage to the optic nerve and further vision loss should the disease progress despite achieving the initial target IOP. This may require reducing IOP until it is in the so-called “low normal range” of 12 mmHg to 14 mmHg to protect the optic nerve from further damage.
There are multiple factors that can contribute to an individual developing open-angle glaucoma, including, but not limited to, age, family history and ethnicity. For example, there generally is a higher incidence and severity of the disease in African-American and Hispanic populations.
Some patients with high IOP are diagnosed with a condition known as ocular hypertension. Patients with ocular hypertension have high IOP without the loss of visual fields or observable damage to the optic nerve and are at an increased risk of developing glaucoma. These patients are commonly treated in the same manner as glaucoma patients.
11
The following diagram illustrates how increased IOP eventually leads to increased pressure on the optic nerve, resulting in gradual loss of vision and ultimately visual disability and blindness.
The ciliary body in the eye is the tissue that produces aqueous humor, the production of which is commonly referred to as fluid inflow. The fluid leaves the eye primarily through the TM, the process of which is commonly referred to as fluid outflow. The healthy eye maintains a state of IOP homeostasis through a constant physiological process of aqueous humor production and drainage. The deteriorating function of the TM in glaucoma leads to increased resistance to fluid outflow and higher IOP. There is also a secondary drain for the fluid in the eye known as the uveoscleral pathway, which is typically responsible for approximately 20% of fluid drainage in a healthy eye.
In addition to aqueous humor production and drainage through the TM and uveoscleral pathway, episcleral venous pressure (“EVP”) plays a significant role in the regulation of IOP. EVP represents the pressure of the blood in the episcleral veins of the eye which are the site of drainage of eye fluid into the bloodstream. Historical studies have shown that EVP accounts for approximately 8 mmHg to 10 mmHg of IOP, or approximately one-half of IOP in patients with pressures near the normotensive level of 21 mmHg, and approximately one-third of IOP in patients with pressures of 24 mmHg to 30 mmHg. When EVP is reduced, aqueous humor is able to flow more freely from the eye.
Patients are diagnosed through measurements of IOP using Goldmann applanation tonometry, the standard device used by clinicians to measure IOP, along with an evaluation of visual fields and observing the appearance of the optic nerve. These tests are routinely carried out by eye-care professionals. The initial treatment for patients diagnosed with open-angle glaucoma or ocular hypertension is typically a PGA eye drop. PGAs are designed to reduce IOP by increasing outflow through the eye’s secondary fluid drain. An eye-care professional will then measure a patient’s response to the drug over the first few months. It has been shown that up to 50% of glaucoma patients require more than one drug to treat their IOP. This may occur as early as three to six months after initiating treatment with a PGA. The eye-care professionals may then add a second drug from one of the non-PGA classes, to be used together with the initial drug, or switch to a fixed-dose combination of two drugs in a single eye drop, or select an alternative single treatment. The reason so many patients eventually need more than one drug is generally considered to be a reflection of the progressive nature of the disease at the TM.
In severe glaucoma cases, patients may need to undergo an invasive surgical procedure. Trabeculectomy is the most common glaucoma-related surgical procedure, also referred to as filtration surgery, in which a piece of tissue in the drainage angle of the eye is removed, creating an opening to the outside of the eye. The opening is partially covered with a scleral flap, the white part of the eye, and the conjunctiva, the thin membrane covering the sclera. This new opening allows fluid to drain out of the eye, bypassing the clogged drainage channels of the TM to maintain a reduced IOP. There are also laser surgeries which apply laser energy to the eye’s drainage tissue to improve the outflow of fluid. Devices called shunts are used in glaucoma surgery to divert fluid in a controlled manner from the inside of the eye to the subconjunctival space bypassing the blocked TM. Generally, the shunts reduce IOP to the extent that the use of drops can be reduced, but often not completely eliminated. Many patients continue to require eye drops even following surgery.
12
Dry Eye Overview
Dry eye is a multifactorial, symptomatic disorder of the ocular surface and tear film. Dry eye has been associated with either decreased tear production, increased tear evaporation, or a combination of both. Symptoms of dry eye include ocular discomfort, dryness, and visual disturbance. Dry eye has been shown to contribute to difficulties with everyday activities, including reading, using a computer and driving. Artificial tears are the most common initial treatment for dry eye disease, but artificial tears often fail to adequately address the signs and symptoms of dry eye.
The U.S. dry eye disease market was estimated to be approximately $1.6 billion in 2020, according to third-party sources and internal estimates. It is estimated that there are approximately 30 million dry eye sufferers in the United States with approximately 10 percent currently being treated. Currently marketed prescription products often lack efficacy and also have a significant number of treatment burdens, including significant instillation site discomfort, delayed onset of efficacy up to twelve weeks, taste altering effects. As a result of the foregoing, these products also have relatively low persistence rates. We believe that the dry eye space remains a very large and underserved market. These unmet needs generated our interest in proceeding with the acquisition of Avizorex, a Spanish ophthalmic pharmaceutical company developing therapeutics for the treatment of dry eye disease. AR-15512 has a novel MOA whereby corneal TRPM8 receptors are modulated, improving signs of dry eye by stimulating basal tear production, and symptoms of dry eye by providing a cooling sensation upon instillation.
Retinal Diseases Overview
The U.S. market for wet AMD, DR and RVO was estimated to be approximately $6.9 billion in 2020, according to IQVIA. AMD is the leading cause of irreversible vision loss in individuals over 50 years of age in developed countries. Clinically, it manifests in two forms: wet AMD and dry AMD. Wet AMD is responsible for a rapid and substantial vision decline characterized by abnormal growth and leakage of blood vessels that breaks through the Bruch’s membrane into the subretinal pigment epithelium space and/or the subretinal space, leading to exudation, hemorrhage, retinal edema, pigment epithelial detachment and fibrous scarring.
DR is the leading cause of vision loss among working age individuals in developed countries and DME is a common cause of vision loss associated with DR. DME occurs due to retinal microvasculature damage, increase in vascular permeability and loss of blood-retinal barrier leading to interstitial fluid accumulation in the retina, particularly in the region of the macula.
RVO is the second-most common sight-threatening vascular disorder of the retina after DR. Current estimates put global prevalence at approximately 16 million people affected with the disease in one or both eyes and approximately 520 new cases per million are reported each year.
In wet AMD, DME and RVO, vascular permeability, angiogenesis and inflammation play an important role and VEGF has shown to be a key mediator that has been found to be upregulated. Currently, the standard of care for treating these diseases is intravitreal (“IVT”) injection of VEGF inhibitors (“anti-VEGF”). In addition, an alternative therapeutic approach for DME and RVO is IVT injection of corticosteroids.
Existing anti-VEGF agents have similar safety and efficacy profiles. Three are the most widely used: bevacizumab, ranibizumab and aflibercept. Although anti-VEGF agents have shown a well-established efficacy profile in wet AMD and DME, a downside of these treatments is that some patients have poor response, experience a loss of efficacy after repeated injections over time or require frequent injections to maintain complete resolution of the exudation/edema. Thus, the need for alternative treatment options with prolonged treatment duration to reduce treatment burden of repeat injections and different mechanism of action to target refractory or non-response to anti-VEGF agents leaves a considerable unmet need.
Our drug-eluting implants for retinal disease have the potential to address these unmet needs. AR-1105 has the potential to provide a longer duration therapy for patients with DME or RVO. AR-1105 is designed to be injected once every six months, whereas the currently available dexamethasone implant, OZURDEX®, typically requires injections approximately once every three months. As a longer duration dexamethasone implant, AR-1105 has the potential to provide the benefit of reducing the treatment burden on patients while treating the inflammatory components of macular edema that are not addressed by inhibition of VEGF. Additionally, since AR-1105 delivers a smaller dose of dexamethasone, there exists the potential for reduced corticosteroid-related adverse events such as cataract formation and increased IOP.
The AR-14034 SR implant potentially addresses the need to reduce the injection frequency of anti-VEGF therapies. The AR-14034 SR implant is designed to reduce the treatment burden on patients and physicians by providing a once per-year anti-VEGF injection. The active ingredient, axitinib, has been shown to provide a blockade of all VEGF signaling pathways, which has the potential to provide greater efficacy than current products that block only one or two of the four VEGFs related to retinal disease.
13
Competition
The pharmaceutical industry is characterized by rapidly advancing technologies, intense competition and a strong emphasis on proprietary products. While we believe that our experience and scientific knowledge provide us with competitive advantages, we face competition from larger established branded and generic pharmaceutical companies such as Bausch Health Companies Inc., Novartis International AG (including its subsidiary Sandoz), Alcon Inc., AbbVie Inc., Teva Pharmaceutical Industries Ltd. and smaller biotechnology and pharmaceutical companies as well as from academic institutions, government agencies and private and public research institutions, any of whom may in the future develop products or technologies to treat glaucoma or other diseases of the eye. Products that we successfully develop and commercialize will compete with existing therapies and new therapies that may become available in the future. We believe that the key competitive factors affecting the success of Rhopressa® and Rocklatan®, are likely to be efficacy and their respective MOA(s), safety, convenience, price, tolerability and the availability of reimbursement from government and other third-party payers. In addition, our segment of the industry is highly competitive and is currently dominated by generic drugs, such as latanoprost and timolol, in the case of glaucoma treatment, and additional products are expected to become available on a generic basis over the coming years. Our ability to compete may be affected because in many cases insurers or other third-party payers encourage the use of generic products. Further, surgical advances, including devices and implants designed to reduce IOP, may have a longer-term effect on the glaucoma eye drop market. We currently expect to compete directly against companies producing existing and future glaucoma treatment products. The most commonly approved classes of eye drops to reduce IOP in glaucoma are discussed below:
PGA Drug Class
•PGAs. Most PGAs are once-daily dosed eye drops generally prescribed as the initial drug to reduce IOP by increasing fluid outflow through the eye’s secondary drain. PGAs represent approximately one-half of the U.S. and European prescription volume for the treatment of glaucoma.
Xalatan® (latanoprost), the best-selling PGA, together with Xalacom®, its fixed-dose combination with a beta blocker, which is not available in the United States, had worldwide peak sales of approximately $1.7 billion before its patent expired in 2012, according to publicly reported sales. The adverse effects of PGAs include conjunctival hyperemia, or eye redness, irreversible change in iris color, discoloration of the skin around the eyes, and droopiness of eyelids caused by the loss of orbital fat. PGAs should be used with caution in patients with a history of intraocular inflammation.
Non-PGA Drug Class
•Beta Blockers. Beta blockers, most commonly prescribed as drugs to treat hypertension, are also prescribed for glaucoma. With their MOA designed to inhibit aqueous production, are one of the oldest approved drugs for the reduction of IOP. The most commonly used drug in this class is timolol. Beta blockers are less effective than PGAs in terms of IOP reduction and are typically used twice daily. Beta blockers are the most used non-PGA drug. They are used as an initially prescribed monotherapy and as an adjunctive therapy to PGAs when the efficacy of PGAs is insufficient. Beta blocker eye drops have contraindications in their label as a result of potential systemic exposures from the topical application of the eye drops potentially leading to cardio-pulmonary events such as bronchospasm, arrhythmia and heart failure.
•Topical Carbonic Anhydrase Inhibitors. Carbonic anhydrase inhibitors, with their MOA designed to inhibit aqueous production, are less effective than PGAs and are required to be dosed three times daily in order to obtain the desired IOP reduction. In published clinical studies of carbonic anhydrase inhibitors, the most frequently reported adverse events reported were blurred vision and bitter, sour or unusual taste. Carbonic anhydrase inhibitors are sulfonamides and, as such, systemic exposure increases risk of adverse responses such as Stevens Johnson syndrome and blood dyscrasias.
•Alpha Agonists. Alpha agonists, with their MOA designed to inhibit aqueous production plus their effect on uveoscleral outflow, are less effective than PGAs and need to be dosed three times daily in order to obtain the desired IOP reduction. In clinical studies, the most frequently reported adverse reactions that occurred in individuals receiving brimonidine ophthalmic solution, a commonly prescribed alpha agonist, included allergic conjunctivitis, conjunctival hyperemia, eye pruritus, burning sensation, conjunctival folliculosis, hypertension, ocular allergic reaction, oral dryness and visual disturbance.
Despite their modest efficacy, safety and tolerability profiles, the requirement for two to three doses per day, and the fact that they do not target the diseased tissue in glaucoma, beta blocker, carbonic anhydrase inhibitor and alpha agonist products account for up to one-half of the total prescription volume for the treatment of glaucoma based on historical prescription patterns. This is driven by the PGA products not being sufficiently effective as monotherapy for up to half of all glaucoma
14
patients. Fixed-dose combination glaucoma products are also currently marketed in the United States, including Cosopt®, the combination of a beta blocker with a carbonic anhydrase inhibitor, and Combigan®, the combination of a beta blocker with an alpha agonist. There are no fixed-dose combinations of PGAs with other glaucoma drugs currently available in the United States.
New eye drops for the treatment of glaucoma continue to be developed by our competitors. The following table outlines publicly disclosed development programs for the treatment of glaucoma of which we are aware:
| New MOA(s) | ||||||||||||||
| Brand | MOA / Dosing | Status | ||||||||||||
Rhopressa® | ROCK inhibitor (qd) | United States: Marketed; launched in April 2018 Europe: Centralised MA granted in November 2019 Japan: Phase 3 | ||||||||||||
Rocklatan® | ROCK inhibitor + PGA (qd) | United States: Marketed; launched in May 2019 Europe: Centralised MA granted in January 2021 | ||||||||||||
New PGAs(1) | ||||||||||||||
| Brand | MOA / Dosing | Status | ||||||||||||
Vyzulta® (Bausch) | NO donating latanoprost (qd) | United States: Marketed | ||||||||||||
XelprosTM (Sun) | Latanoprost, without BAK (qd) | United States: Marketed | ||||||||||||
| DE-117 (Santen) | EP2 agonist (qd) | United States: NDA filed Japan: launched in November 2018 | ||||||||||||
| DE-126 (Santen) | FP/EP3 agonist (qd) | United States and Europe: Phase 2 Japan: Phase 2b | ||||||||||||
| NCX-470 (Nicox) | NO donating bimatoprost (qd) | United States: Phase 3 | ||||||||||||
(1)Not usable as add-on therapy to current PGAs.
Many of our competitors have significantly greater financial resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approvals and marketing approved products than we do. Early-stage companies are also developing treatments for open-angle glaucoma, dry eye and retinal diseases and may prove to be significant competitors. We expect that our competitors will continue to develop new treatments for open-angle glaucoma, dry eye and retinal diseases, which may include eye drops, oral treatments, surgical procedures, implantable devices or laser treatments. Alternative treatments beyond eye drops continue to develop.
Early-stage companies may also compete through collaborative arrangements with large and established companies. Mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources being concentrated among a smaller number of our competitors. These competitors also compete with us in recruiting and retaining qualified scientific, commercial and management personnel and establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies complementary to, or necessary for, our programs.
Our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize products that are safer, more effective, have fewer adverse effects, are more convenient or are less expensive than any products that we may develop. Our competitors also may obtain FDA or other regulatory approval for their products more rapidly than we may obtain approval for ours.
15
Sales and Marketing
We have commercialized Rhopressa® and Rocklatan® in the United States with our own focused, specialized sales force. Our commercial team responsible for the sales of Rhopressa® and Rocklatan® includes approximately 100 sales representatives targeting select eye-care professionals throughout the United States.
We have obtained broad formulary coverage for the lives covered for our glaucoma franchise products under commercial plans and Medicare Part D plans. Product affordability for the patient drives consumer acceptance, and this is generally managed through coverage by third-party payers, such as government or private healthcare insurers and pharmacy benefit managers (“Third-party Payers”) and such product may be subject to rebates and discounts payable directly to those Third-party Payers.
Outside of the United States, we have a development and commercialization partner for Europe, Japan, East Asia and certain other regions of the world.
Major Customers
For the year ended December 31, 2021, a significant percentage of our sales of Rhopressa® were to three large wholesale drug distributors. Sales to McKesson Corporation, Cardinal Health, Inc. and AmerisourceBergen Corporation accounted for 36.9%, 31.0% and 30.9% of total revenues, respectively, for the year then ended.
Manufacturing
We currently rely on our manufacturing plant in Athlone, Ireland and our contract manufacturers to produce commercial supplies of Rhopressa® and Rocklatan®, as well as our third-party manufacturers to produce the active pharmaceutical ingredient (“API”). We are likely to continue to rely on a combination of internal manufacturing and third-party manufacturers for our current and future product candidates.
The commercial production of the final drug product is supported by a combination of internal and outsourced manufacturing. In early 2019, we completed the build-out of our manufacturing plant in Athlone, Ireland for commercial production of Rocklatan® and Rhopressa®. In January 2020, we received FDA approval to produce Rocklatan® at the Athlone manufacturing plant for commercial distribution in the United States. The manufacturing plant began production of commercial supplies of Rocklatan® during the first quarter of 2020. Shipments of commercial supply of Rocklatan® from the Athlone manufacturing plant to the United States commenced in the third quarter of 2020. We received FDA approval to produce Rhopressa® at the Athlone manufacturing plant in September 2020. Shipments of commercial supply of Rhopressa® from the Athlone manufacturing plant to the United States commenced in the fourth quarter of 2020. The Athlone manufacturing plant manufactures most of our ongoing needs for Rhopressa® and Rocklatan® in the United States. In addition, it also manufactured clinical supplies of Rhopressa® for the Phase 3 clinical trials in Japan as well as registration batches to support product approval in Japan. We expect to commence shipments of Rhopressa® to Santen pursuant to the Second Santen Agreement in the fourth quarter of 2022 for its sales to third parties in early 2023.
As the Athlone manufacturing plant commenced operations in early 2020, it has not reached full capacity. We expect the Athlone manufacturing plant will have adequate capacity to produce for the markets included in the Santen Agreements, as needed, which include Europe, Japan, East Asia and certain other regions of the world, if approved for commercial distribution in those markets. We may continue to use contract manufacturers to produce commercial supplies of Rhopressa® and Rocklatan® for distribution in the United States, but at reduced levels as a result of the Athlone manufacturing plant commencing manufacturing operations.
In addition to our current contract manufacturers, we obtained FDA approval for an additional Rhopressa® drug product contract manufacturer, which began to supply commercial product in 2019. Further, we obtained FDA approval for an additional API contract manufacturer, which began to supply commercial API in 2019. We also received FDA approval of an additional Rocklatan® drug product contract manufacturer, which began to supply commercial product in the first quarter of 2020. Latanoprost, used in the manufacture of Rocklatan®, is available in commercial quantities from multiple reputable third-party manufacturers.
We expect to continue to develop product candidates that can be produced cost-effectively at contract manufacturing facilities.
As demand for Athlone-sourced products grows, we may need to continue to use products sourced from our contract manufacturers. We need to continue to hire and train qualified employees to staff this facility. The management and operation of a pharmaceutical manufacturing facility requires the implementation and development of procedures that are compliant with
16
the quality and other regulations dictated by regulatory authorities in the jurisdictions for which product is produced. Failure to maintain such compliance could cause us to experience delays in production, reputational harm and could negatively affect our commercial operations.
Intellectual Property
We own the worldwide rights to all indications for Rhopressa® and Rocklatan®. We have obtained patent protection for Rhopressa® and Rocklatan® (patent protection for Rocklatan® includes patent protection we have secured for Rhopressa®), in the United States and foreign jurisdictions, including in, but not limited to, Europe and Asia, and will seek and are seeking patent protection in additional foreign jurisdictions from time to time as we deem appropriate. We intend to maintain and defend our patent rights to protect our technology, inventions, processes, designs and improvements that are commercially important to the development of our business. Our commercial success depends on the viability of our existing, future developed or future acquired intellectual property to be useful to provide protection to our products and also depends in part on our non-infringement of the patents or proprietary rights of third parties. For a more comprehensive discussion of the risks related to our intellectual property, see “Risk Factors—Risks Related to Intellectual Property.”
Our intellectual property portfolio consists of patents and pending patent applications related to the compositions of matter, pharmaceutical compositions, methods of use, synthetic methods, medical devices and designs. We have patent protection for Rhopressa® and Rocklatan® in the United States through early 2034. Additionally, we hold patents for composition of matter, pharmaceutical compositions and methods of use in certain foreign jurisdictions for Rhopressa® and Rocklatan® through 2034. We have obtained patent protection for Rhopressa® and Rocklatan® in Japan through 2037 and have filed for patent protection in the United States and internationally through 2037.
With respect to our product candidates, through the acquisition of Avizorex, we are the exclusive licensee through 2031 of issued U.S. patents providing patent protection for pharmaceutical compositions comprising AR-15512 (previously named AVX-012) and methods of its use, including ophthalmic uses. The Avizorex acquisition also enabled us to be the exclusive licensee of pending foreign counterparts to the issued U.S. patents regarding AR-15512. Should these foreign counterparts issue such patents, they will provide patent protection for pharmaceutical compositions comprising AR-15512 and methods of its use, including ophthalmic uses, in such jurisdictions through 2031. Furthermore, we have issued patents in the United States and Japan that provide patent protection for our AR-1105 implant in such countries through 2036. We have foreign counterparts of these issued patents that upon issuance will provide patent protection internationally through 2036. We have also filed patent applications in the United States and internationally covering our preclinical sustained-release implant AR-14034 SR. Upon issuance, such applications would provide protection for AR-14034 SR through 2040. These product candidate and preclinical implants utilize DSM’s polyesteramide polymer technology, for which Aerie has obtained a worldwide exclusive license for all ophthalmic indications.
We also hold patents and have pending patent applications for other ROCK inhibitor molecules.
17
The following table summarizes the status of our patent portfolio as of December 31, 2021 setting forth the number of existing issued patents and pending patent applications, as well as their respective estimated expiration date ranges:
| Country | Number of Issued Patents | Number of Pending Patents | Estimated Expiration Date Range | ||||||||
| United States | 56 | 25 | 2026 - 2041 | ||||||||
| Australia | 15 | 12 | 2026 - 2041 | ||||||||
| Brazil | 0 | 7 | 2036 - 2041 | ||||||||
| Canada | 5 | 12 | 2026 - 2041 | ||||||||
| China | 2 | 8 | 2034 - 2041 | ||||||||
| Europe | 70(1) | 14 | 2026 - 2041(1) | ||||||||
| Hong Kong | 2 | 9 | 2030 - 2041 | ||||||||
| India | 0 | 5 | 2035 - 2041 | ||||||||
| Japan | 9 | 16 | 2026 - 2041 | ||||||||
| Mexico | 0 | 5 | 2026 - 2041 | ||||||||
| Patent Cooperation Treaty | 0 | 11 | 2021 - 2023 | ||||||||
| Singapore | 1 | 2 | 2036 - 2038 | ||||||||
| South Korea | 0 | 8 | 2035 - 2040 | ||||||||
| Israel | 0 | 1 | 2039 | ||||||||
| Total | 160 | 135 | |||||||||
(1) Includes patent protection in Belgium (3 issued patents), France (10 issued patents), Germany (11 issued patents), Great Britain (10 issued patents), Ireland (2 issued patents), Italy (9 issued patents), Netherlands (6 issued patents), Spain (14 issued patents) and Switzerland (5 issued patents). Our issued European Patent EP3461484 is presently the subject of an opposition proceeding in the European Patent Office.
Our patents covering Rhopressa® and Rocklatan® may be subject to validity and enforceability challenges by competitors who file ANDAs to obtain permission to market generic versions of Rhopressa® and/or Rocklatan®. Our competitors may file such ANDAs as of December 18, 2021, if the ANDA contains a certification of patent invalidity or noninfringement, also known as a Paragraph IV Certification.
Aerie®, Rhopressa®, Rocklatan®, Rhokiinsa® and Roclanda® are registered trademarks of ours in the United States, Japan and numerous international jurisdictions. We also have other pending trademark applications and registered trademarks in the United States and foreign jurisdictions.
Regulatory Matters
FDA Regulation and Marketing Approval
In the United States, the FDA regulates drugs under the Federal Food, Drug and Cosmetic Act (“FDCA”) and related regulations. The FDA and other federal, state and local entities regulate research and clinical development activities and the testing, manufacture, quality control, safety, effectiveness, labeling, packaging, storage, distribution, record keeping, approval, post- approval monitoring, advertising, promotion, sampling and import and export of our products. Prescription drugs must be approved by the FDA through the New Drug Application (“NDA”) process before they may be legally marketed in the United States. See “—The NDA Approval Process” below.
Prescription drugs are also subject to other federal, state and local statutes and regulations. Failure to comply with the applicable United States regulatory requirements at any time during the product development process, approval process or after approval may subject an applicant to administrative or judicial sanctions, including FDA holds on clinical trials, FDA refusal to approve pending applications or related supplements, withdrawal of an approval, untitled or warning letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, restitution, disgorgement, civil penalties or criminal prosecution.
Regulation of Combination Products
Combination products are defined by the FDA as products composed of two or more regulated components (e.g., a biologic and/or drug and a device). Biologics and drugs and devices each have their own regulatory requirements, and combination
18
products may have additional requirements. As a result of litigation on the question of how the FDA regulates certain products, the FDA has recently taken the position that ophthalmic products in dispensers previously regulated as drugs will be classified as drug-led drug-device combination products. This would apply to approved products as well as products in development.
INDs and Clinical Trials
Prior to commencing the first clinical trial of an investigational drug, a sponsor must submit an initial IND to the FDA, which contains the results of preclinical tests along with other information, such as information about product chemistry, manufacturing and controls and a proposed protocol. Absent FDA rejection, the IND automatically becomes effective 30 days after receipt by the FDA. Further, an independent institutional review board (“IRB”) for each site proposing to conduct the clinical trial must review and approve the plan for any clinical trial before it commences at that site. Each trial subject must also provide informed consent. Regulatory authorities, including the FDA, an IRB, a data safety monitoring board or the sponsor, may suspend or terminate a clinical trial at any time on various grounds, including a finding that the participants are being exposed to an unacceptable health risk or that the clinical trial is not being conducted in accordance with FDA requirements. The sponsor must make a separate submission to the existing IND for each successive clinical trial to be conducted during product development.
Human clinical trials are typically conducted in sequential phases that may overlap:
•Phase 1—studies involve the initial introduction of the drug to healthy human subjects or patients to assess for safety, dosage tolerance, absorption, metabolism, distribution and excretion, and, possibly, early evidence of effectiveness.
•Phase 2—trials are conducted in a limited number of patients in the target population to identify possible adverse effects and safety risks, to evaluate the efficacy of the product for specific targeted diseases and to determine dosage tolerance and optimal dosage.
•Phase 3—registration trials are undertaken to provide statistically significant evidence of clinical efficacy and to further test for safety in an expanded patient population at multiple clinical trial sites. They are performed to establish the overall benefit-risk relationship of the investigational drug and to provide an adequate basis for product labeling and approval by the FDA. In most cases, the FDA requires two adequate and well-controlled Phase 3 clinical trials to demonstrate the efficacy of the drug.
All clinical trials must be conducted in accordance with FDA regulations, Good Clinical Practices (“GCP”) requirements and their protocols in order for the data to be considered reliable for regulatory purposes.
An investigational drug product that is a combination of two different drugs in the same dosage form must comply with an additional rule that requires that each component make a contribution to the claimed effects of the drug product. This typically requires larger studies that test the drug against each of its components. In addition, typically, if a drug product is intended to treat a chronic disease, safety and efficacy data must be gathered over an extended period of time, which can range from six months to three years or more.
Disclosure of Clinical Trial Information
With limited exceptions, the FDA requires companies to register both pre-approval and post-approval clinical trials and disclose information about the product, patient population, phase of investigation, study sites and investigators, and the clinical trial results in public databases.
The NDA Approval Process
In order to obtain approval to market a drug in the United States, an NDA must be submitted to the FDA that provides data establishing to the FDA’s satisfaction the safety and effectiveness of the investigational drug for the proposed indication. Each NDA submission requires a substantial user fee payment unless a waiver or exemption applies. The application must include all relevant data available from pertinent nonclinical, preclinical and clinical trials, including negative or ambiguous results as well as positive findings, together with detailed information relating to the product’s chemistry, manufacturing, controls and proposed labeling, among other things.
An NDA must also contain data to assess the safety and effectiveness of the product for the claimed indication in all relevant pediatric populations, but the FDA may grant deferrals or full or partial waivers for submission of pediatric data. If the FDA determines that the NDA is sufficiently complete for substantive review, it will file the NDA. The FDA has agreed to specific performance goals on the review of NDAs and seeks to review standard NDAs in 12 months from submission of the NDA. The
19
review process may be extended by the FDA for three additional months to consider certain late submitted information or information intended to clarify information already provided in the submission. After the FDA completes its initial review of an NDA, it will communicate to the sponsor that the drug will either be approved, or it will issue a complete response letter to communicate that the NDA will not be approved in its current form and inform the sponsor of the deficiencies that must be resolved before the application can be approved. If, or when, those deficiencies have been addressed to the FDA’s satisfaction in a resubmission of the NDA, the FDA will issue an approval letter. FDA has committed to reviewing such resubmissions in two to six months depending on the type of information included. The FDA may refer applications for novel drug products or drug products that present difficult questions of safety or efficacy to an advisory committee, typically a panel that includes clinicians and other experts, for review, evaluation and a recommendation as to whether the application should be approved and, if so, under what conditions. The FDA is not bound by the recommendations of an advisory committee, but it considers such recommendations when making decisions.
Before approving an NDA, the FDA typically will inspect the facilities at which the product is manufactured. The FDA will not approve the product unless it determines that the manufacturing processes and facilities are in compliance with cGMP requirements and adequate to assure consistent production of the product within required specifications. Additionally, before approving an NDA, the FDA may inspect one or more clinical sites to assure compliance with GCP. If the FDA finds that a clinical site did not conduct the clinical trial in accordance with GCP, the FDA may determine the data generated by the clinical site should be excluded from the primary efficacy analyses provided in the NDA.
The FDA may require, or companies may pursue, additional clinical trials after a product is approved. These so-called Phase 4 trials may be made a condition to be satisfied for continuing drug approval. In addition, the FDA has express statutory authority to require sponsors to conduct post-marketing trials to specifically address safety issues identified by the agency after approval. The FDA has recently taken the position that under this authority it can require studies with efficacy endpoints in certain circumstances.
The FDA also has authority to require a Risk Evaluation and Mitigation Strategy (“REMS”) from manufacturers to ensure that the benefits of a drug outweigh its risks. Based on statutory standards, elements of a REMS may include “dear doctor letters,” a medication guide, more elaborate targeted educational programs, and in some cases elements to assure safe use (“ETASU”). ETASU can include, but are not limited to, special training or certification for prescribing or dispensing, dispensing only under certain circumstances, special monitoring and the use of patient registries. The need for REMS is determined, and the elements are negotiated, as part of the review of the NDA approval. Once adopted, REMS are subject to periodic assessment and modification.
The Hatch-Waxman Amendments
Under the Drug Price Competition and Patent Term Restoration Act of 1984, referred to as the Hatch-Waxman Amendments, a portion of a product’s U.S. patent term that was lost during clinical development and regulatory review by the FDA may be restored. The Hatch-Waxman Amendments also provide a process for listing patents pertaining to approved products in the FDA’s Approved Drug Products with Therapeutic Equivalence Evaluations (commonly known as the “Orange Book”) and for a competitor seeking approval of an application that references a product with listed patents to make certifications pertaining to such patents. In addition, the Hatch-Waxman Amendments provide for a statutory protection, known as non-patent exclusivity, against the FDA’s acceptance or approval of certain competitor applications.
Patent Term Extension
Patent Term Extension (“PTE”) in the United States can compensate for lost patent grant time during product development and the regulatory review process for a patent that covers a new product or its use. This PTE period is generally one-half the time between the effective date of an IND (falling after issuance of the patent) and the submission date of an NDA, plus the time between the submission date of an NDA and the approval of that application, provided the sponsor acted with diligence. PTEs that can be obtained are for up to five years beyond the expiration of the patent or 14 years from the date of product approval, whichever is earlier. Only one patent applicable to an approved drug may be extended and the extension must be applied for prior to expiration of the patent. The USPTO, in consultation with the FDA, reviews and approves the application for any patent term extension or restoration.
Orange Book Listing
In seeking approval for a drug through an NDA, applicants are required to list with the FDA each patent with claims covering the applicant’s product or method of using the product. Upon approval of a drug, each of the patents identified in the application for the drug are then published in the FDA’s Orange Book. Drugs listed in the Orange Book can, in turn, be cited by potential generic competitors in support of approval of an abbreviated new drug application (“ANDA”). An ANDA provides for
20
marketing of a drug product that has the same active ingredients in the same strengths and dosage form as the listed drug and has been shown to be bioequivalent to the listed drug. Other than the requirement for bioequivalence testing, ANDA applicants are not required to submit results of preclinical or clinical tests to prove the safety or effectiveness of their drug product. Drugs approved in this way are commonly referred to as “generic equivalents” to the listed drug and can often be substituted by pharmacists under prescriptions written for the original listed drug.
The ANDA applicant is required to certify to the FDA concerning any patents listed for the approved product in the FDA’s Orange Book. Specifically, the applicant must certify that: (i) the required patent information has not been filed; (ii) the listed patent has expired; (iii) the listed patent has not expired, but will expire on a particular date and approval is sought after patent expiration; or (iv) the listed patent is invalid or will not be infringed by the new product. The ANDA applicant may also elect to submit a Section VIII statement certifying that its proposed ANDA labeling does not contain (or carves out) any language regarding the patented method-of-use rather than certify to a listed method-of-use patent. If the applicant does not challenge the listed patents, the ANDA will not be approved until all the listed patents claiming the referenced product have expired.
A certification that the new product will not infringe the already approved product’s listed patents, or that such patents are invalid, is called a Paragraph IV certification. If the ANDA applicant has provided a Paragraph IV certification to the FDA, the applicant must also send notice of the Paragraph IV certification to the NDA and patent holders once the ANDA has been filed with and accepted by the FDA. The NDA and patent holders may then initiate a patent infringement lawsuit in response to the notice of the Paragraph IV certification. The filing of a patent infringement lawsuit within 45 days of the receipt of a Paragraph IV certification automatically prevents the FDA from approving the ANDA until the earlier of 30 months, expiration of the patent, settlement of the lawsuit or a decision in the infringement case that is favorable to the ANDA applicant.
An applicant submitting an NDA under Section 505(b)(2) of the FDCA, which permits the filing of an NDA where at least some of the information required for approval comes from studies not conducted by, or for, the applicant and for which the applicant has not obtained a right of reference, is required to certify to the FDA regarding any patents listed in the Orange Book for the approved product it references to the same extent that an ANDA applicant would.
Market Exclusivity
Market exclusivity provisions under the FDCA also can delay the submission or the approval of certain applications. The FDCA provides a five-year period of non-patent marketing exclusivity within the United States to the first applicant to gain approval of an NDA for a new chemical entity (“NCE”). A drug is entitled to NCE exclusivity if it contains a drug substance no active moiety of which has been previously approved by the FDA. This means that, in the case of a fixed-dose combination product, the FDA makes the NCE exclusivity determination for each drug substance in the drug product and not for the drug product as a whole. During the exclusivity period, the FDA may not accept for review an ANDA or a 505(b)(2) NDA submitted by another company for another version of such drug where the applicant does not own or have a legal right of reference to all the data required for approval. However, an application may be submitted after four years if it contains a Paragraph IV certification. For a drug that has been previously approved by the FDA, the FDCA also provides three years of marketing exclusivity for an NDA, 505(b)(2) NDA or supplement to an existing NDA if new clinical investigations, other than bioavailability studies, that were conducted or sponsored by the applicant are deemed by the FDA to be essential to the approval of the application, for example, for new indications, dosages or strengths of an existing drug. This three-year exclusivity covers only the new conditions of use and does not prohibit the FDA from approving ANDAs for drugs for the original conditions of use, such as the originally approved indication. Five-year and three-year exclusivity will not delay the submission or approval of a full NDA; however, an applicant submitting a full NDA would be required to conduct or obtain a right of reference to all of the non-clinical studies and adequate and well-controlled clinical trials necessary to demonstrate safety and effectiveness.
Post-Marketing Requirements
Following approval of a new product, a pharmaceutical company and the approved product are subject to continuing regulation by the FDA, including, among other things, monitoring and recordkeeping activities, reporting to the applicable regulatory authorities of adverse experiences with the product, providing the regulatory authorities with updated safety and efficacy information, product sampling and distribution requirements, and complying with promotion and advertising requirements. Modifications or enhancements to the product or its labeling or changes of the site of manufacture are often subject to the approval of the FDA and other regulators, who may or may not grant approval or may include in a lengthy review process.
Changes to some of the conditions established in an approved application, including changes in indications, labeling, manufacturing processes or facilities, require submission and FDA approval of a new NDA or NDA supplement before the change can be implemented. An NDA supplement for a new indication typically requires clinical data similar to that in the
21
original application, including relevant pediatric data, and the FDA uses the same procedures and actions in reviewing NDA supplements as it does in reviewing NDAs.
The FDA regulates prescription drug promotion, including direct-to-consumer advertising, restrictions on promoting drugs for uses or in patient populations that are not described in the drug’s approved labeling (known as “off-label use”), limitations on industry-sponsored scientific and educational activities, and requirements for promotional activities involving the internet. Although physicians may prescribe legally available drugs for off-label uses, manufacturers may not market or promote such off-label uses.
Any distribution of prescription drug products and pharmaceutical samples must comply with the U.S. Prescription Drug Marketing Act (“PDMA”), a part of the FDCA. In addition, Title II of the Federal Drug Quality and Security Act of 2013, known as the Drug Supply Chain Security Act (“DSCSA”), imposes new “track and trace” requirements on the distribution of prescription drug products by manufacturers, distributors, and other entities in the drug supply chain.
The FDA regulations require that an approved drug product be manufactured in specific facilities and in accordance with cGMP. Drug manufacturers and other entities involved in the manufacture and distribution of approved drugs are required to register their establishments with the FDA and certain state agencies and are subject to periodic unannounced inspections by the FDA and certain state agencies for compliance with cGMP and other laws. NDA holders using contract manufacturers, laboratories or packagers are responsible for the selection and monitoring of qualified firms, and, in certain circumstances, qualified suppliers to these firms. These firms and, where applicable, their suppliers are subject to inspections by the FDA at any time, and the discovery of violative conditions, including failure to conform to cGMP, could result in enforcement actions that interrupt the operation of any such product or may result in restrictions on a product, manufacturer, or holder of an approved NDA, including, among other things, recall or withdrawal of the product from the market. In addition, the applicant under an approved NDA is subject to a substantial annual program fee.
Reimbursement, Anti-Kickback and False Claims Laws and Other Regulatory Matters
In the United States, the research, manufacturing, distribution, sale and promotion of drug products and medical devices are potentially subject to regulation by various federal, state and local authorities in addition to the FDA, including the Centers for Medicare & Medicaid Services (“CMS”), other divisions of the U.S. Department of Health and Human Services (e.g., the Office of Inspector General), the Drug Enforcement Administration, the Consumer Product Safety Commission, the Federal Trade Commission, the Occupational Safety & Health Administration, the Environmental Protection Agency, state Attorneys General and other state and local government agencies. For example, sales, marketing and scientific/educational grant programs must comply with the Federal Anti-Kickback Statute, the False Claims Act, as amended, the privacy regulations promulgated under the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), as amended, and similar state laws. Pricing and rebate programs must be considered in price reports in order to comply with the Medicaid Drug Rebate Program requirements of the Omnibus Budget Reconciliation Act of 1990, as amended, and the Veterans Health Care Act of 1992, as amended. If products are made available to authorized users of the Federal Supply Schedule of the General Services Administration, additional laws and requirements apply. The handling of any controlled substances must comply with the U.S. Controlled Substances Act and Controlled Substances Import and Export Act. Products must meet applicable child-resistant packaging requirements under the U.S. Poison Prevention Packaging Act. All of these activities are also potentially subject to federal and state consumer protection and unfair competition laws.
The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (“MMA”) established the Medicare Part D program to provide a voluntary prescription drug benefit to Medicare beneficiaries. Under Part D, Medicare beneficiaries may enroll in prescription drug plans operated by private entities under contract with CMS, which will provide coverage of outpatient prescription drugs. Unlike Medicare Parts A and B, Part D coverage is not standardized. Part D prescription drug plan sponsors are not required to pay for all covered Part D drugs, and each drug plan can develop its own drug formulary that identifies which drugs it will cover and at what tier or level. However, Part D prescription drug formularies must include drugs within each therapeutic category and class of covered Part D drugs, though not necessarily all the drugs in each category or class. Any formulary used by a Part D prescription drug plan must be developed and reviewed by a pharmacy and therapeutic committee as well as by CMS. Government payment for some of the costs of prescription drugs may increase demand for products for which we receive regulatory approval. However, any negotiated prices for our products covered by a Part D prescription drug plan will likely be lower than the prices we might otherwise obtain. Moreover, while the MMA applies only to drug benefits for Medicare beneficiaries, private payers often follow Medicare coverage policy and payment limitations in setting their own payment rates. Any reduction in payment that results from the MMA may result in a similar reduction in payments from non-government payers.
The distribution of pharmaceutical products is subject to additional requirements and regulations, including extensive record-keeping, licensing, storage and security requirements intended to prevent the unauthorized sale of pharmaceutical products.
22
In addition, in some foreign countries, the proposed pricing for a drug must be approved before it may be lawfully marketed. The requirements governing drug pricing vary widely from country to country. For example, the European Union provides options for its member states to restrict the range of medicinal products for which their national health insurance systems provide reimbursement and to control the prices of medicinal products for human use. A member state may approve a specific price for the medicinal product, or it may instead adopt a system of direct or indirect controls on the profitability of the company placing the medicinal product on the market. There can be no assurance that any country that has price controls or reimbursement limitations for pharmaceutical products will allow favorable reimbursement and pricing arrangements for any of our potential products. Historically, products launched in the European Union do not follow price structures of the United States and generally tend to be significantly lower.
As noted above, in the United States, we are subject to complex laws and regulations pertaining to healthcare “fraud and abuse,” including, but not limited to, the Federal Anti-Kickback Statute, the Federal False Claims Act, and other state and federal laws and regulations. The Federal Anti-Kickback Statute makes it illegal for any person, including a prescription drug manufacturer (or a party acting on its behalf) to knowingly and willfully solicit, receive, offer, or pay any remuneration that is intended to induce the referral of business, including the purchase, order, or prescription of a particular drug, for which payment may be made under a federal healthcare program, such as Medicare or Medicaid. Violations of this law are punishable by up to five years in prison, criminal fines, administrative civil money penalties, and exclusion from participation in federal healthcare programs. In addition, many states have adopted laws similar to the Federal Anti-Kickback Statute. Some of these state prohibitions apply to the referral of patients for healthcare services reimbursed by any insurer, not just federal healthcare programs such as Medicare and Medicaid. Due to the breadth of these federal and state anti-kickback laws, and the potential for additional legal or regulatory change in this area, it is possible that our future sales and marketing practices and/or our future relationships with eye-care professionals might be challenged under anti-kickback laws, which could harm us. Because we intend to commercialize products that could be reimbursed under a federal healthcare program and other governmental healthcare programs, we have developed a comprehensive compliance program that establishes internal controls to facilitate adherence to the rules and program requirements to which we will or may become subject.
The Federal False Claims Act prohibits anyone from knowingly presenting, or causing to be presented, for payment to federal programs (including Medicare and Medicaid) claims for items or services, including drugs, that are false or fraudulent, claims for items or services not provided as claimed, or claims for medically unnecessary items or services. Although we would not submit claims directly to payers, manufacturers can be held liable under these laws if they are deemed to “cause” the submission of false or fraudulent claims by, for example, providing inaccurate billing or coding information to customers or promoting a product off-label. In addition, our future activities relating to the reporting of wholesaler or estimated retail prices for our products, the reporting of prices used to calculate Medicaid rebate information and other information affecting federal, state and third-party reimbursement for our products, and the sale and marketing of our products, are subject to scrutiny under this law. For example, pharmaceutical companies have been found liable under the Federal False Claims Act in connection with their off-label promotion of drugs. Penalties for a False Claims Act violation include three times the actual damages sustained by the government, plus mandatory civil penalties currently between $11,803 and $23,607 for each separate false claim, the potential for exclusion from participation in federal healthcare programs, and, although the Federal False Claims Act is a civil statute, conduct that results in a False Claims Act violation may also implicate various federal criminal statutes. If the government were to allege that we were, or convict us of, violating these false claims laws, we could be subject to a substantial fine and may suffer a decline in our stock price. In addition, private individuals have the ability to bring actions under the Federal False Claims Act and certain states have enacted laws modeled after the Federal False Claims Act.
There are also an increasing number of state laws with requirements for manufacturers and/or marketers of pharmaceutical products. Some states require the reporting of expenses relating to the marketing and promotion of drug products and the reporting of gifts and payments to individual healthcare practitioners in these states. Other states prohibit various marketing-related activities, such as the provision of certain kinds of gifts or meals. Still other states require the reporting of certain pricing information, including information pertaining to and justification of price increases. In addition, states such as California, Connecticut, Nevada, and Massachusetts require pharmaceutical companies to implement compliance programs and/or marketing codes. Many of these laws contain ambiguities as to what is required to comply with the laws. In addition, as discussed in “—Patient Protection and Affordable Care Act” below, a similar federal requirement requires manufacturers to track and report to the federal government certain payments made to physicians, physician assistants, certain types of advanced practice nurses, and teaching hospitals made in the previous calendar year. These laws may affect our sales, marketing and other promotional activities by imposing administrative and compliance burdens on us. In addition, given the lack of clarity with respect to these laws and their implementation, our reporting actions could be subject to the penalty provisions of the pertinent state and federal authorities.
Numerous U.S. federal and state laws, including state security breach notification laws, state health information privacy laws and U.S. federal and state consumer protection laws, govern the collection, use and disclosure of personal information. Other countries also have, or are developing, laws governing the collection, use and transmission of personal information. In addition,
23
most healthcare providers who are expected to prescribe our products and from whom we obtain patient health information, are subject to privacy and security requirements under HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act (“HITECH”) and its implementing regulations, which imposes requirements relating to the privacy, security and transmission of individually identifiable health information. Among other things, HITECH makes HIPAA’s privacy and security standards directly applicable to “business associates,” such as independent contractors or agents of covered entities that receive or obtain protected health information while providing a service on behalf of a covered entity. HITECH also increased the civil and criminal penalties that may be imposed against covered entities and business associates. In addition, HITECH also gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws and seek attorney’s fees and costs associated with pursuing these actions. As a result of HIPAA, we could be subject to criminal penalties if we obtain and/or disclose individually identifiable health information from a HIPAA-covered entity, including healthcare providers, in a manner that is not authorized or permitted by HIPAA. In addition, many U.S. states and foreign governments have enacted comparable laws addressing the privacy and security of health information, such as the General Data Protection Regulation (the “GDPR”) enacted by the European Union, some of which are more stringent than HIPAA. The legislative and regulatory landscape for privacy and data protection continues to evolve, and there has been an increasing amount of focus on privacy and data protection issues with the potential to disrupt our operations, including recently enacted laws in a majority of states requiring security breach notification. If there are any violations of these laws, we could face significant administrative and monetary sanctions as well as reputational damage, which may have a material adverse effect on our business.
The failure to comply with regulatory requirements subjects firms to possible legal or regulatory action. Depending on the circumstances, failure to meet applicable regulatory requirements can result in criminal prosecution, fines or other penalties, injunctions, recall or seizure of products, total or partial suspension of production, denial or withdrawal of product approvals, exclusion of company products from coverage under federal health care programs, or refusal to allow a firm to enter into supply contracts, including government contracts.
Changes in regulations, statutes or the interpretation of existing regulations could impact our business in the future by requiring, for example: (i) changes to our manufacturing arrangements; (ii) additions or modifications to product labeling; (iii) the recall or discontinuation of our products; or (iv) additional record-keeping requirements. If any such changes were to be imposed, they could adversely affect the operation of our business.
Government Programs for Marketed Drugs
Medicaid, the 340B Drug Pricing Program, and Medicare
Federal law requires that a pharmaceutical manufacturer, as a condition of having its products receive federal reimbursement under Medicaid and Medicare Part B, must pay rebates to state Medicaid programs for all units of its covered outpatient drugs dispensed to Medicaid beneficiaries and paid for by a state Medicaid program under either a fee-for-service arrangement or through a managed care organization. This federal requirement is effectuated through a Medicaid drug rebate agreement between the manufacturer and the Secretary of Health and Human Services. CMS administers the Medicaid drug rebate agreements, which provide, among other things, that the drug manufacturer will pay rebates to each state Medicaid agency on a quarterly basis and report certain price information on a monthly and quarterly basis. The rebates are based on prices reported to CMS by manufacturers for their covered outpatient drugs. For innovator products, that is, drugs that are marketed under approved NDAs, the basic rebate amount is the greater of 23.1% of the average manufacturer price (“AMP”) for the quarter or the difference between such AMP and the best price for that same quarter. The AMP is the weighted average of prices paid to the manufacturer (1) directly by retail community pharmacies and (2) by wholesalers for drugs distributed to retail community pharmacies. The best price is essentially the lowest price available to non-governmental entities. Innovator products are also subject to an additional rebate that is based on the amount, if any, by which the product’s current AMP has increased over the baseline AMP, which is the AMP for the first full quarter after launch, adjusted for inflation. To date, the rebate amount for a drug has been capped at 100% of the AMP; however, effective January 1, 2024, this cap will be eliminated, which means that a manufacturer could pay a rebate amount on a unit of the drug that is greater than the average price the manufacturer receives for the drug. For non-innovator products, generally generic drugs marketed under approved abbreviated new drug applications, the basic rebate amount is 13% of the AMP for the quarter. Non-innovator products are also subject to an additional rebate. The additional rebate is similar to that discussed above for innovator products, except that the baseline AMP quarter is the fifth full quarter after launch (for non-innovator multiple source drugs launched on April 1, 2013 or later) or the third quarter of 2014 (for those launched before April 1, 2013).The terms of participation in the Medicaid drug rebate program impose an obligation to correct the prices reported in previous quarters, as may be necessary. Any such corrections could result in additional or lesser rebate liability, depending on the direction of the correction. In addition to retroactive rebates, if a manufacturer were found to have knowingly submitted false information to the government, federal law provides for civil monetary penalties for failing to provide required information, late submission of required information, and false information.
24
A manufacturer must also participate in a federal program known as the 340B drug pricing program in order for federal funds to be available to pay for the manufacturer’s drugs under Medicaid and Medicare Part B. Under this program, the participating manufacturer agrees to charge certain federally funded clinics and safety net hospitals no more than an established discounted price for its covered outpatient drugs. The formula for determining the discounted price is defined by statute and is based on the AMP and the unit rebate amount as calculated under the Medicaid drug rebate program, discussed above. Manufacturers are required to report pricing information to the Health Resources and Services Administration (“HRSA”) on a quarterly basis. HRSA has also issued regulations relating to the calculation of the ceiling price as well as imposition of civil monetary penalties for each instance of knowingly and intentionally overcharging a 340B covered entity.
Federal law also requires that manufacturers report data on a quarterly basis to CMS regarding the pricing of drugs that are separately reimbursable under Medicare Part B. These are generally drugs, such as injectable products, that are administered “incident to” a physician service and are not generally self-administered. The pricing information submitted by manufacturers is the basis for reimbursement to physicians and suppliers for drugs covered under Medicare Part B. As with the Medicaid drug rebate program, federal law provides for civil monetary penalties for failing to provide required information, late submission of required information, and false information.
Medicare Part D provides prescription drug benefits for seniors and people with disabilities. Medicare Part D beneficiaries once had a gap in their coverage (between the initial coverage limit and the point at which catastrophic coverage begins) where Medicare did not cover their prescription drug costs, known as the coverage gap. However, beginning in 2019, Medicare Part D beneficiaries pay 25% of brand drug costs after they reach the initial coverage limit - the same percentage they were responsible for before they reached that limit - thereby closing the coverage gap. Most of the cost of closing the coverage gap is being borne by innovator companies and the government through subsidies. Each manufacturer of a drug approved under an NDA is required to enter into a Medicare Part D coverage gap discount agreement and provide a 70% discount on those drugs dispensed to Medicare beneficiaries in the coverage gap, in order for its drugs to be reimbursed by Medicare Part D.
Federal Contracting/Pricing Requirements
Manufacturers are also required to make their covered drugs, which are generally drugs approved under NDAs, available to authorized users of the Federal Supply Schedule (“FSS”) of the General Services Administration. The law also requires manufacturers to offer deeply discounted FSS contract pricing for purchases of their covered drugs by the Department of Veterans Affairs, the Department of Defense (“DoD”), the Coast Guard, and the Public Health Service (including the Indian Health Service) in order for federal funding to be available for reimbursement or purchase of the manufacturer’s drugs under certain federal programs. FSS pricing to those four federal agencies for covered drugs must be no more than the Federal Ceiling Price (“FCP”), which is at least 24% below the Non-Federal Average Manufacturer Price (“Non-FAMP”) for the prior year. The Non-FAMP is the average price for covered drugs sold to wholesalers or other middlemen, net of any price reductions.
The accuracy of a manufacturer’s reported Non-FAMPs, FCPs, or FSS contract prices may be audited by the government. Among the remedies available to the government for inaccuracies is recoupment of any overcharges to the four specified federal agencies based on those inaccuracies. If a manufacturer were found to have knowingly reported false prices, in addition to other penalties available to the government, the law provides for civil monetary penalties of $100,000 per incorrect item. Finally, manufacturers are required to disclose in FSS contract proposals all commercial pricing that is equal to or less than the proposed FSS pricing, and subsequent to award of an FSS contract, manufacturers are required to monitor certain commercial price reductions and extend commensurate price reductions to the government, under the terms of the FSS contract Price Reductions Clause. Among the remedies available to the government for any failure to properly disclose commercial pricing and/or to extend FSS contract price reductions is recoupment of any FSS overcharges that may result from such omissions.
Tricare Retail Pharmacy Network Program
The DoD provides pharmacy benefits to current and retired military service members and their families through the Tricare healthcare program. When a Tricare beneficiary obtains a prescription drug through a retail pharmacy, the DoD reimburses the pharmacy at the retail price for the drug rather than procuring it from the manufacturer at the discounted FCP discussed above. In order for the DoD to realize discounted prices for covered drugs (generally drugs approved under NDAs), federal law requires manufacturers to pay refunds on utilization of their covered drugs sold to Tricare beneficiaries through retail pharmacies in DoD’s Tricare network. These refunds are generally the difference between the Non-FAMP and the FCP and are due on a quarterly basis. Absent an agreement from the manufacturer to provide such refunds, DoD will designate the manufacturer’s products as Tier 3 (non-formulary) and require that beneficiaries obtain prior authorization in order for the products to be dispensed at a Tricare retail network pharmacy. However, refunds are due whether or not the manufacturer has entered into such an agreement.
25
Branded Pharmaceutical Fee
A branded pharmaceutical fee is imposed on manufacturers and importers of branded prescription drugs, generally drugs approved under NDAs. In each year between 2011 and 2018, the aggregate fee for all such manufacturers ranged from $2.5 billion to $4.1 billion, and has remained at $2.8 billion in 2019 and subsequent years. This annual fee is apportioned among the participating companies based on each company’s sales of qualifying products to or utilization by certain U.S. government programs during the preceding calendar year. The fee is not deductible for U.S. federal income tax purposes. Utilization of generic drugs, generally drugs approved under ANDAs, is not included in a manufacturer’s sales used to calculate its portion of the fee.
Healthcare Reform
Healthcare reforms that have been adopted, and that may be adopted in the future, could result in further reductions in coverage and levels of reimbursement for pharmaceutical products, increases in rebates payable under U.S. government rebate programs and additional downward pressure on pharmaceutical product prices. On September 9, 2021, the Biden administration published a wide-ranging list of policy proposals, most of which would need to be carried out by Congress, to reduce drug prices and drug payment. The HHS plan includes, among other reform measures, proposals to lower prescription drug prices, including by allowing Medicare to negotiate prices and disincentivizing price increases, and to support market changes that strengthen supply chains, promote biosimilars and generic drugs, and increase price transparency. Many similar proposals, including the plans to give Medicare Part D authority to negotiate drug prices, require drug manufacturers to pay rebates on drugs whose prices increase greater than the rate of inflation, and cap out-of-pocket costs, have already been included in policy statements and legislation currently being considered by Congress. It is unclear to what extent these and other statutory, regulatory, and administrative initiatives will be enacted and implemented.
European Union
European Union Drug Development
In the European Union, our products and product candidates will also be subject to extensive regulatory requirements. Regulatory laws for pharmaceuticals are largely harmonized throughout the European Union, so that applicable E.U. law is most significant and national laws have less importance. As in the United States, medicinal products can only be marketed if either a Centralised MA has been obtained from the European Medicines Authority (“EMA”) or national authorizations have been obtained from the competent regulatory agencies.
The various phases of preclinical and clinical research in the European Union are subject to significant regulatory controls. Phases 1 to 3 of clinical trials in humans are comparable to those regulated in the United States, and GCP requirements in the European Union for these studies follow internationally accepted standards.
Although the E.U. Clinical Trials Directive 2001/20/EC has sought to harmonize the E.U. clinical trial regulatory framework for pharmaceuticals by setting out common rules for the control and authorization of clinical trials in the European Union, the E.U. Member States have transposed and applied the provisions of the Directive differently. This has led to significant variations in the member state regimes. Under the current regime, before a clinical trial can be initiated it must be approved in each of the E.U. countries where the trial is to be conducted by two distinct bodies: the National Competent Authority (“NCA”) and one or more Ethics Committees (“ECs”). All suspected unexpected serious adverse reactions to the investigated drug that occur during the clinical trial must be reported to the competent authorities of the Member State in which they occurred. All clinical trials must conform to current GCP guidelines issued by the European Union and the International Council on Harmonisation of Technical Requirements for Registration of Pharmaceuticals for Human Use, in particular when the results of such trials are being used in marketing authorisation procedures, and audits by E.U. inspectors on regulatory conformance of such clinical trials are likely.
In 2014, the new E.U. Clinical Trial Regulation 546/2014 was enacted (the “Regulation”) and became applicable on January 31, 2022. From that date, it governs all newly-commenced clinical trials in the EU and European Economic (“EEA”). The new Regulation aims to make more uniform and streamline the clinical trials authorisation process, ensure consistent rules for conducting clinical trials throughout the European Union, increase the efficiency of clinical trials, and increase the transparency of authorization, conduct and results of clinical trials. All clinical trials initiated before the Regulation became effective remain subject to the Clinical Trials Directive of 2001.
Generally, in the EEA, for every product candidate, a pediatric investigation plan (“PIP”) will have to be submitted and approval be obtained, unless a waiver is obtained where justified, in addition to clinical trials conducted in adults. The clinical studies that sponsoring companies must carry out on children are to be set out in detail in the PIP where the indication is one
26
found in children. In most cases, the PIP will become a commitment when applying for a marketing authorisation for a product candidate. A PIP may entail significant cost.
European Union Drug Review and Approval
In the EEA, which is currently comprised of the 27 Member States of the European Union plus Norway, Iceland and Liechtenstein (together forming the EEA), medicinal products can only be commercialized after obtaining a Marketing Authorisation (“MA”) which is comparable to an NDA in the United States. There are two types of marketing authorisations in the EEA: the Centralised MA, which is issued by the European Commission through the Centralized Procedure based on the opinion of the Committee for Medicinal Products for Human Use (“CHMP”), a body of the EMA, and which is valid throughout the entire territory of the EEA; and the National MA, which is issued by the competent authorities of each Member State of the EEA and only authorizes marketing in that Member State’s national territory and not in the EEA as a whole.
The Centralized Procedure is mandatory for certain types of products, such as biotechnology medicinal products, orphan medicinal products and medicinal products containing a new active substance indicated for the treatment of AIDS, cancer, neurodegenerative disorders, diabetes, auto-immune and viral diseases. The Centralized Procedure is optional for products containing a new active substance not yet authorized in the EEA, or for products that constitute a significant therapeutic, scientific or technical innovation or which are in the interest of public health in the European Union. The National MA is for products not falling within the mandatory scope of the Centralized Procedure. Where a product has already been authorized for marketing in a Member State of the EEA, this National MA can be recognized in another Member State through the Mutual Recognition Procedure. If the product has not received a National MA in any Member State at the time of application, it can be approved simultaneously in various Member States through the Decentralized Procedure. Under the Decentralized Procedure an identical dossier is submitted to the competent authorities of each of the Member States in which the MA is sought, one of which is selected by the applicant as the Reference Member State (“RMS”). If the RMS proposes to authorize the product, and the other Member States do not raise objections, the product is granted a national MA in all the Member States where the authorization was sought. Before granting the MA, the EMA or the competent authorities of the Member States of the EEA make an assessment of the risk-benefit balance of the product on the basis of scientific criteria concerning its quality, safety and efficacy. A third alternative system is mutual recognition in which member states “mutually recognize” an authorization already granted in another member state, which shortens the application process.
The EMA is responsible for the validation and scientific evaluation of the application, but the European Commission will decide upon our application. The EMA's CHMP will carry out a scientific assessment of the application and will give a recommendation on whether the medicine should be authorized or not. A favorable opinion is accompanied by a draft summary of the product's characteristics, the package leaflet and the proposed text for the packaging.
The time limit for the evaluation procedure is 210 days, subject to extensions if additional questions need to be addressed. Within 15 days of the adoption, the EMA will forward its opinion to the European Commission to start the decision-making phase. Within 15 days a draft implementing decision is sent by the Commission to the Standing Committee on Medicinal Products for Human Use, allowing for its scrutiny by E.U. countries. These have 15 days to return their linguistic comments, and 22 days for substantial ones. Once a favorable opinion is reached, the draft decision is adopted via an empowerment procedure. The adoption of the decision should take place within 67 days of the opinion of the EMA. The Commission's Secretariat-General then notifies the marketing authorisation holder of the decision. The decision is subsequently published in the Community Register. In practice, the procedure is expected to take at least one year.
Marketing authorisations are initially valid for five years. Applications for renewal must be made to the EMA at least six months before this five-year period expires. Marketing authorisations lapse if the authorized products are not placed on the market for a period of 3 consecutive years.
In November 2019, we received a Centralised MA for Rhokiinsa®, and in January 2021, we received a Centralised MA for Roclanda®. We will complete a further administrative step to have the Roclanda® authorisation accepted in the United Kingdom, subject to the agreement of the MHRA.
Files Required for Obtaining an E.U. Marketing Authorisation
Similar to the United States, applications for MAs in the European Union must be supported by an extensive dossier that shows the product candidate has the required quality, efficacy and safety suitable for the intended use, and additional administrative documents. The content and format of the dossier must follow the so-called Common Technical Document (“CTD”) format. Amongst other things, the applicant must submit all relevant data from pharmaceutical, preclinical and clinical trials, and all relevant information as regards the composition, quality and manufacturing process of the product. These requirements are laid down in applicable E.U. legislation and very detailed EMA guidelines.
27
In the course of the MAA process, an inspection of the veracity and the compliance of the clinical trials that form the basis of the MAA may be conducted by E.U. inspectors. If it turns out that a clinical trial does not meet GCP and other applicable regulatory standards, it may not serve as a basis for proving efficacy and safety of the product at issue.
Also, the manufacturing sites for the active ingredients of the product candidate may be inspected by the European Union in order to establish that the manufacturing indeed complies with cGMP standards.
Applicants are responsible for ensuring the safety profile of their medicine is adequately characterized at the time of submitting their MAA. Applicants are required to submit a risk management plan as part of their MAA. Risk management plans describe existing knowledge on the safety of a medicine and future pharmacovigilance activities designed to further study or monitor the product's safety. Part of that plan will be that a qualified person responsible for pharmacovigilance is being retained.
Post-approval Obligations of an MA Holder in the European Union
Even after approval of a product candidate by the EC, an MA holder will face various ongoing actions and obligations and must ensure that it has a suitable organization in place that is able to meet these obligations.
Reportable suspected adverse events must be reported to competent authorities via EudraVigilance, a centralized European information system of suspected adverse reactions to medicines. EudraVigilance will re-route the case safety reports to E.U. member states. The EMA will make the reports of individual cases of suspected adverse reactions also available to the WHO Uppsala Monitoring Centre. Patients and healthcare professionals will continue to report adverse reactions to national competent authorities.
For public health reasons, the EMA may require the MA holder to provide additional data post-authorization, as necessary to provide additional data about the safety and, in certain cases, the efficacy or quality of authorized medicinal products.
The EMA is responsible for harmonizing and coordinating pharmacovigilance inspections at E.U. level, which involves, among others:
•Preparing a risk-based program of routine pharmacovigilance inspections in relation to centrally authorised products.
•Preparing and developing guidance on pharmacovigilance inspections.
•Coordinating advice on the interpretation of pharmacovigilance requirements and related technical issues.
National competent authorities are responsible for coordinating inspections to verify compliance with cGMP, GCP, good laboratory practice and good pharmacovigilance practice within their own territories, and any other aspects of the supervision of authorized medicinal products, subject to laws and guidance provided by the EMA. Where a manufacturing site outside the European Union supplies product in more than one E.U. country, the EMA facilitates cooperation between those concerned competent authorities.
Member States and the Commission must inform other member states, the EMA and the Commission if concerns result from the evaluation of data from pharmacovigilance activities. This may result in the suspension or revocation of the marketing authorisation.
Member states have systems in place which aim at preventing dangerous medicinal products from reaching the patient and cover the receipt and handling of notifications of suspected falsified medicines or quality defects. Rapid alerts must be sent to all member states and a recall may be initiated if such medicines have already reached patients.
An MA holder must:
•Continuously operate a pharmacovigilance system, part of which requires a permanently and continuously available appropriately qualified person responsible for pharmacovigilance.
•Establish a risk management system, take account of scientific and technical progress and adapt accordingly, and continuously provide the competent authorities with information which might involve amendment of its marketing authorisation.
•Inform the competent authorities of positive and negative results in clinical trials or studies and any defects, and on request have at its disposal details regarding, for example, the volume of sales.
28
•Ensure that a package information leaflet is made available on request from patients' organizations, in formats appropriate for the blind and partially-sighted.
•Inform the EMA of changes related to the placement of the medicinal product on the market, for example withdrawal or suspension.
Data Exclusivity and Similar Protection in the European Union
An innovator company enjoys a period of “data exclusivity” during which its preclinical and clinical trials data may not be referenced in the regulatory filings of another company (typically a generic company) for the same drug substance.
The period of data exclusivity in Europe has been harmonized as eight years from the date of first authorization in Europe. There is an additional period of two years of “market exclusivity”. This is the period of time during which a generic company may not market an equivalent generic version of the originator's pharmaceutical product (although their application for authorization may be processed during this period, such that they are in a position to market their product on the expiry of this additional two-year period).
After that ten-year period, generic companies can market their “essentially similar” products by referencing the innovator’s data, unless the innovator product qualifies for a further one year of exclusivity. This additional one year may be obtained if the innovator company is granted an MA for a significant new indication for the relevant medicinal product within the first eight years of its marketing. In such a situation, the generic companies can only market their copy products after 11 years from the grant of the innovator company's initial MA.
Separately, the innovator company may be eligible to receive a Supplementary Protection Certificate (“SPC”). This is an intellectual property right that serves as an extension to a patent right within the scope of the marketing authorisation, comparable to a PTE in the United States. SPCs aim to offset the loss of patent protection for pharmaceutical products that occurs due to the compulsory lengthy testing and clinical trials these products require prior to obtaining regulatory marketing approval.
An SPC can extend an eligible patent right for a maximum of five years. An additional six-month extension is available in accordance with Regulation (EC) No 1901/2006 if the SPC relates to a medicinal product for children for which data has been submitted according to a PIP, as outlined above.
Manufacture of pharmaceuticals in the European Union
As a manufacturer of pharmaceutical products in the European Union, we are subject to extensive E.U. and national legislation that intends to ensure that only safe products will come into circulation. As a manufacturer, we have to comply with GMP.
Current GMP describes the minimum standard that medicines manufacturers must meet in their production processes. The EMA coordinates inspections to verify compliance with these standards and plays a key role in harmonizing GMP activities at E.U. level. GMP requires that medicines:
•are of consistent high quality;
•are appropriate for their intended use;
•meet the requirements of the marketing authorisation or clinical trial authorization.
GMP in the European Union is based on several E.U. regulations and directives, as well as on extensive EMA guidance. These GMP guidelines provide interpretation of GMP principles and guidelines, supplemented by a series of annexes that modify or augment the detailed guidelines for certain types of product, or provide more specific guidance on a particular topic.
Manufacturers and importers located in the European Union must hold an authorization issued by the national competent authority of the Member State where they carry out these activities. They must show that they comply with E.U. GMP to obtain a manufacturing authorisation.
In the European Union, national competent authorities are responsible for inspecting manufacturing sites located within their own territories. Competent authorities plan routine inspections following a risk-based approach, or if there is suspicion of non-compliance. After inspecting a manufacturing site, E.U. competent authorities issue a GMP certificate or a non-compliance statement, which is entered in a publicly available database (EudraGMDP).
29
Reimbursement in the European Union
The European Union does not have a centralized healthcare system. Healthcare is provided through very different systems at the national level. Most E.U. citizens have government-sponsored healthcare coverage. Constant budgeting pressures and the jurisdictional divide may lead to delayed or restricted patient access. Generally, the reimbursement prices must be negotiated with national healthcare carriers on a state-by-state process. Therefore, the receipt of a marketing authorisation will not be equivalent to full market access in all E.U. member states. Reimbursement prices may depend on the level of innovation and improvement of patient care that the product brings about, as evaluated, e.g., by public bodies like the Institute for Quality and Efficiency in Health Care (“IQWiG”) in Germany. It may take one to two years from the issuance of a marketing authorisation before market access in all E.U. member states with full reimbursement is achieved, if at all.
E.U. and national laws impose a number of restrictions on pricing. Directive 89/105/EEC relating to the transparency of measures regulating the prices of medicinal products (“Transparency Directive”) aims to ensure the transparency of national pricing and reimbursement. It sets procedural requirements to help monitor national decisions and their compatibility with pharmaceutical trade in the E.U. internal market. For example, member states must ensure that decisions on prices are made within a certain timeframe and communicated to the applicant with a statement of reason based on objective and verifiable criteria. Member states must also ensure that such decisions are open to an administrative law process for review.
Another important restriction on pricing is Article 102 of the Treaty on the Functioning of the European Union (“TFEU”), which prohibits dominant pharmaceutical companies from abusing this dominance in their relevant markets.
EU Regulation 2021/2282 on health technology assessment came into effect on December 15, 2021, and will be fully applicable in January 2025. This regulation provides for a member state coordination group on health technology assessment to be established to carry out joint product assessments according to a common set of rules and methodologies. Member states will retain the right to make decisions at the national level on clinical added value in the healthcare context of the member country. This regulation will reduce the burden of having to submit different data and analyses to different member states for the assessment of clinical effectiveness.
E.U. Privacy Laws
The GDPR came into effect in the European Union on May 25, 2018 and has changed the way that personal data can be held and processed. Non-compliance can lead to substantial fines, amounting to up to 4% of annual global revenue or €20 million, whichever is greater.
The GDPR expands and formalizes many rights that existed under former laws. It also requires that organizations inventory their data and document the legal basis for processing personal information. Further, the GDPR provides E.U. data subjects with rights they may exercise in connection with their data such as the “right to be forgotten” and to access to their data.
Generally, personal data of third parties must only be held and used by a company (the “Data Controller”) when covered by an informed consent of the person concerned, or by a legitimate and vital interest, as defined in the GDPR. Any consent must be informed, freely given and specific, and, if applicable, also include the right to transfer personal data to a country outside of the European Union. The Data Controller is responsible for GDPR compliance, but can outsource certain tasks to third parties, so-called “Data Processors”. Affected third parties must be informed in some detail on the storage and use of their data, e.g. as clinical trial subjects, or as prescribers, and have the right to deny their consent.
It is important for companies to ensure they have a nominated data protection officer. They must also brief and train their staff, so they are aware and aligned. Companies should keep records of their approach to GDPR and how they have prepared for it. Preparation should also extend to a response in the event of an access request or complaint from a data subject, or with regards to a GDPR breach.
United Kingdom
United Kingdom Drug Review and Approval
In the United Kingdom, the drug approval process is currently very similar to the process in the European Union. The United Kingdom is made up of Great Britain (England, Scotland and Wales) and Northern Ireland. Due to the Northern Ireland Protocol, agreed with the European Union to protect the integrity of trade in the island of Ireland, Northern Ireland is to remain in the E.U. regulatory system for drugs.
The United Kingdom is currently considering how it might develop its regulatory processes since the United Kingdom left the European Union on January 31, 2020 (“Brexit”), with a transition period that ended on December 31, 2020. Rhokiinsa® has
30
been grandfathered into a UK national authorization under the country’s Brexit legislation and will continue to be authorised in the United Kingdom as long as we provide the MHRA with the required additional information.
For new products, the option in the United Kingdom is to apply for one of three types of National MAs: the United Kingdom as a whole, Great Britain or Northern Ireland. New centralised applications in the European Union are to be notified to the MHRA together with the timetable and a dossier submitted (because the MHRA does not have access to the E.U. regulatory systems). These applications might until December 31, 2022 be used for a procedurally simplified application for a Great Britain MA through what is known as the EC Decision Reliance Procedure. Because the Centralised MA for Roclanda® was received after December 31, 2020, it was subject to this process, which has been successfully completed.
The MHRA is obliged under this procedure to make a decision (positive or negative) within 67 days. Alternatively, a separate application might be made to the MHRA for a Great Britain National MA. Similarly, where the mutual recognition or decentralised process is used in the European Union for applications for national marketing authorisations, there is an option in the United Kingdom to apply under a different reliance procedure, which again requires the MHRA to take a decision within 67 days. Alternatively, the application in the United Kingdom (or Great Britain) can be made separately from the one in Europe. There are then two options for Northern Ireland – including it either in a European mutual recognition or decentralised application process or as part of a U.K. national application. The assessment made by the United Kingdom is on the same basis as in the European Union, focusing on quality, safety and efficacy.
Reimbursement in the United Kingdom
Reimbursement in the United Kingdom is determined for new medicinal products by the National Institute for Health and Care Excellence (“NICE”). NICE reviews health economic data and, in particular, efficacy data in the target population and the cost/ benefit in qualified life years (“QUALY”). If the process runs smoothly there is a 245-day timetable to final decision, although the process can take longer, particularly if there are any appeals. NICE determines whether drug products are recommended for use in the National Health Service (“NHS”) and for which indications and price that the NHS might pay for the product.
The United Kingdom, although no longer covered by GDPR, has included the same rules within its separate national laws.
Japan
Right of Reference
In Japan, clinical trial data collected for obtaining an approval in foreign countries can be used for obtaining an approval for a drug in accordance with the requirements stipulated in the notification by Ministry of Health, Labor and Welfare (the “MHLW”). The collection of such clinical data and drafting of the submission must meet the requirements under the normal Japanese regulations (Article 43 of the Enforcement Regulations of Pharmaceuticals and Medical Devices Law). The clinical trial data are required to include (i) pharmacodynamics, dose response, efficacy and safety in the foreign countries, (ii) clinical test data clearly exhibiting dose response, efficacy and safety (planned and performed in accordance with Japan rules, such as the Ministerial Ordinance on Good Clinical Practice for Drugs, and GCP; well-managed and using proper test controls; and using proper endpoints, and (iii) pharmacodynamics characteristic in the Japanese population. Further, the MHLW usually requests that a company submit bridging data from testing that is performed in Japan so that the clinical test data in foreign countries are demonstrated to be able to be generalized to the Japanese population. Generally, when the bridging data demonstrate that the dose response, efficacy and safety in Japan are similar to those in the foreign countries, the MHLW recognizes that the test results in the foreign countries can be generalized to the Japanese population. When the dose of the Japanese population in the bridging data is different from that of the test in the foreign countries, the MHLW will request that a company submit pharmacodynamics test results. When the number of samples in the bridging study or studies is limited, the MHLW will request that a company further submit test data demonstrating safety. When the bridging data cannot demonstrate efficacy and safety, the MHLW will request that a company submit clinical test results for the Japanese population.
Obtaining Approval
In practice, there are three basic ways for a non-Japanese company to obtain approval for pharmaceuticals manufactured overseas:
•Option 1—establish a Japanese corporation that obtains the necessary approvals and licenses. This provides the most durable presence in Japan. It also entails high initial time and expense (including hiring staff) and must be done in compliance with the provisions of the Pharmaceuticals and Medical Devices Law.
31
•Option 2—designate an existing Japanese company to obtain the necessary approvals and licenses. The manufacturing/sales approval for the drug will be registered in the Japanese company's name. This can raise potential problems if the overseas company does not strictly control the Japanese approval holder.
•Option 3—use the designated marketing approval holder (“DMAH”) system under Article 19-2 of the Pharmaceuticals and Medical Devices Law and select a Japanese company approved by the MHLW to act as a DMAH. This option provides several benefits, including the manufacturing/sales approval being held directly by the non-Japanese company. In addition, the costs for obtaining/maintaining drug approval are lower than in the first two options. Since the approval is under the non-Japanese company's name, there are fewer concerns about the Japanese company acting on its own. If there are problems with the DMAH, the non-Japanese company can designate another company as the DMAH. Compared with the first option, the costs for a DMAH are lower, since there is no need to establish a new company. DMAHs are authorized by the MHLW, licensed for manufacture/sales of pharmaceuticals and provide full support in the drug approval process.
Japan Privacy Laws
Japan has regulatory provisions for privacy protection for personal information, including of patients in clinical trials. Most importantly, the Act on the Protection of Personal Information covers the protection of personal information. Personal information as used in the Act means information about a living individual that can identify the specific individual by name, date of birth or other description contained in such information (including such information as will allow easy reference to other information and will thereby enable the identification of the specific individual).
Pharmaceutical companies in Japan typically adopt their own internal privacy policies based on this law. The requirements tend to be general and leave a good deal of discretion to individual companies, but typically pharmaceutical companies establish policies covering appropriate safeguarding of personal information, prior consent for disclosure, and protection of personal data from leaks or other unauthorized access or disclosure.
The Clinical Research Act establishing clinical research guidelines, similarly, requires persons conducting clinical studies to obtain informed consent of participants and protect participants’ personal data.
Other Countries
In addition to regulations in the United States, the European Union, Japan, and potentially the United Kingdom, we will be subject to a variety of regulations in other jurisdictions governing, among other things, clinical trials and any commercial sales and distribution of our potential products. Whether or not we obtain FDA approval of a product, we must obtain the requisite approvals from regulatory authorities in foreign countries prior to the commencement of clinical trials or marketing of the product in those countries. The approval process varies from country to country and the time may be longer or shorter than that required to obtain FDA approval. In addition, the requirements governing the conduct of clinical trials, commercial sales, product licensing, pricing and reimbursement vary greatly from country to country.
Other Regulations
We are also subject to numerous federal, state and local laws relating to such matters as safe working conditions, manufacturing practices, environmental protection, fire hazard control and disposal of hazardous or potentially hazardous substances. In addition, our international operations and relationships with partners, collaborators, contract research organizations, vendors and other agents are subject to anti-corruption and anti-bribery laws and regulations, including the U.S. Foreign Corrupt Practices Act (“FCPA”), which prohibits U.S. companies and their representatives from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Failure to comply with the FCPA, or similar applicable laws and regulations in other countries, could expose us and our personnel to civil and criminal sanctions. We may incur significant costs to comply with such laws and regulations now or in the future.
Environmental, Social and Governance (“ESG”) and Human Capital
ESG
We are dedicated to the principles of environmental stewardship, social responsibility, and good corporate governance. We consider these ESG principles to be among our most important values and therefore integrate them in our ongoing and strategic activities. We believe incorporating these values and practices into our operations not only improves our performance but also creates a sustainable and growth-oriented culture that benefits our employees, our customers and our investors. Our Nominating and Governance Committee of the Board of Directors regularly reviews our operations with senior management to assess our
32
progress in realizing these values. With our Board of Directors’ leadership, we continue to evaluate our practices and will continue to integrate sustainability into our business.
We recognize our responsibility to be environmentally conscious and to contribute to the global effort of tackling climate change, moving toward a low-carbon economy and expanding our renewable energy production. We employ green processes, materials, practices, equipment and technologies where possible throughout our operations to foster conservation and reduce waste, as discussed below.
Renewable energy is an important part of our commitment to sustainability and we are operating our manufacturing facilities using renewable energy through renewable sources. At our research facility in Durham, North Carolina, we source our energy from Duke Energy, a leader in renewable energy, including solar and wind, and Duke Energy is adding additional renewable solutions such as microgrids and battery storage. At our Athlone manufacturing plant in Ireland we receive 100% of our electricity from renewable sources and the electric supply is 100% carbon neutral.
We minimize energy consumption using various power-saving technologies designed to consume electrical power only when needed. The majority of our office space in the U.S. is Leadership in Energy and Environmental Design (“LEED”) Certified, and both our manufacturing plant in Athlone, Ireland, and our research facility in Durham, North Carolina, were built from end-to-end with sustainability and good manufacturing practices in mind. We have also instituted environmentally conscious programs into the work environment for our employees by implementing recycling and composting programs, offering water dispensers to reduce plastic bottle waste, and providing electric automobile charging stations in our employee parking areas, as examples. In 2021, we (i) recycled 76% and (ii) recycled and recovered 99.5% of the non-hazardous waste produced at our Athlone manufacturing plant. Through these programs and continuous improvement, we strive to reduce our waste while maximizing the proportion that may be recycled. Looking to the future, we plan to continue to further enhance our sustainability posture through detailed monitoring and management.
From a social responsibility perspective, although we have not yet attained profitability as a company, we have donated hundreds of thousands of dollars to causes that we believe are important to society. These donations were directed to support glaucoma research and glaucoma patient education through ongoing collaborations with the Glaucoma Research Foundation, to help fund free cataract surgery for 1,186 indigent patients in the United States over the past four years through a continuing match program with the American Society of Cataract Refractive Surgery Foundation and promote the empowerment of women in ophthalmology as a lead sponsor of Women in Ophthalmology. In addition, these donations were also directed to accelerate treatments and cures for retinal diseases for the next generation through the Foundation Fighting Blindness and expand opportunities for young physicians from groups that are underrepresented in medicine or who want to work in underserved communities through support of the National Medical Association’s Rabb-Venable Excellence in Ophthalmology Research Program. We are also involved with the Association for Research in Vision and Ophthalmology Leadership Development Program and have been named a 2022 Association for Research in Vision and Ophthalmology Foundation Honoree. Additionally, we have promoted diversity in the ophthalmic industry as a corporate partner of Ophthalmic World Leaders.
We also strive to be socially conscious in our employment practices. We support diversity in our hiring practices and follow a management philosophy that integrates social responsibility and the highest governance standards. We established an Affirmative Action Plan in 2018 as an Office of Federal Contract Compliance Programs compliance requirement. We are committed to make a good faith effort to improve the incumbency of targeted areas over time when the opportunity is available. All managers are trained in Equal Employment Opportunity compliant recruiting and interviewing practices. See “Human Capital—Diversity and Inclusion” below.
Our Audit Committee of the Board of Directors has consistently received very high ratings for independence and competency. As we continue to build our company, we will continue to implement policies and procedures to further strengthen our stated intent on our ESG objectives.
Human Capital
In order to successfully attract and retain highly professional and skilled employees, it is crucial that we offer a diverse, inclusive and safe workplace. Our recruitment process begins with hiring individuals that we believe fit well with our strong culture and our shared values. In 2021, we hired Raj Kannan as our new Chief Executive Officer, who we believe personifies our shared values and exhibits behaviors that fit well with our culture. We have a philosophy of investing in our employees by providing the necessary resources to grow professionally through our training and development programs, which will ultimately help drive company success. We reward our employees by offering a competitive compensation and benefits package, which includes incentive-based awards, which we believe motivates our employees and drives company performance. We also seek to engage and give back to the community through donations and fundraising for organizations providing help for those with glaucoma, as discussed in “—ESG” above.
33
As of December 31, 2021, we employed approximately 376 full-time employees, of which 294 were employed in the United States and 82 were outside the United States. The majority of our employees outside of the United States primarily support our manufacturing operations in Athlone, Ireland. Of our total employee population, there were 146 sales force and marketing employees, 108 in research and development and medical affairs, 68 in product manufacturing and 54 in general and administrative support roles such as human resources, finance, legal and information technology. We are committed to providing our employees with a positive work environment that helps them realize their full potential and helps them contribute to the success of our company. None of our employees are represented by any collective bargaining unit. We believe that we maintain good relations with our employees.
Diversity, Equity and Inclusion
We have a strong commitment to continue to build a diverse, equitable and inclusive work environment that fosters a positive culture. We believe our diverse workforce brings a wide array of skills and experiences that help increase innovation and strategic thinking and ultimately contribute to the success of our company. All of our ongoing and planned clinical studies have no exclusions to participation based on race, sexual orientation or gender. In addition, we are committed to exploring options to encourage diversity and accessibility to our clinical trials.
As part of our commitment to racial equity, we have conducted field listening programs, a pilot diversity seminar as well as an analysis of progress in line with racial equity goals. We take deliberate measures to ensure we lead by example in promoting racial equity in hiring, promotion and opportunities within the Company.
Our hiring practices reflect our commitment to increase diversity and inclusion among our employees. We strive to achieve and maintain pay equity for employees of all races and for both female and male employees within our organization. From a governance perspective, our Compensation Committee of the Board of Directors provides oversight of our policies, programs and initiatives focusing on workforce diversity and inclusion. As of December 31, 2021, over a quarter of our employees in the United States identify as a racial or ethnic minority, with approximately a quarter of management identifying as minority employees in the United States. The female to male ratio for our total employee population was approximately 50:50.
Talent and Development
The success of our company is highly dependent on the performance, skills and industry knowledge of our employees. A significant proportion of our employee base is comprised of professionals who have had prior experience with pharmaceutical and biotechnology companies. In order to attract and retain such highly qualified talent, we invest significant resources to further develop our employees and provide opportunities that help them achieve career goals and lead our organization. All employees have access to technical and soft skill career development materials online and materials designed in-house to help support them throughout their career.
We maintain a robust technical training curriculum for all our employees and executives based on function. These curricula incorporate training addressing specific regulatory requirements germane to the performance of specific functions. The training for our scientific and quality personnel, for example, includes modules focusing on our good manufacturing and laboratory practices as well as proper documentation and reporting.
Through our soft skill training and development programs, we provide training that helps employees increase their performance and productivity. We also provide focused development for managers, directors and aspiring leaders of the future who are designated as “key talent” based on performance and leadership potential.
In addition to technical and soft skill training, all of our employees are required to regularly train on our Code of Business Conduct and Ethics (the “Code”), receive cyber security training and receive harassment training. We believe a well-trained employee base is the best way to ensure proper business operations and to best ensure the establishment of a collaborative and supportive corporate culture.
In keeping with our commitment to the highest standards of honest and ethical behavior and integrity in carrying out our business activities, all of our employees who interact with health care professionals on behalf of our company are required to be trained in, and knowledgeable of, not only our Code but also our Healthcare Compliance Manual (the “HCM”). The HCM is a compendium of our standards intended to not only help ensure continued compliance with the prevailing laws, regulations and standards of our industry, but also to provide a framework for our expectations for employee behavior, operational excellence and risk mitigation to help us achieve our broader organizational goals of discovering and delivering new technologies and safe and efficacious therapies to those in medical need. The HCM builds on the Code and governs how our employees engage with the healthcare community when conducting promotional activities and scientific exchanges as well as financial interactions. All such employees or those in areas who support those activities are required to follow these policies.
34
Health and Safety
We are dedicated to creating and maintaining a work environment where our employees feel safe to carry on their responsibilities. We regularly review health and safety legislation to ensure compliance with current standards, we identify and monitor potential health and safety hazards, we coordinate emergency and fire drills and we train our employees to avoid or minimize any potential risks within the workplace. The health and safety of our employees, patients, prescribers and community are of utmost importance during this time and we are complying with all requirements and mandates from various agencies and governments.
We value the patient volunteers who participate in clinical trials and we are committed to protecting their rights and well-being. As such, we have policies and procedures in place to ensure our clinical trial practices comply with laws and regulations in all countries in which we operate clinical trials and meet our high ethical standards. We also have protocols in place to obtain informed consent from patients participating in our clinical trials. In addition, we have procedures in place specific to the COVID-19 pandemic allowing us to adapt to the needs of participants, clinical sites and employees, as changes may occur, to ensure first and foremost safety while protecting data integrity.
In our research and manufacturing facilities, we maintain a safety-first culture and seek to eliminate workplace incidents and minimize risks and hazards. We have created and implemented processes to help eliminate safety events by reducing their frequency and severity. These programs include an Illness and Injury Prevention Program and a Safety Committee. We also review and monitor our performance closely. We monitor and constantly seek to reduce safety incidents each year. Through our efforts, we had a recordable incident rate of 1.1 (recordable incidents per 100 employees, as defined by the U.S. Occupational Safety and Health Administration, (“OSHA”) at our Athlone manufacturing plant in 2021. This compares to an OSHA incident rate of 1.6 for the U.S. pharmaceutical and medicine manufacturing industry in 2020.
In response to the coronavirus (“COVID-19”) pandemic, we have taken precautionary measures to protect our employees and our stakeholders by adapting company policy to maintain the continuity of our business. We have adapted our facilities and work practices and implemented all necessary safety controls in line with government health policy guidelines. In taking measures intended to protect our employees, customers and vendors from contracting and spreading COVID-19, we have established an employee vaccination/ weekly testing policy based on guidance from the Centers for Disease Control (“CDC”) and Prevention, OSHA and the Equal Employment Opportunity Commission (“EEOC”) that is designed to comply with all applicable federal, state, and local laws. We also continue to encourage our employees to work remotely to the extent feasible and to limit air travel to essential business meetings or events to minimize the risk of infection among our employees. In addition, we have formed interdisciplinary teams to (i) focus on company-wide communication about the COVID-19 pandemic, including initiatives implemented to address the COVID-19 pandemic and its impact on our business and (ii) discuss, recommend and supervise the implementation of physical measures at our sites to best ensure employee safety. For example, to further support our employees at the Athlone manufacturing plant, we have implemented a Well-being Program to boost communication, engagement and wellness initiatives. With precautionary measures in place company-wide, we continue to operate effectively as most of our manufacturing plant personnel are working on site and the balance of our total workforce has the flexibility to work remotely through a hybrid work environment. Especially important in light of the COVID-19 pandemic, we provide all of our employees with excellent healthcare benefits and we make every effort to provide high levels of coverage at the most affordable cost possible.
Compensation and Benefits
To compete in a highly competitive job market and attract, retain and reward outstanding talent, we offer our employees a comprehensive compensation package which includes competitive salaries and benefit programs. Our well-designed compensation package includes salaries, annual bonuses, equity compensation, 401(k) plan with 401(k) plan match, premium health and dental insurance, life insurance, short-term and long-term disability insurance and workers’ compensation insurance. In addition, our generous time off policy includes paid time off, paid sick leave, holidays, personal leave of absence, military leave and family medical leave.
We proactively advocate and support programs that benefit our employees’ well-being and flexibility to help our employees sustain high performance, productivity and engagement. Our comprehensive health and benefits programs, including employee assistance programs, offer a wide range of resources and tools, covering areas including preventive health, mental and physical health, fitness, nutrition, financial support and personal well-being.
Our equity compensation plans, pursuant to which we may grant stock options, restricted stock and equity-based awards, are designed to align employees’ interests with our stockholders’ interests and motivate effective performance which drives company success. We also adopted an Employee Stock Purchase Plan under which substantially all employees may purchase Aerie common stock through payroll deductions and lump sum contributions at a price equal to 85% of the lower of the fair market value of the stock as of the beginning or end of the offering periods.
35
Corporate and Available Information
Our principal executive offices are located at 4301 Emperor Boulevard, Suite 400, Durham, North Carolina 27703 and our telephone number is (919) 237-5300. We were incorporated in Delaware in June 2005. Our internet address is www.aeriepharma.com. We make available on our website, free of charge, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Our SEC reports and our Global Code of Business Conduct and Ethics can be accessed through the Investors section of our website. The SEC maintains a website that contains reports, proxy and information statements and other information regarding our filings at http://www.sec.gov. The information found on our website is not incorporated by reference into this report or any other report we file with or furnish to the SEC.
36
ITEM 1A. RISK FACTORS
We operate in an industry that involves numerous risks and uncertainties. The risks and uncertainties described below are not the only ones we face. Other risks and uncertainties, including those that we do not currently consider material, may impair our business. If any of the risks discussed below actually occur, our business, financial condition, operating results or cash flows could be materially adversely affected. This could cause the trading price of our common stock to decline.
Risks Factors Summary
The following is a summary of the principal factors that make an investment in our common stock speculative or risky.
Risks Related to Development and Commercialization
•If we or our collaborators are unable to successfully commercialize our products, or experience significant delays in doing so, our business will be materially harmed.
•If we fail to obtain and sustain market acceptance for our products or an adequate level of coverage and reimbursement for our products, potential future sales would be materially adversely affected.
•We face significant competition, and our operating results will suffer if we fail to compete effectively.
•If clinical trials are unsuccessful or delayed, we could be required to abandon development.
•Our products may have undesirable or adverse effects, which may result in the delay, denial or withdrawal of regulatory approval or may limit sales of our products after regulatory approval is received.
•We may not be able to identify additional therapeutic opportunities for our products or to expand our portfolio of product candidates.
Risks Related to Regulation
•Regulatory approval may be substantially delayed or may not be obtained for our products if regulatory authorities require additional time or studies to assess the safety and efficacy.
•Our products subject us to ongoing regulatory requirements and we may face future development, manufacturing and regulatory difficulties.
•Legislation may increase the difficulty and cost of commercialization and affect the prices we may obtain.
•Healthcare law and policy changes may negatively impact our business, including by decreasing the prices that we and our collaborators receive for our products.
Risks Related to Manufacturing
•We anticipate continued reliance on third-party manufacturers. Production at our suppliers’ facilities could be disrupted, which could prevent us from producing enough of our products to satisfy demand.
Risks Related to Our Reliance on Third Parties
•Any collaboration arrangement that we may enter into may not be successful, which could adversely affect our ability to develop and commercialize our products or to enter new therapeutic areas.
•We currently depend on third parties for portions of our operations, and we may not be able to control their work as effectively as if we performed these functions ourselves. If the third parties fail to comply with regulations, our financial results and financial condition will be adversely affected.
•If we fail to manage an effective distribution process in the United States or establish an effective distribution process in jurisdictions outside the United States, our business may be adversely affected.
Risks Related to Intellectual Property
•We may not be able to enforce and protect our intellectual property rights and our proprietary technology.
•If our pending patent applications fail to issue, our business will be adversely affected.
37
•We may infringe the intellectual property rights of others, which may prevent or delay product development and disrupt the commercialization of or increase the costs of commercializing our products.
•We may be unable to adequately prevent disclosure of trade secrets and other proprietary information.
•We will need to obtain regulatory approval of any proposed product names, and any failure or delay associated with such approval may adversely affect our business.
Risks Related to Our Financial Position and Need for Additional Capital
•We have limited revenue and may never become profitable.
•We may need to obtain additional financing to fund our operations and, if we are unable to obtain such financing, we may be unable to complete the development and commercialization of our products.
•Our indebtedness and liabilities could limit the cash flow available for our operations, expose us to risks that could adversely affect our business, financial condition and results of operations and impair our ability to satisfy our obligations under the 1.50% convertible senior notes due 2024 (the “Convertible Notes”).
•We may be unable to raise the funds necessary to repurchase the Convertible Notes if required or to pay any cash amounts due upon conversion, and the terms of our then-existing borrowing arrangements may limit our ability to repurchase the Convertible Notes or pay cash upon their conversion.
•The capped call transactions may affect the value of our common stock and subject us to counterparty risk.
•We may sell additional debt or equity securities at any time, which may result in dilution to our stockholders, cause our stock price to fall and impose restrictions on our business.
•Our ability to use our net operating loss carryforwards may be limited and changes to U.S. tax laws and tax laws in other jurisdictions could materially impact our financial position and results of operations.
Risks Related to Our Business Operations and Industry
•We depend upon our key personnel and our ability to attract and retain employees. Our employees may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements and insider trading, which could significantly harm our business.
•Our business may be negatively impacted by macroeconomic conditions, including inflation and a public health crisis.
•If we engage in acquisitions or licenses in the future, we will incur a variety of costs and we may never realize the anticipated benefits of such acquisitions or licenses.
•Business interruptions could delay the development of our potential products and our manufacturing activities and could disrupt our potential sales. Our reputation, business and operations may suffer in the event of system failures, cyber-attacks or other security breaches or failure to comply with legal obligations related to information security.
•Our disclosure controls and procedures and our systems to implement such disclosure controls and procedures may not prevent or detect all errors or acts of fraud.
•Any litigation could result in substantial damages and may divert management’s time and attention from our business. Any successful litigation may result in the incurrence of substantial liability if our insurance is inadequate.
Risks Related to Ownership of Our Common Stock
•The market price of our common stock has been, and may continue to be, highly volatile.
•Certain of our existing stockholders, executive officers and directors own a significant percentage of our common stock and may be able to influence or control matters submitted to our stockholders for approval.
•As we do not intend to declare cash dividends on our common stock in the foreseeable future, stockholders must rely on appreciation of the value of our common stock for any return on their investment.
•Our charter documents and Delaware law could prevent a takeover that stockholders consider favorable and could also reduce the market price of our stock.
38
Risks Related to Development and Commercialization
We depend substantially on the success of our products, Rhopressa® and Rocklatan®. If we are unable to successfully commercialize Rhopressa® or Rocklatan®, or experience significant delays in doing so, our business will be materially harmed.
Our business and the ability to generate revenue related to product sales depend on the successful commercialization of our products, Rhopressa® and Rocklatan®, and the successful development, regulatory approval and commercialization of any product candidates or future product candidates for the treatment of patients with open-angle glaucoma, dry eye and retinal diseases. Rhopressa® and Rocklatan® have been approved by the FDA in the United States, and the EC has granted Centralised MAs for the European Union for Rhopressa® (where it will be marketed as Rhokiinsa®) and for Rocklatan® (where it will be marketed as Roclanda®). Rhokiinsa® has been grandfathered into a U.K. national authorisation under the country’s Brexit legislation and will continue to be authorised in the United Kingdom as long as we provide the MHRA with the required additional information, and Roclanda® received a U.K. authorisation in April 2021. Neither product has received regulatory approval in any other jurisdiction and no sales can be made in any such jurisdiction unless such approval occurs. Centralized and U.K. marketing authorisations lapse if the authorized products are not placed on the market for a period of three consecutive years. If we are unable to place our products on the market for a period of three consecutive years, which might occur for a variety of reasons, both practical (manufacturing issues) and regulatory (pricing and reimbursement decisions), then we would lose the right and opportunity to do so and would have to reapply for a marketing authorisation. We have invested a significant portion of our efforts and financial resources in the development of Rhopressa® and Rocklatan®, and our prospects are highly dependent on, and a significant portion of the value of our company relates to, our ability to successfully commercialize these products. The success of Rhopressa®, Rocklatan® and any product candidates or future product candidates depends on factors including:
•successfully completing clinical trials;
•receiving and maintaining current regulatory approvals from applicable regulatory authorities;
•developing and maintaining effective sales, marketing and distribution capabilities;
•establishing adequate manufacturing capacity;
•obtaining and maintaining patent and trade secret protection and regulatory exclusivity;
•establishing commercial markets;
•obtaining coverage and reimbursement from third-party payers at a commercially reasonable price point; and
•successfully competing with other products.
If we do not achieve one or more of these factors in a timely manner or at all, or if we lose market exclusivity such as through the approval of an ANDA—the filing of which by our competitors with respect to Rhopressa® and/or Rocklatan® is possible as of December 18, 2021, if such filing contains a Paragraph IV Certification, we could experience significant delays or an inability to successfully commercialize Rhopressa®, Rocklatan® or any product candidates or future product candidates or to expand into new markets. This could materially harm our business, and we may not be able to earn sufficient revenues and cash flows to continue our operations.
The commercial success of Rhopressa® and Rocklatan® and any product candidates or future product candidates, if approved, will depend on the degree of market acceptance among eye-care professionals, patients, patient advocacy groups, healthcare payers and the medical community.
The commercial success of Rhopressa® and Rocklatan® in the United States will depend on the degree of market acceptance among eye-care professionals, patients, patient advocacy groups, healthcare payers, including pharmacy benefit managers, and the medical community. Similarly, if Rhopressa® and Rocklatan® are approved in jurisdictions outside the United States, the European Union, the United Kingdom or any product candidates or future product candidates are approved in any jurisdiction in which they may receive approval, those products may not gain such market acceptance in such jurisdictions. There are a number of available therapies marketed for the treatment of open-angle glaucoma, dry eye and retinal diseases. Some of these drugs are branded and subject to patent protection, but most others, including latanoprost and many beta blockers, in the case of glaucoma treatment, are available on a generic basis. Many of these approved drugs are well-established therapies and are widely accepted by eye-care professionals, patients and third-party payers. Insurers and other third-party payers may also encourage the use of generic products, either in preference to or prior to the use of brand therapies. The degree of market
39
acceptance of Rhopressa® and Rocklatan® and any product candidates or future product candidates, if approved, will depend on a number of factors, including:
•the market price, affordability and patient out-of-pocket costs, relative to other available products, which are predominantly generics;
•the possibility that third-party payers will not give favorable positions on their formularies or will place restrictions on their use, including through use of step therapy or prior authorization programs;
•the timing of market introduction;
•their effectiveness as compared with currently available products;
•eye-care professional willingness to prescribe and patient willingness to adopt them in place of current therapies;
•varying patient characteristics including demographic factors such as age, health, race and economic status;
•changes in the standard of care for the targeted indications;
•the prevalence and severity of any adverse side effects;
•limitations or warnings contained in labeling;
•limitations in the approved clinical indications and MOA(s);
•our success in demonstrating their benefits including relative convenience and ease of initiation, prescription and administration;
•the strength of our selling, marketing and distribution capabilities;
•the quality of our relationships with eye-care professionals, patient advocacy groups, third-party payers and the medical community;
•the continuous availability of quality manufactured products;
•sufficient third-party coverage or reimbursement; and
•the degree to which the products are subject to material product liability claims.
As we have done with Rhopressa® and Rocklatan®, it is possible that we may find it necessary or desirable to provide rebates on product candidates or future product candidates, if approved, to customers or third-party payers or to implement patient assistance programs, including co-pay assistance programs, which could affect our profitability. In addition, we do not know how eye-care professionals, patients and third-party payers will continue to respond to the pricing of Rhopressa® and Rocklatan® in the United States or how they will respond to their pricing in jurisdictions outside the United States, or the pricing of any product candidates or future product candidates in any jurisdiction, if approved.
The market opportunities for our currently marketed or potential products, if approved, are difficult to precisely estimate. Our estimates of these market opportunities include several key assumptions based on our industry knowledge, industry publications, third-party research reports and other surveys. While we believe that our internal assumptions are reasonable, independent sources have not verified our assumptions. If any of these assumptions prove to be inaccurate and the actual market for any of our products post-regulatory approval is smaller than we expect or if we fail to maintain market acceptance or fail to achieve market acceptance, our potential product revenue may be limited, and it may be more difficult for us to achieve or maintain profitability.
If we fail to obtain and sustain an adequate level of coverage and reimbursement for Rhopressa® or Rocklatan® or any product candidates or future product candidates, if approved, by third-party payers, potential future sales would be materially adversely affected.
The course of treatment for patients with open-angle glaucoma, dry eye and retinal diseases includes primarily older drugs, and the leading products for the treatment of open-angle glaucoma, dry eye and retinal diseases currently in the market, including latanoprost and timolol, in the case of glaucoma treatment, are available as generic drugs. Therefore, there will be no commercially viable market for Rhopressa® or Rocklatan® or any product candidates or future product candidates, if approved, without adequate coverage and reimbursement from third-party payers, and any reimbursement policy may be affected by future healthcare reform measures. We have obtained broad formulary coverage for our glaucoma franchise products for the lives covered under commercial plans and Medicare Part D plans. We cannot be certain that those levels of coverage will continue to increase, or that we will be able to maintain those levels of coverage. Further, we cannot be certain that adequate
40
coverage and reimbursement will be available for either of our products in jurisdictions outside the United States or for any product candidates or future product candidates, if approved. Additionally, even if there is a commercially viable market, if the level of coverage or reimbursement is below our expectations, our anticipated revenue and gross margins will be adversely affected.
Third-party payers, such as government or private healthcare insurers and pharmacy benefit managers, carefully review and increasingly question and challenge the coverage of and the prices charged for drugs. Reimbursement rates from private health insurance companies vary depending on the company, the insurance plan and other factors. Reimbursement rates may be based on reimbursement levels already set for lower cost drugs and may be incorporated into existing payments for other services. A current trend in the United States healthcare industry is toward cost containment. Large public and private payers, managed care organizations, group purchasing organizations and similar organizations are exerting increasing influence on decisions regarding the use of, and reimbursement levels for, treatments. Such third-party payers, including Medicare, may question the coverage of, and challenge the prices charged for, medical products and services, and many third-party payers limit coverage of or reimbursement for newly approved healthcare products. Third-party payers may limit the covered indications. Cost-control initiatives in the U.S. healthcare industry could decrease the price we have established for Rhopressa®, Rocklatan® or any product candidates or future product candidates, if approved, which could result in product revenues being lower than anticipated. Our products are currently priced higher than existing generic drugs and consistently with current branded drugs. If we are unable to show a significant benefit relative to existing generic drugs, Medicare, Medicaid and private payers may not be willing to reimburse for Rhopressa® or Rocklatan® or any product candidates or future product candidates, if approved, which would significantly reduce the likelihood of them gaining market acceptance. Reimbursement systems in international markets vary significantly by country and by region, and reimbursement approvals must be obtained on a country-by-country basis. In some foreign markets, prescription pharmaceutical pricing remains subject to continuing governmental control even after initial approval is granted.
We believe that U.S. third-party payers consider the efficacy, cost effectiveness, safety and tolerability of Rhopressa® and Rocklatan® and will consider such factors of any product candidates or future product candidates, if approved, and whether use of any such products should be a covered benefit under its health plan in determining whether to approve coverage and reimbursement for such products and at what level. Obtaining these approvals can be a time consuming and expensive process. Our business would be materially adversely affected if we do not maintain approval for reimbursement of Rhopressa® or Rocklatan® or if we do not receive approval for reimbursement of any product candidates or future product candidates, if approved, from third-party payers on a timely or satisfactory basis or if pricing is set at unsatisfactory levels. Limitations on coverage could also be imposed at the local Medicare carrier level or by fiscal intermediaries. Medicare Part D, which provides a pharmacy benefit to Medicare patients as discussed below, does not require participating prescription drug plans to cover all drugs within a class of products. Our business could be materially adversely affected if Part D prescription drug plans were to limit access to or deny or limit reimbursement of any of our approved products.
Reimbursement in the European Union must be negotiated on a country-by-country basis and in many countries the product cannot be commercially launched until reimbursement is approved. Reimbursement in the United Kingdom will also need to be negotiated separately. The negotiation process in some countries can exceed 12 months. To obtain reimbursement or pricing approval in some countries, we or a collaborator may be required to conduct a clinical trial that compares the cost-effectiveness of any of our products, if approved by the appropriate regulatory authorities, to other available therapies. If the prices for any of our products, if approved by the appropriate regulatory authorities, decrease or if governmental and other third-party payers do not provide adequate coverage and reimbursement levels, our revenue, potential for future cash flows and prospects for profitability will suffer. Also, we or a collaborator may not be able to launch the product uniformly throughout the European Union but may have to commence commercial operations on a country-by-country basis, which could complicate the launching process and negatively affect our sales.
We face competition from larger established branded and generic pharmaceutical companies and if our competitors are able to develop and market products that are preferred over our products, our commercial opportunity will be reduced or eliminated.
The development and commercialization of new drug products is highly competitive. We face competition from larger established branded and generic pharmaceutical companies and smaller biotechnology and pharmaceutical companies, as well as from academic institutions, government agencies and private and public research institutions, which may in the future develop products to treat patients with open-angle glaucoma, dry eye, retinal diseases and other diseases of the eye. Our products currently compete directly against companies producing existing and future glaucoma treatment products. To the extent we develop proprietary compounds for use beyond glaucoma, we will face competition from companies, academic institutions, government agencies and private and public research institutions operating in such new therapeutic areas.
41
Many of our competitors have significantly greater financial resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approvals and marketing approved products than we do. Early-stage companies are also developing treatments for open-angle glaucoma, dry eye and retinal diseases and may prove to be significant competitors. We expect that our competitors will continue to develop new treatments for open-angle glaucoma, dry eye and retinal diseases, which may include eye drops, oral treatments, surgical procedures, implantable devices or laser treatments. Alternative treatments beyond eye drops continue to develop. For example, although surgical procedures are currently used in severe cases, less invasive procedures are currently under development, and we expect that we will compete with other companies that develop implantable devices or other products or procedures for use in the treatment of open-angle glaucoma, dry eye and retinal diseases.
Early-stage companies may also compete through collaborative arrangements with large and established companies. Mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources being concentrated among a smaller number of our competitors. Our commercial opportunity will be reduced or eliminated if our competitors develop and commercialize products that are safer, more effective, have fewer adverse effects, are more convenient or are less expensive than any products that we may develop.
In addition, our ability to compete may be affected because in many cases insurers or other third-party payers encourage the use of generic products. Ophthalmology is currently dominated by generic drugs, such as latanoprost and timolol, in the case of glaucoma treatment, and additional products are expected to become available on a generic basis over the coming years. In the United States, we currently enjoy regulatory exclusivity for Rhopressa® and Rocklatan® through December 18, 2022, although competitors are permitted to file ANDAs as of December 18, 2021, if the ANDA contains a certification that the proposed generic product will not infringe or that our patents are allegedly invalid. Our current products are priced at a premium over competitive generic products and consistent with other branded glaucoma drugs. Our ability to compete effectively will depend upon, among other things, our ability to:
•obtain and maintain patent protection and non-patent exclusivity in all current and potential commercial jurisdictions for our products;
•attract and retain key personnel;
•continue to build an effective selling and marketing infrastructure;
•demonstrate the advantages of our products compared to alternative therapies, including, in the case of Rhopressa® and Rocklatan®, other currently marketed PGA and non-PGA products;
•identify and develop additional product candidates to expand our current product portfolio;
•compete against other products with fewer contraindications; and
•obtain and sustain adequate coverage and reimbursement from third-party payers.
If our competitors’ market products that are more effective, safer, have fewer side effects or are less expensive than our products or that reach the market sooner than any of our product candidates or future product candidates, if approved, we may not achieve commercial success.
Failure can occur at any stage of clinical development. If the clinical trials are unsuccessful or delayed, we could be required to abandon development.
A failure of one or more clinical trials can occur at any stage of testing for a variety of reasons. The outcome of preclinical testing and early clinical trials may not be predictive of the outcome of later clinical trials, and interim results of a clinical trial do not necessarily predict final results. In addition, adverse events may occur or other risks may be discovered in Phase 3 registration trials that may cause us to suspend or terminate our clinical trials. In some instances, there can be significant variability in safety and/or efficacy results between different trials of the same product candidate due to numerous factors, including changes in or adherence to trial protocols, differences in size and type of the patient populations and the rates of dropout among clinical trial participants. Our future clinical trial results therefore may not demonstrate safety and efficacy sufficient to obtain regulatory approval for Rhopressa® and Rocklatan® in jurisdictions outside the United States or for any product candidates or future product candidates in any jurisdiction.
Flaws in the design of a clinical trial may not become apparent until the clinical trial is well-advanced or after data results have been obtained. We have limited experience in designing clinical trials and may be unable to design and execute clinical trials on time to support regulatory approval. In addition, clinical trials often reveal that it is not practical or feasible to continue development efforts.
42
We may voluntarily suspend or terminate our clinical trials if at any time we believe that they present an unacceptable risk to participants. Further, regulatory agencies, IRBs or data safety monitoring boards may at any time order the temporary or permanent discontinuation of our clinical trials or request that we cease using investigators in the clinical trials if they believe that the clinical trials are not being conducted in accordance with applicable regulatory requirements, or that they present an unacceptable safety risk to participants. Since our inception, we have not voluntarily or involuntarily suspended or terminated a clinical trial due to unacceptable safety risks to participants.
If the results of any of our clinical trials do not achieve the primary efficacy endpoints or demonstrate unexpected safety issues, the prospects for approval of our product candidates will be materially adversely affected. Moreover, preclinical and clinical data are often susceptible to varying interpretations, analyses and entry criteria, and many companies that believed their product candidates performed satisfactorily in preclinical studies and clinical trials have failed to achieve similar results in later clinical trials, including longer term trials, or have failed to obtain regulatory approval of their product candidates. Many compounds that initially showed promise in clinical trials or earlier stage testing have later been found to cause undesirable or unexpected adverse effects that have prevented further development of the compound. Our ongoing clinical trials for regulatory approvals in jurisdictions outside the United States may not produce the results that we expect and remain subject to the risks associated with clinical drug development as indicated above.
The breadth of the labeling of any product or product candidate, if approved, will depend upon providing evidence of such product’s MOA(s) that is satisfactory to the applicable regulatory authority. Failure to do so will limit the types of claims we will be able to make in our product marketing and labeling. For example, based on the results of our preclinical and clinical studies, we believed Rhopressa® reduced IOP through additional MOAs; however, Rhopressa® received FDA approval for only one MOA, ROCK inhibition or the mechanism by which Rhopressa® increases outflow of aqueous humor through the TM of the eye, as reflected in the Rhopressa® product labeling.
We may experience numerous unforeseen events that could cause our clinical trials to be unsuccessful, delayed, suspended or terminated, or which could delay or prevent our ability to receive regulatory approval or commercialize our product candidates, including:
•clinical trials may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical trials or implement a clinical hold;
•the number of patients required for clinical trials may be larger than we anticipate, enrollment in these clinical trials may be slower than we estimate or participants may drop out of these clinical trials at a higher rate than we anticipate;
•our third-party contractors may fail to comply with regulatory requirements or meet their contractual obligations to us in a timely manner, or at all;
•regulators or IRBs may not authorize us or our investigators to commence a clinical trial or conduct a clinical trial at a prospective trial site;
•we may have delays in reaching or fail to reach agreement on acceptable clinical trial contracts or clinical trial protocols with prospective trial sites;
•we may elect or be required to suspend or terminate clinical trials based on a finding that the participants are being exposed to health risks;
•the cost of clinical trials may be greater than we anticipate;
•the supply or quality of product candidates or other materials necessary to conduct clinical trials may be insufficient or inadequate; and
•product candidates may have undesirable adverse effects or other unexpected characteristics.
If we elect or are required to suspend or terminate a clinical trial, our commercial prospects will be adversely impacted and our ability to generate product revenues may be delayed or eliminated.
Rhopressa®, Rocklatan® or any product candidates or future product candidates may have undesirable or adverse effects, which may result in the delay, denial or withdrawal of regulatory approval or may require our products to be taken off the market, require them to include safety warnings or otherwise limit their sales after regulatory approval is received.
Unforeseen adverse effects from Rhopressa®, Rocklatan® or any product candidates or future product candidates could arise either during clinical development or, even after approval, after the approved product has been marketed. To date, the main tolerability finding of Rhopressa® has been mild conjunctival hyperemia, or eye redness. In our Phase 3 registration trials, some
43
patients also experienced conjunctival hemorrhages, or petechiae, corneal verticillata, blurry vision, and decreased visual acuity as adverse events. Rocklatan® combines Rhopressa® with latanoprost. To date, the main tolerability finding of Rocklatan® has also been mild conjunctival hyperemia. In our Phase 3 registration trials, some patients also experienced conjunctival hemorrhage, eye pruritus, increased lacrimation, reduced visual acuity, blepharitis, punctate keratitis and corneal disorder as adverse events. The main adverse effects of latanoprost include conjunctival hyperemia, irreversible change in iris color, discoloration of the skin around the eyes and droopiness of eyelids caused by the loss of orbital fat. New data relating to Rhopressa® or Rocklatan®, including from any adverse event reports or any negative results during clinical development for additional indications, may emerge at any time.
Any undesirable or adverse effects that may be caused by any such products or product candidates could interrupt, delay or halt clinical trials and could result in the delay, denial or withdrawal of regulatory approval by the FDA or other regulatory authorities for any or all targeted indications, and in turn prevent us from successfully commercializing such products or product candidates, if approved, and generating or continuing to generate revenues from their sale. In addition, if we or others identify undesirable or adverse effects caused by Rhopressa®, Rocklatan® or any product candidates or future product candidates after regulatory approval we could face consequences relating to regulations, litigation or reputational harm, including the withdrawal of regulatory approval of the affected product. These events could prevent us from achieving or maintaining market acceptance of the affected product or could substantially increase the costs and expenses of commercializing such product, which in turn could delay or prevent us from generating or continuing to generate revenues from its sale.
We may not be able to identify additional therapeutic opportunities for Rhopressa®, Rocklatan® or any product candidates or future product candidates or to expand our portfolio of product candidates.
We continue to explore other therapeutic opportunities in ophthalmology through internal research programs and from time to time we may explore such opportunities through research collaboration arrangements or acquisitions and may seek to commercialize a portfolio of new ophthalmic drugs or technologies in addition to Rhopressa® and Rocklatan®. For example, in 2019, we acquired Avizorex, a Spanish ophthalmic pharmaceutical company developing therapeutics for the treatment of dry eye disease. Our clinical operations to date have been limited to developing product candidates for the treatment of glaucoma, ocular hypertension, retinal diseases and dry eye disease, and there can be no assurance that we will successfully develop, license or acquire any drugs or technologies in new therapeutic areas or at all.
Preclinical studies require additional research and development, which in some cases may include significant preclinical, clinical and other testing, prior to initiating clinical development or seeking regulatory approval to market new indications, technologies and/or product candidates. Accordingly, these additional indications, technologies and product candidates will not be commercially available for a number of years, if at all.
Research programs, including through collaboration arrangements, to pursue the development of Rhopressa®, Rocklatan® and any product candidates or future product candidates for additional indications and to identify new product candidates, technologies, therapeutic areas and disease targets require substantial technical, financial and human resources whether or not we ultimately are successful. Our research programs may initially show promise in identifying potential additional indications, technologies, therapeutic areas and/or product candidates, yet fail to yield results for clinical development for a number of reasons.
We are also focused on furthering the development of our product candidates and future product candidates for treatment of retinal diseases and dry eye disease. The decision whether to pursue, and the timing of, any additional preclinical research programs is subject to a number of factors and we may suspend or discontinue research programs at any time.
In addition, because we have limited financial and managerial resources, we focus on research programs and product candidates for specific indications. As a result, we may forego or delay pursuit of opportunities with other product candidates or for other indications that later prove to have greater commercial potential or a greater likelihood of success. Our resource allocation decisions may cause us to fail to capitalize on viable commercial products or profitable market opportunities.
Accordingly, there can be no assurance that we will ever be able to identify or develop additional therapeutic opportunities for Rhopressa®, Rocklatan® or any product candidates or future product candidates or any uses for our existing proprietary compounds beyond glaucoma or to develop suitable potential product candidates or technologies through internal research programs, research collaboration arrangements or acquisitions, which could materially adversely affect our future growth and prospects.
44
Risks Related to Regulation
Regulatory approval may be substantially delayed or may not be obtained for our products in jurisdictions outside the United States or for any product candidates or future product candidates in any jurisdiction if regulatory authorities require additional time or studies to assess the safety and efficacy.
We may be unable to initiate or complete development of our products in jurisdictions outside the United States on schedule, if at all. If applicable regulatory authorities require additional time or studies to assess the safety or efficacy of any of our products, product candidates or future product candidates, we may require funding beyond the amounts currently on our balance sheet. In addition, in the event of any unforeseen costs or other business decisions, we may not have or be able to obtain adequate funding to complete the necessary steps for approval of any of our products, product candidates or future product candidates. Preclinical studies and clinical trials required to demonstrate the quality, safety and efficacy of drug products are time consuming and expensive and together take several years or more to complete. Delays in regulatory approvals or rejections of applications for regulatory approval in the United States, Europe, Japan or other markets may result from many factors, including:
•our inability to obtain sufficient funds required for a clinical trial;
•regulatory requests for additional analyses, reports, data, non-clinical and preclinical studies and clinical trials;
•regulatory questions regarding interpretations of data and results and the emergence of new information regarding product candidates or other products;
•clinical holds, other regulatory objections to commencing or continuing a clinical trial or the inability to obtain regulatory approval to commence a clinical trial in countries that require such approvals;
•failure to reach agreement with the applicable regulators regarding the scope or design of our clinical trials;
•our inability to enroll a sufficient number of patients who meet the inclusion and exclusion criteria in our clinical trials;
•our inability to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols;
•unfavorable or inconclusive results of clinical trials and supportive non-clinical studies, including unfavorable results regarding the effectiveness or safety of product candidates during clinical trials;
•any determination that a clinical trial or product candidate presents unacceptable health risks;
•lack of adequate funding to continue the clinical trial due to unforeseen costs or other business decisions;
•our inability to reach agreements on acceptable terms with prospective contract research organizations (“CROs”) and trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;
•our inability to identify and maintain a sufficient number of sites, many of which may already be engaged in other clinical trial programs, including some that may be for the same indications targeted by any of our product candidates;
•our inability to obtain approval from IRBs to conduct clinical trials at their respective sites;
•the failure of a third party to comply with applicable regulatory requirements, including site inspections and inspection readiness;
•our inability to timely manufacture or obtain from third parties sufficient quantities or quality of the product candidate or other materials required for a clinical trial; and
•difficulty in maintaining contact with patients after treatment, resulting in incomplete data.
Changes in regulatory requirements and guidance may also occur and we may need to amend clinical trial protocols submitted to applicable regulatory authorities to reflect these changes. Amendments may require us to resubmit clinical trial protocols to IRBs for re-examination, which may impact the costs, timing or successful completion of a clinical trial.
Regulatory authorities outside of the United States, such as in Europe and Japan and in emerging markets, have specific requirements for approval of drugs for commercial sale with which we must comply prior to marketing in those areas. Regulatory requirements can vary widely from country to country and could delay or prevent the introduction of our product candidates. Clinical trials conducted in one country may not be accepted by regulatory authorities in other countries, and
45
obtaining regulatory approval in one country does not mean that regulatory approval will be obtained in any other country. Approval processes vary among countries and can involve additional product testing and validation and additional administrative review periods. Seeking foreign regulatory approval could require additional non-clinical studies or clinical trials, which could be costly and time consuming. For all of these reasons, we may not obtain foreign regulatory approvals on a timely basis, if at all.
If we are required to conduct additional clinical trials or other studies with respect to our product candidates beyond those that are initially contemplated, if we are unable to successfully complete our clinical trials or other studies or if the results of these studies are not positive or are only modestly positive, we may be delayed in obtaining regulatory approval for that product candidate, we may not be able to obtain regulatory approval at all or we may obtain approval for indications that are not as broad as intended. Our product development costs will also increase if we experience delays in testing or approvals and we may not have sufficient funding to complete the testing and approval process. Significant clinical trial delays could allow our competitors to bring products to market before we do and impair our ability to commercialize our products if and when approved. If any of this occurs, our business will be materially harmed.
The United Kingdom left the European Union on January 31, 2020, with a transitional period that ended on December 31, 2020. Rhokiinsa® has been grandfathered into a U.K. national authorisation under the country's Brexit legislation, and Roclanda® received a U.K. authorisation. We expect both will continue to be authorised in the United Kingdom as long as we provide the MHRA with the required additional information and do not have three consecutive years without sales.
Rhopressa® and Rocklatan® and any product candidates or future product candidates, if approved, subject us to ongoing regulatory requirements and we may face future development, manufacturing and regulatory difficulties.
Rhopressa® and Rocklatan® are, and any product candidates or future product candidates, if approved, will be, subject to ongoing regulatory requirements for labeling, packaging, storage, advertising, promotion, sampling, record-keeping, submission of safety and other post-market approval information, importation and exportation. In addition, approved products, manufacturers and manufacturing facilities are required to comply with extensive FDA and EMA requirements and the requirements of other similar agencies, including ensuring that quality control and manufacturing procedures conform to current good manufacturing requirements (“cGMP”) requirements. As such, we and our contract manufacturers are subject to continual review and periodic inspections to assess compliance with cGMPs. Accordingly, we and others with whom we work are required to expend time, money and effort in all areas of regulatory compliance, including manufacturing, production and quality control. We are also required to report certain adverse reactions and production problems, if any, to the FDA and the EMA and other similar agencies and to comply with certain requirements concerning advertising and promotion. Promotional communications with respect to prescription drugs also are subject to a variety of legal and regulatory restrictions and must be consistent with the information in the product’s approved labeling. Accordingly, we may not promote any product for indications, uses or claims for which they are not approved, even though physicians may prescribe them for those uses. If we want to expand any such indications for which we may market a product, we will need to obtain additional regulatory approvals, which may not be granted.
Since the 1970s, by regulation, the FDA has classified dispensers of ophthalmic drugs as drugs when packaged with the drugs. However, the FDA has informed us that, as a result of unrelated litigation regarding the definition of a medical device and despite not taking measures to repeal the existing regulation, the FDA has reconsidered this classification and determined that such products should be classified as drug-led drug-device combination products. This change in classification subjects our dispensers to regulation as device components of combination products. We are still evaluating the impact this change in classification, if maintained by the FDA, will have on our approved products, including supplements requesting approval of changes to our NDAs, and our product candidates, as well as our operations. We cannot predict if this change in classification will be subject to challenge or what the outcome of any such challenge would be.
If a regulatory agency discovers previously unknown problems with Rhopressa® or Rocklatan® or any product candidates or future product candidates, if approved, such as adverse events of unanticipated severity or frequency, or problems with the facility where such product is manufactured, or disagrees with the promotion, marketing or labeling of such product, or finds that we have engaged in the promotion of off-label use, it may impose restrictions on that product or us, including requiring withdrawal of that product from the market. If either of our products fails to comply with applicable regulatory requirements, a regulatory agency may:
•issue warning letters or untitled letters;
•require product recalls;
•mandate modifications to promotional materials or require us to provide corrective information to healthcare practitioners;
46
•require us or our potential future collaborators to enter into a consent decree or permanent injunction, which can include shutdown of manufacturing facilities, imposition of various fines, reimbursements for inspection costs, required due dates for specific actions and penalties for noncompliance;
•impose other administrative or judicial civil or criminal penalties or pursue criminal prosecution;
•withdraw regulatory approval;
•refuse to approve pending applications or supplements to approved applications filed by us or by our potential future collaborators;
•impose restrictions on operations, including costly new manufacturing requirements; or
•seize or detain products.
Existing and future legislation may increase the difficulty and cost of commercializing our potential products and may affect the prices we may obtain.
In the United States and some foreign jurisdictions, there have been a number of legislative and regulatory changes and proposed changes regarding the healthcare system that could prevent or delay regulatory approval of our potential products or restrict or regulate post-marketing activities. In the United States, legislative and regulatory proposals have been introduced at both the state and federal level to expand post-approval requirements and restrict sales and promotional activities for pharmaceutical products. We are not sure whether additional legislative changes will be enacted, or whether agencies such as the FDA will issue new guidance or interpretations, whether existing guidance or interpretations will be changed, or what the impact of such changes on our sales and promotional activities for our approved products or the marketing approvals of our potential products may be. In addition, increased scrutiny by the U.S. Congress of the FDA’s approval process may significantly delay or prevent marketing approval, as well as subject us to more stringent product labeling and post-marketing approval testing and other requirements.
If we are found in violation of U.S. federal or state “fraud and abuse” laws or other healthcare laws and regulations, we may be required to pay a penalty and/or be suspended from participation in U.S. federal or state healthcare programs, which may adversely affect our business, financial condition and results of operation.
In the United States, our current and future arrangements with healthcare providers, healthcare organizations, third-party payors and customers expose us to broadly applicable anti-bribery, fraud and abuse and other healthcare laws and regulations that may constrain the business or financial arrangements and relationships through which we research, market, sell and distribute our product candidates. Restrictions under applicable federal and state anti-bribery and healthcare laws and regulations, include the following:
•The Federal Anti-Kickback Statute makes it illegal for any person, including a prescription drug manufacturer (or a party acting on its behalf), to knowingly and willfully solicit, receive, offer or pay any remuneration that is intended to induce the referral of business, including the purchase, order or prescription of a particular drug for which payment may be made under a federal healthcare program, such as Medicare or Medicaid. Although we seek to structure our business arrangements in compliance with all applicable requirements, these laws are broadly written, and it is often difficult to determine precisely how the law will be applied in specific circumstances. Accordingly, it is possible that our practices may be challenged under the Federal Anti-Kickback Statute.
•The Federal False Claims Act prohibits anyone from, among other things, knowingly presenting or causing to be presented for payment to the government, including the federal healthcare programs, claims for reimbursed drugs or services that are false or fraudulent, claims for items or services that were not provided as claimed, or claims for medically unnecessary items or services. Many states have similar false claims laws. Cases have been brought under false claims laws alleging that off-label promotion of pharmaceutical products or the provision of kickbacks have resulted in the submission of false claims to governmental healthcare programs.
•Under the HIPAA, we are prohibited from knowingly and willfully executing a scheme to defraud any healthcare benefit program, including private payers, or knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services to obtain money or property of any healthcare benefit program.
Violations of fraud and abuse laws may be punishable by criminal and/or civil sanctions, including penalties, fines and/or exclusion or suspension from federal and state healthcare programs such as Medicare and Medicaid and debarment from
47
contracting with the U.S. government. In addition, private individuals have the ability to bring actions on behalf of the government under the Federal False Claims Act as well as under the false claims laws of several states.
In addition, certain manufacturers of covered drugs, devices, biologics and medical supplies that are reimbursable under Medicare, Medicaid, or the Children’s Health Insurance Program, with certain exceptions, are required to report annually to CMS information related to certain payments and other transfers of value to physicians, physician assistants, certain types of advance practice nurses, and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family members, with the information made publicly available on a searchable website.
Many states have adopted laws similar to the Federal Anti-Kickback Statute, some of which apply to the referral of patients for healthcare services reimbursed by any source, not just governmental payers. In addition, some states have passed laws that require pharmaceutical companies to comply with the April 2003 Office of Inspector General Compliance Program Guidance for Pharmaceutical Manufacturers and/or the Pharmaceutical Research and Manufacturers of America’s Code on Interactions with Healthcare Professionals. Several states also impose other marketing restrictions or require pharmaceutical companies to make marketing, price, and/or price increase disclosures to the state. There are ambiguities as to what is required to comply with these state requirements and if we fail to comply with an applicable state law requirement, we could be subject to penalties.
Furthermore, the government purchasing and reimbursement programs include remedies such as the obligation to correct reported prices and pay additional rebates (depending on the direction of the correction) or pay restitution to the extent the government overpaid for covered drugs, In addition, federal law provides for civil monetary penalties for conduct such as failure to provide required information, late submission of required information, false information, and knowingly and intentionally overcharging a 340B covered entity.
Law enforcement authorities are increasingly focused on enforcing these laws, and it is possible that some of our practices may be challenged under these laws. Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs. While we believe we have structured our business arrangements to comply with these laws, it is possible that the government could allege violations of, or convict us of violating, these laws. If we are found in violation of one of these laws, we could be subject to significant civil, criminal and administrative penalties, damages, fines, exclusion from governmental funded federal or state healthcare programs and the curtailment or restructuring of our operations. Were this to occur, our business, financial condition and results of operations and cash flows may be materially adversely affected.
If we face allegations of noncompliance with the law and encounter sanctions, our reputation, revenues and liquidity may suffer, and Rhopressa® or Rocklatan® or any product candidates or future product candidates, if approved, could be subject to restrictions or withdrawal from the market.
Any government investigation of alleged violations of law could require us to expend significant time and resources in response and could generate negative publicity. Any failure to comply with ongoing regulatory requirements may significantly and adversely affect our ability to commercialize and generate revenues. If regulatory sanctions are applied or if regulatory approval is withdrawn, the value of our company and our operating results will be materially adversely affected. Additionally, if we are unable to continue to generate revenues from our product sales, our potential for achieving profitability will be diminished and the need to raise capital to fund our operations will be increased.
Healthcare law and policy changes may negatively impact our business, including by decreasing the prices that we and our collaborators receive for our products.
In recent years, the United States has enacted or proposed legislative and regulatory actions and executive orders affecting the healthcare system that may impact our ability to profitably sell any product for which we obtain marketing approval. For example, the federal government has implemented reforms to government healthcare programs in the United States, including changes to the methods for, and amounts of, Medicare reimbursement and changes to the Medicaid Drug Rebate Program. The implementation of certain of these policy changes has decreased our revenues and increased our costs, and federal and state legislatures, health agencies and third-party payers continue to focus on containing the cost of prescription drugs. Further legislative and regulatory changes, and increasing pressure from social sources, are likely to further influence the manner in which our products are priced, reimbursed, prescribed and purchased.
The Medicare Modernization Act (“MMA”) changed the way Medicare covers and pays for pharmaceutical products. The legislation expanded Medicare coverage for drug purchases by the elderly by establishing Medicare Part D and introduced a reimbursement methodology based on average sales prices for physician-administered drugs under Medicare Part B. In addition, this legislation provided authority for limiting the number of drugs that are covered in any therapeutic class under the
48
Part D program. Cost reduction initiatives and other provisions of this legislation could decrease the coverage and reimbursement rate that we receive for any of our approved products. While the MMA only applies to drug benefits for Medicare beneficiaries, private payers often follow Medicare coverage policy and payment limitations in setting their own reimbursement rates. Therefore, any reduction in reimbursement that results from the MMA may result in a similar reduction in payments from private payers.
The Patient Protection and Affordable Care Act (“PPACA”) added provisions to broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for healthcare and health insurance industries, impose new taxes and fees on the health industry and impose additional health policy reforms. Among other things, PPACA increased manufacturers’ rebate liability under the Medicaid Drug Rebate Program, imposed a significant annual fee on companies that manufacture or import branded prescription drug products and required manufacturers to provide a discount off the negotiated price of prescriptions filled by beneficiaries in the Medicare Part D coverage gap, referred to as the “donut hole,” which is now 70% of the negotiated price. There have been efforts to repeal or overturn PPACA. On June 17, 2021, the U.S. Supreme Court dismissed a challenge on procedural grounds that argued the PPACA is unconstitutional in its entirety because the “individual mandate” was repealed by Congress. Thus, the PPACA will remain in effect in its current form. It is possible that the PPACA will be subject to judicial or Congressional challenges in the future. It is uncertain how any such challenges and the healthcare measures of the Biden administration will impact the PPACA and our business.
In addition, the United States Department of Health and Human Services (“HHS”) through FDA has issued a final rule to permit importation of certain pharmaceutical products provided certain requirements can be met. Litigation was initiated with regard to this final rule and the Biden Administration has defended the final rule. The litigation is ongoing. In addition, former President Trump and President Biden both issued Executive Orders intended to favor government procurement from domestic manufacturers.
On November 20, 2020, HHS finalized a regulation removing safe harbor protection under the Federal Anti-Kickback Statute for price reductions from pharmaceutical manufacturers to plan sponsors under Part D, either directly or through pharmacy benefit managers, unless the price reduction is required by law or unless it is passed through to the dispensing pharmacy and reflected in the price to the patient. The implementation of the rule has been delayed by the Biden administration to January 1, 2023 in response to ongoing litigation. In addition, effective January 1, 2024, a provision capping the rebate amount under the Medicaid Drug Rebate program at 100% of AMP will be eliminated, which means that a manufacturer could pay a rebate amount on a unit of the drug that is greater than the price the manufacturer receives for the drug. Further, effective January 1, 2023, a final rule issued by CMS will change the way copay assistance program prices are treated in best price for purposes of the Medicaid Drug Rebate Program. This change could result in manufacturers eliminating their patient assistance programs, which would make many innovator drugs more expensive for patients. This final rule is subject to ongoing litigation, but it is not clear when a decision will be made or how the court will rule.
On September 9, 2021, the Biden administration published a wide-ranging list of policy proposals, most of which would need to be carried out by Congress, to reduce drug prices and drug payment. The HHS plan includes, among other reform measures, proposals to lower prescription drug prices, including by allowing Medicare to negotiate prices and disincentivizing price increases, and to support market changes that strengthen supply chains, promote biosimilars and generic drugs, and increase price transparency Many similar proposals, including the plans to give Medicare Part D authority to negotiate drug prices, require drug manufacturers to pay rebates on drugs whose prices increase greater than the rate of inflation, and cap out-of-pocket costs, have already been included in policy statements and legislation currently being considered by Congress. It is unclear to what extent these and other statutory, regulatory, and administrative initiatives will be enacted and implemented, and to what extent these or any future legislation or regulations by the Biden administration will have on our business, including market acceptance, and sales, of our products and product candidates.
In addition, the Health Resources and Services Administration (“HRSA”) recently referred several manufacturers to the HHS Office of Inspector General for consideration of assessment of civil monetary penalties over the manufacturers’ policies that place restrictions on 340B pricing to 340B Covered Entities that utilize contract pharmacies. Under the 340B program, manufacturers are required to charge specified categories of federally funded clinics and safety net hospitals (known as 340B Covered Entities) no more than an established discounted price for their covered outpatient drugs. The program is designed to give 340B Covered Entities access to the same discount obtained by Medicaid under the Medicaid drug rebate program. 340B Covered Entities that do not have their own pharmacies may contract with outside pharmacies to dispense drugs to the Covered Entity’s patients, though concerns about pharmacies diverting 340B drugs to non-340B patients has recently led to the manufacturer restrictions described above and manufacturer litigation over whether a 340B Covered Entity is permitted to contract with multiple outside pharmacies. This litigation is ongoing.
49
Also, some states have enacted or are considering legislation and ballot initiatives that would control the prices and coverage and reimbursement levels of drugs, including laws to allow importation of pharmaceutical products from lower cost jurisdictions outside the United States and laws intended to impose price controls on state drug purchases.
In addition, governments in countries outside the United States control the costs of pharmaceuticals. Many European countries and Canada have established pricing and reimbursement policies that contain costs by referencing the price of the same or similar products in other countries. In these instances, if coverage or the level of reimbursement is reduced, limited or eliminated in one or more countries, we may be unable to obtain or maintain anticipated pricing or reimbursement in other countries or in new markets. This may influence our decision whether to sell a product in one or more countries, thus adversely affecting our geographic expansion plans. It is also possible that governments may take additional action to reform the healthcare system in response to the evolving effects of the coronavirus pandemic.
Healthcare reforms that have been adopted, and that may be adopted in the future, could result in further reductions in coverage and levels of reimbursement for our products, increases in the rebates payable under U.S. government rebate programs and additional downward pressure on the prices that we and our collaborators receive for our products. We cannot be certain as to the ultimate content, timing, or effect of future healthcare law and policy changes, nor is it possible at this time to estimate the impact of any such potential changes; however, such changes or the ultimate impact of changes could materially and adversely affect our revenue or sales of our current or future products and product candidates, as well as those of our collaborators. These actions and the uncertainty about the future PPACA are likely to continue the downward pressure on pharmaceutical pricing and increase our regulatory burdens and operating costs.
These actions and the uncertainty about the future PPACA are likely to continue the downward pressure on pharmaceutical pricing and increase our regulatory burdens and operating costs.
Risks Related to Manufacturing
If we or third-party manufacturers fail to comply with manufacturing regulations, our financial results and financial condition will be adversely affected.
Before we or a third party can begin commercial manufacturing of Rhopressa® or Rocklatan® or any product candidates or future product candidates, if approved, we or the third party must obtain regulatory approval of our or their manufacturing facilities, processes and quality systems. If we or our third-party manufacturers do not have a cGMP compliant status or other comparable status acceptable to the FDA or other regulatory authority, as applicable, approval of any NDA or other application that includes those manufacturers will be delayed.
Due to the complexity of the processes used to manufacture pharmaceutical products and product candidates, we or any potential third-party manufacturer may be unable to initially pass federal, state or international regulatory inspections in a cost-effective manner. We or any of our contract manufacturers may fail to satisfy or comply with manufacturing regulations. If we or our contract manufacturers do not have a compliance status acceptable to the FDA, regulatory approval and/or commercial supply of the active pharmaceutical ingredients of Rhopressa® or Rocklatan® or any product candidates or future product candidates, if approved, will be significantly delayed and may result in significant additional costs.
In addition, pharmaceutical manufacturing facilities are continuously subject to inspection by the FDA and foreign regulatory authorities, before and after product approval, and must comply with cGMP. We or our contract manufacturers may encounter difficulties in achieving quality control and quality assurance and may experience shortages in qualified personnel. In addition, failure to achieve and maintain high manufacturing standards in accordance with applicable regulatory requirements, or the incidence of manufacturing errors, could result in patient injury, product liability claims, product shortages, product recalls or withdrawals, delays or failures in product testing or delivery, cost overruns or other problems that could seriously harm our business. If we or a third-party manufacturer with whom we contract is unable to comply with manufacturing regulations, we may be subject to fines, unanticipated compliance expenses, recall or seizure of our products, product liability claims, total or partial suspension of production and/or enforcement actions, including injunctions and criminal or civil prosecution. These possible sanctions could materially adversely affect our reputation, financial results and financial condition.
Furthermore, changes in the manufacturing process or procedure, including a change in the location where the product is manufactured or a change of a third-party manufacturer, will require prior FDA or other regulatory review and/or approval of the manufacturing process and procedures in accordance with the FDA’s regulations or comparable foreign requirements. This review may be costly and time consuming and could delay or prevent the launch or commercial production of a product. The new facility will also be subject to pre-approval inspection. In addition, we have to demonstrate that the product made at the new facility is equivalent to the product made at the former facility by physical and chemical methods, which are costly and
50
time consuming. It is also possible that the FDA or other regulatory authority may require clinical testing as a way to prove equivalency, which would result in additional costs and delay.
While we expect to rely heavily on our own manufacturing capabilities at our Athlone plant, there will be continued reliance on third-party manufacturers for the commercialization of Rhopressa® and Rocklatan® as back-up suppliers and the development of any product candidates or future product candidates in accordance with manufacturing regulations, beyond our recent progress in internal manufacturing capabilities.
With respect to the commercial production of Rhopressa® and Rocklatan®, we currently have contractual relationships for finished product manufacturing with two vendors and are outsourcing the production of the API. To the extent we terminate our existing supplier arrangements in the future and seek to enter into arrangements with alternative suppliers, we may experience a delay in our ability to obtain our clinical or commercial supplies.
Reliance on third-party manufacturers entails risks, including:
•manufacturing delays if our third-party manufacturers give greater priority to the supply of other products over Rhopressa® or Rocklatan® or any product candidates or future product candidates, if approved, or otherwise do not satisfactorily perform according to the terms of their agreements with us;
•delays in obtaining regulatory approval for Rhopressa® and/or Rocklatan® outside the United States or any product candidates or future product candidates, if our third-party manufacturers fail to satisfy or comply with regulatory requirements;
•the possible termination or nonrenewal of the agreement by the third party at a time that is costly or inconvenient for us;
•the possible breach of the manufacturing agreement by the third party;
•product loss due to contamination, equipment failure or improper installation or operation of equipment or operator error;
•the failure of the third-party manufacturer to comply with applicable regulatory requirements; and
•the possible misappropriation of our proprietary information, including our trade secrets and know-how.
For example, in October 2016, we were required to withdraw the initial submission of our NDA for Rhopressa® due to a contract manufacturer of our drug product not being prepared for pre-approval inspection by the FDA. We resubmitted the Rhopressa® NDA in February 2017 upon receiving confirmation from the contract manufacturer that it was prepared for FDA inspection and the Rhopressa® NDA was subsequently approved in December 2017.
In addition, our manufacturers may not perform as agreed or may not remain in the contract manufacturing business. In the event of a natural disaster, business failure, strike or other difficulty, we may be unable to replace a third-party manufacturer in a timely manner and the production of Rhopressa®, Rocklatan® or any product candidates or future product candidates could be interrupted, resulting in delays and additional costs. We may also have to incur other charges and expenses for products that fail to meet specifications and undertake remediation efforts.
In January 2017, we established our own manufacturing plant in Athlone, Ireland, and we completed the build-out during the second quarter of 2019. In January 2020 and September 2020, we received FDA approval to produce Rocklatan® and Rhopressa®, respectively, at the Athlone manufacturing plant for commercial distribution in the United States. The Athlone manufacturing plant began manufacturing commercial supplies of Rocklatan® in the first quarter of 2020 and Rhopressa® in the third quarter of 2020 for distribution to the United States. The Athlone manufacturing plant has also manufactured clinical supplies of Rhopressa® for the Phase 3 clinical trials in Japan as well as registration batches to support product approval in Japan. We expect that the Athlone manufacturing plant will have adequate capacity to produce Rhopressa® and Rocklatan® for the United States as well as both the European and Japanese commercial markets. However, there can be no assurance that we will be able to successfully manufacture our final drug product on a commercial scale or in accordance with manufacturing regulations. If our manufacturing operations fail to achieve regulatory approval or to effectively produce commercial supplies of Rhopressa® or Rocklatan® or any product candidates or future product candidates, if approved, or until such time we are capable of developing internal manufacturing capabilities, we will be required to rely solely on third-party manufacturers to meet our commercial manufacturing needs, which may materially adversely affect our business, results of operations or financial condition.
51
We commenced operation of our cGMP-validated manufacturing facility in RTP for production of ophthalmic implants using the proprietary PRINT® technology platform in the fourth quarter of 2018. We anticipate that this facility will be the primary manufacturer of our implant product candidates.
Production at our suppliers’ facilities could be disrupted for a variety of reasons, which could prevent us from producing enough of our products to maintain our sales and satisfy our customers' demands.
A disruption in production at our suppliers’ facilities could have a material adverse effect on our business. Disruptions or interruptions of production or operations could occur for many reasons, including accidents, unplanned maintenance or other manufacturing problems, cyber security incidents, terrorism, acts of war or political unrest, disease or public health crises, strikes or other labor unrest, transportation interruption or other unforeseen events as a result of weather, fire, natural disasters or otherwise. Additional facilities with sufficient capacity or capabilities may not be available, may cost substantially more or may take a significant time to start production due to the need for FDA approval, each of which could negatively affect our business and financial performance. If one of our key suppliers is unable to produce our products or raw materials for an extended period of time, our sales may be reduced by the shortfall caused by the disruption and we may not be able to meet our customers’ needs, which may materially adversely affect our business and financial performance.
Risks Related to Our Reliance on Third Parties
If we or our collaborators are unable to successfully obtain regulatory approval and commercialize Rhopressa® and Rocklatan® in jurisdictions outside the United States, our business may be harmed.
To obtain regulatory approval and commercial success for our products in jurisdictions outside the United States, we must either conduct clinical trials and develop a sales and marketing organization in such jurisdictions or outsource these functions to third parties through collaboration agreements. In October 2020, we announced the First Santen Agreement for the development and commercialization of Rhopressa® and Rocklatan® in Japan. In December 2021, we entered into the Second Santen Agreement, which expands the scope of the First Santen Agreement, and granted Santen the exclusive right to develop and commercialize Rhopressa® and Rocklatan® in Europe, China, India, the Middle East, CIS, Africa, parts of Latin America and the Oceania countries. We have limited experience conducting clinical trials in jurisdictions outside the United States and no experience selling, marketing or distributing any drug product in any jurisdictions outside the United States. A failure of one or more clinical trials can occur at any stage of testing for a variety of reasons. See “—Risks Related to Development and Commercialization—Failure can occur at any stage of clinical development. If the clinical trials are unsuccessful or delayed, we could be required to abandon development.” Other companies have experienced unsuccessful product launches and failed to meet expectations of market potential, including companies with significantly more experience and resources than we do, and there can be no guarantee that we or our collaborators will successfully launch any product in any jurisdictions outside the United States. If we enter into any collaboration agreement, such as the Santen Agreements, our collaborator may not advance the clinical trials or commercialization milestones as quickly or as successfully as we had expected. See “—Any collaboration arrangement that we may enter into may not be successful, which could adversely affect our ability to develop and commercialize any product candidates or future product candidates or technologies or to enter new therapeutic areas.” If we pursue on our own a sales and marketing strategy in an additional jurisdiction, which may occur if a collaboration agreement does not result in a successful product launch, we would incur significant additional expenses and commit significant additional time and management resources if we were to establish and train a sales force to market and sell our products in jurisdictions outside the United States. We may not be able to successfully obtain regulatory approval or commercialize our products on our expected timing or at all despite these additional expenditures.
Factors that may inhibit our efforts to successfully obtain regulatory approval and commercialize our products outside the United States include:
•regulatory questions regarding interpretations of data and results and the emergence of new information regarding product candidates or other products;
•clinical holds, other regulatory objections to commencing or continuing a clinical trial or the inability to obtain regulatory approval to commence a clinical trial in countries that require such approvals;
•failure to reach agreement with the applicable regulators regarding the scope or design of the clinical trials;
•an inability to enroll a sufficient number of patients who meet the inclusion and exclusion criteria in the clinical trials;
•an inability to compete with other pharmaceutical companies to recruit, hire, train and retain adequate numbers of effective sales and marketing personnel with requisite knowledge of our target market;
52
•an inability to effectively manage a geographically dispersed sales and marketing organization in such jurisdictions;
•the inability of sales personnel to obtain access to adequate numbers of eye-care professionals to prescribe any future approved products;
•failure to adhere to regulatory requirements governing the sale of products in any jurisdiction;
•unforeseen costs and expenses associated with creating an independent sales and marketing organization;
•a delay in bringing products to market after efforts to hire and train our sales force have already commenced; and
•failure to maintain the relationship contemplated by a collaboration agreement for a territory leading to its termination.
In the event we are unable to successfully market and promote our products, our business may be harmed.
Any collaboration arrangement that we may enter into may not be successful, which could adversely affect our ability to develop and commercialize our products, any product candidates or future product candidates or technologies or to enter new therapeutic areas.
We continually explore and discuss additional opportunities for new ophthalmic products, delivery alternatives and new therapeutic areas with potential partners and on our own. We may seek collaboration arrangements with pharmaceutical or biotechnology companies or universities for the development or commercialization of our product candidates or future product candidates or technologies. As part of our globalization strategy, in October 2020, we entered into the First Santen Agreement to advance our clinical development and ultimately commercialize Rhopressa® and Rocklatan® in Japan and East Asia and in December 2021, we entered into the Second Santen Agreement to advance our clinical development and ultimately commercialize Rhopressa® and Rocklatan® in Europe, China, India, the Middle East, the CIS, Africa, parts of Latin America and the Oceania countries. We will face, to the extent that we decide to enter into additional collaboration agreements, significant competition in seeking appropriate collaborators. Moreover, collaboration arrangements are often complicated and time consuming to negotiate, document and implement. We may not be successful in our efforts to establish, implement and maintain collaborations or other alternative arrangements and the terms of such arrangements may not be favorable to us. If and when we collaborate with a third party for development and commercialization of a product candidate and/or technology, we can expect to relinquish some or all of the control over the future success of that product candidate and/or technology to the third party. The success of our collaboration arrangements will depend heavily on the efforts and activities of our collaborators. Collaborators generally have significant discretion in determining the efforts and resources that they will apply to these collaborations. Accordingly, there can be no assurance that any collaboration or licensing arrangement or similar strategic transaction we enter into will result in the benefits that we anticipate.
Pursuant to the First Santen Agreement and the Second Santen Agreement, there are various development milestones and sales milestones. If Santen is not able to hit the milestones within the timeframes contemplated by each agreement, as applicable, or at all, our development and commercialization efforts in Japan, Europe, the Middle East and the other countries will be harmed. Additionally, Santen Pharmaceuticals may terminate the First Santen Agreement if, among other events, there are patents issued that may prevent the commercialization of Rhopressa® and Rocklatan® and such discretionary termination would require us to repay up to approximately 85% of a $50.0 million upfront payment, which Santen paid pursuant to the First Santen Agreement, all development milestone payments, and 50% of the development expenses incurred by Santen Pharmaceuticals. Any such discretionary termination of the First Santen Agreement may adversely affect us financially and could harm our reputation. Furthermore, under the Second Santen Agreement, if among other events, there are patents issued in China that may prevent the commercialization of Rhopressa® and Rocklatan®, we would be required to repay $8.0 million of the $88.0 upfront payment, which Santen SA paid in January 2022.
Disagreements between parties to a collaboration arrangement regarding research, clinical development and commercialization matters can lead to delays in the development process or commercializing the applicable product candidate or technology and, in some cases, termination of the collaboration arrangement. These disagreements can be difficult to resolve if neither of the parties has final decision-making authority. In addition, collaborators may not pursue development and commercialization of our preclinical molecules or product candidates or may elect not to continue or renew development or commercialization programs based on our results, changes in their strategic focus due to the acquisition of competitive products or technologies, availability of funding, or other external factors, such as a business combination that diverts resources or creates competing priorities. Collaborations with pharmaceutical or biotechnology companies and other third parties often are terminated or allowed to expire by the other party. Any such termination or expiration may adversely affect us financially and could harm our business reputation.
53
We have entered into collaboration arrangements and intend to continue exploring the licensing of commercialization rights or other forms of collaboration outside of the United States and we have developed internal manufacturing capabilities in Ireland, both of which will expose us to additional risks of conducting business in international markets.
Entering markets outside of the United States is a component of our growth strategy. If we fail to successfully commercialize, obtain licenses or enter into collaboration arrangements with selling parties, or if these parties are not successful, our revenue-generating growth potential will be adversely affected. As part of this strategy, we completed the build-out of our manufacturing plant in Athlone, Ireland, for additional commercial production of Rhopressa® and Rocklatan® in the second quarter of 2019. In January 2020 and September 2020, respectively, we received FDA approval to produce Rocklatan® and Rhopressa®, respectively, at the Athlone manufacturing plant for commercial distribution in the United States. The Athlone manufacturing plant began manufacturing commercial supplies of Rocklatan® in the first quarter of 2020 and Rhopressa® in the third quarter of 2020 for distribution to the United States. The Athlone manufacturing plant has also manufactured clinical supplies of Rhopressa® for the Phase 3 clinical trials in Japan. We expect that the Athlone manufacturing plant will have adequate capacity to produce Rhopressa® and Rocklatan® for the United States as well as both the European and Japanese commercial markets, but there can be no guaranty that the facility will be able to manufacture products with specifications unique to any particular jurisdiction. We have entered into the First Santen Agreement to advance our clinical development and ultimately commercialize Rhopressa® and Rocklatan® in Japan and East Asia and, pursuant to the Second Santen Agreement, we intend to utilize the Athlone manufacturing plant to manufacture and supply Rhopressa® and Rocklatan® for Europe and the other territories covered by such agreement. Our offices in Ireland, the United Kingdom and Japan assist with our international expansion. International operations and business relationships subject us to additional risks that may materially adversely affect our ability to attain or sustain profitable operations, including:
•efforts to enter into or expand collaboration or licensing arrangements with third parties in connection with our international sales, marketing, manufacturing and distribution efforts may increase our expenses or divert our management’s attention from the acquisition or development of product candidates;
•changes in a specific country’s or region’s political and cultural climate or economic condition or changes in governmental regulations and laws;
•differing regulatory requirements for drug approvals, manufacturing and marketing internationally;
•difficulty of effective enforcement of contractual provisions in local jurisdictions;
•potentially reduced protection for intellectual property rights;
•potential third-party patent rights in countries outside of the United States;
•changes in tariffs, trade barriers and other regulatory requirements including those governing data privacy;
•divergent environmental laws and regulations;
•economic weakness, including inflation, or political instability, particularly in non-U.S. economies and markets, including several countries in Europe;
•compliance with tax, employment, immigration and labor laws for employees traveling abroad;
•the effects of applicable foreign tax structures and potentially adverse tax consequences (including the tax reform law that was enacted in the United States in December 2017) that create uncertainty with respect to the tax impact on our business operations and profitability;
•foreign currency fluctuations, which could result in increased operating expenses and reduced revenue, and other obligations incidental to doing business in another country;
•workforce uncertainty in countries where labor unrest is more common than in the United States;
•the potential for so-called parallel importing, which is what happens when a local seller, faced with high or higher local prices, opts to import goods from a foreign market (with low or lower prices) rather than buying them locally;
•failure of our employees and contracted third parties to comply with Office of Foreign Asset Control rules and regulations and the Foreign Corrupt Practices Act or other extra-territorial anti-bribery laws such as the U.K. Bribery Act 2010;
•production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad; and
54
•business interruptions resulting from geo-political actions, including war and terrorism, or natural disasters, including earthquakes, volcanoes, typhoons, tsunamis, floods, hurricanes and fires.
These and other risks may materially adversely affect our business, results of operations, financial condition or ability to attain or sustain revenue from international markets.
We currently depend on third parties to conduct some of the operations of our clinical trials and other portions of our operations, and we may not be able to control their work as effectively as if we performed these functions ourselves.
We rely on third parties, such as CROs, clinical data management organizations, medical institutions and clinical investigators, to oversee and conduct our clinical trials and to perform the related data collection and analysis. We expect to rely on these third parties to conduct clinical trials of any product candidates or future product candidates that we develop. These parties are not our employees and we cannot control the amount or timing of resources that they devote to our programs. In addition, any CRO that we retain will be subject to the FDA’s regulatory requirements or similar foreign standards and we do not have control over compliance with these regulations by these providers. Our agreements with third-party service providers are on a trial-by-trial and project-by-project basis. Typically, we may terminate the agreements with notice and are responsible for the third party’s incurred costs. If any of our relationships with our third-party CROs terminate, we may not be able to enter into arrangements with alternative CROs or to do so on commercially reasonable terms. We also rely on other third parties to store and distribute drug supplies for our clinical trials and commercial supply. Any performance failure on the part of our third-party vendors could delay, as applicable, clinical development, regulatory approval or commercialization of Rhopressa®, Rocklatan® or any product candidates or future product candidates, producing additional losses and depriving us of potential product revenue.
Our reliance on these third parties for clinical development activities reduces our control over these activities but does not relieve us of our responsibilities, and we remain responsible for ensuring that each of our clinical trials is conducted in accordance with the general investigational plan, the protocols for the trial and the FDA’s regulations and international standards, referred to as GCP requirements, for conducting, recording and reporting the results of clinical trials to assure that data and reported results are credible and accurate, and that the rights, integrity and confidentiality of trial participants are protected. Preclinical studies must also be conducted in compliance with the Animal Welfare Act requirements. Managing performance of third-party service providers can be difficult, time consuming and cause delays in our development programs. We currently have a small number of employees, which limits the internal resources we have available to identify and monitor our third-party providers.
Furthermore, these third parties may produce or manufacture competing drugs or may have relationships with other entities, some of which may be our competitors. The use of third-party service providers requires us to disclose our proprietary information to these parties, which could increase the risk that this information will be misappropriated.
If these third parties do not successfully carry out their contractual duties or obligations and meet expected deadlines, if they need to be replaced or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols according to regulatory requirements or for other reasons, our financial results and the commercial prospects for Rhopressa® and Rocklatan® and any product candidates or future product candidates, if approved, could be harmed, our costs could increase and our ability to obtain regulatory approval (as applicable) and commence product sales could be delayed.
If we fail to manage an effective distribution process in the United States or establish an effective distribution process in jurisdictions outside the United States, our business may be adversely affected.
We have established the infrastructure necessary for distributing pharmaceutical products in which third-party logistics wholesalers warehouse Rhopressa® and Rocklatan® and distribute them to pharmacies and will need to establish such infrastructures in jurisdictions outside the United States. This distribution network requires significant coordination with our sales and marketing and finance organizations, and the failure to coordinate financial systems could negatively impact our ability to accurately report product revenue. If we are unable to effectively manage the distribution process, the continued commercialization of our products could be disrupted or the commercial launch and sales of Rhopressa® and Rocklatan® in jurisdictions outside the United States, in any such case, or any product candidates or future product candidates, if approved, will be delayed or severely compromised and our results of operations may be harmed.
55
A significant portion of our revenue currently comes from a limited number of distributors, and any decrease in revenue from these distributors could harm our business.
A significant portion of our revenue comes from a limited number of distributors, including McKesson Corporation, Cardinal Health, Inc. and AmerisourceBergen Corporation. We further expect that a significant portion of our revenue will continue to depend on sales to a limited number of distributors in the foreseeable future. We do not have long-term commitments from our distributors to carry our products, and any of our distributors may from quarter to quarter comprise a significant concentration of our revenues. Our dependence on a few distributors could expose us to the risk of substantial losses if any single large distributor stops purchasing our products, purchases a lower quantity of our products or goes out of business and we cannot find substitute distributors on equivalent terms without delays, if at all. While we may be able to shift our business to one of our other existing distributors or to a new distributor, there may be disruption in the interim. In addition, any reduction in the prices we receive for our products could adversely impact our revenues and financial condition. If we lose our relationship with any of our significant distributors, we could experience delays in the distribution of our products and could also experience declines in our revenues which in turn could materially adversely affect our business, results of operations or financial condition.
Risks Related to Intellectual Property
We may not be able to protect our proprietary technology in the marketplace.
We depend on our ability to protect our proprietary technology. We rely on trade secret, patent, copyright and trademark laws, and confidentiality, licensing and other agreements with employees and third parties, all of which offer only limited protection. Our success depends in large part on our ability and any future licensee’s ability to obtain and maintain patent protection in the United States and other countries with respect to our proprietary technology and products. We believe we will be able to obtain, through prosecution of our current pending patent applications, adequate patent protection for our proprietary drug technology. If we are compelled to spend significant time and money protecting or enforcing our patents, designing around patents held by others or licensing or acquiring, potentially for large fees, patents or other proprietary rights held by others, our business and financial prospects may be harmed. If we are unable to effectively protect the intellectual property that we own, other companies may be able to offer the same or similar products for sale, which could materially adversely affect our competitive business position and harm our business prospects. Our patents may be challenged, narrowed, invalidated, or circumvented, which could limit our ability to stop competitors from marketing the same or similar products or limit the length of term of patent protection that we may have for our products.
The patent positions of pharmaceutical products are often complex and uncertain. The standards of patentability as well as the breadth of claims allowed in pharmaceutical patents in the United States and many jurisdictions outside of the United States is not consistent. For example, in many jurisdictions the support standards for pharmaceutical patents are becoming increasingly strict. Some countries prohibit method of treatment claims in patents. Changes in either the patent laws or interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property or create uncertainty. In addition, publication of information related to our current product and potential products may prevent us from obtaining or enforcing patents relating to such product and potential products, including without limitation composition-of-matter patents, which are generally believed to offer the strongest patent protection.
Our intellectual property includes issued patents and pending patent applications for compositions of matter, pharmaceutical formulations, methods of use, medical devices, synthetic methods and designs. As of December 31, 2021, we owned 58 patents and have 19 pending patent applications in the United States and certain foreign jurisdictions for Rhopressa® and Rocklatan®. Patent protection for Rocklatan® includes the U.S. patents that cover Rhopressa®. The patents cover composition of matter, pharmaceutical compositions and methods of use. As of December 31, 2021, we owned and had pending patent applications in the United States and certain foreign jurisdictions for our product candidates. Our exclusive license regarding AR-15512 provides us with exclusive rights in patents covering pharmaceutical compositions of AR-15512 and its use in treating dry-eye in the United States and pending patent applications internationally. Furthermore, as of December 31, 2021, for AR-1105 we had two issued patents, one in the United States and one in Japan, which could provide coverage for AR-1105 in the United States and Japan through 2036. See “Business—Intellectual Property” for further information about our issued patents and patent applications. With respect to our sustained-release implant AR-14034 SR, we have filed patent applications in the United States as well as internationally. Should these applications issue, they would provide patent protection through 2040.
Patents that we own or may license in the future do not necessarily ensure the protection of our intellectual property for a number of reasons, including without limitation the following:
•our patents may not be broad or strong enough to prevent competition from other products that are identical or similar to Rhopressa® and Rocklatan®;
56
•there can be no assurance that the term of a patent can be extended under the provisions of Patent Term Extension (“PTE”) afforded by U.S. law or similar provisions in foreign countries, where available;
•our issued patents and patents that we may obtain in the future may not prevent generic entry into the markets for Rhopressa® and Rocklatan®;
•we do not currently own or control foreign patents issued outside of Australia, Canada, Europe and Japan that would prevent generic entry into those markets for Rhopressa® and Rocklatan®;
•we may be required to disclaim part of the term of one or more patents;
•there may be prior art of which we are not aware that may affect the validity or enforceability of a patent claim;
•there may be prior art of which we are aware, which we do not believe affects the validity or enforceability of a patent claim, but which, nonetheless, ultimately may be found to affect the validity or enforceability of a patent claim;
•there may be other patents issued to others that will affect our freedom to operate;
•if our patents are challenged, a court of competent jurisdiction could determine that they are invalid or unenforceable;
•there might be a significant change in the law that governs patentability, validity and infringement of our patents that adversely affects the scope of our patent rights;
•a court of competent jurisdiction could determine that a competitor’s technology or product does not infringe our patents; and
•our patents could irretrievably lapse due to failure to pay fees or otherwise comply with regulations or could be subject to compulsory licensing.
Our competitors may be able to circumvent our patents by developing similar or alternative technologies or products in a non-infringing manner. Our competitors may seek to market generic versions of Rhopressa® and/or Rocklatan® by submitting ANDAs to the FDA in which our competitors claim that our patents are invalid, unenforceable and/or not infringed. Our period of regulatory market exclusivity in the United States for each of Rhopressa® and Rocklatan® with respect to their current indications will end on December 18, 2022. However, our competitors are permitted to file ANDAs to obtain permission to market generic versions of Rhopressa® and/or Rocklatan® as of December 18, 2021, if the ANDA contains a certification of patent invalidity or non-infringement, also known as a Paragraph IV Certification. In such circumstances, we may need to file a lawsuit to delay FDA approval of such ANDA, to defend our patent rights and to try to maintain the longer-term benefits of patent-based market exclusivity. The filing of such a lawsuit would trigger a 30-month stay of regulatory approval of the ANDA filer’s application. In addition, our competitors may file patent applications that may have an impact on our ability to make, use and sell products that contain Rhopressa® or Rocklatan®. Should such a competitor’s patent application(s) issue, it is possible the competitor will allege that our making, using or selling of products containing Rhopressa® or Rocklatan® infringes such issued patents. In such circumstances, we may need to challenge such pending applications or issued patents, or perhaps come to a financial arrangement with the competitor.
Alternatively, our competitors may seek approval to market their own products similar to or otherwise competitive with our products. In these circumstances, we may need to defend and/or assert our patents, including by filing lawsuits alleging patent infringement. In any of these types of proceedings, a court or other agency having competent jurisdiction may find our patents invalid and/or unenforceable. We may also fail to identify patentable aspects of our research and development before it is too late to obtain patent protection. Even if we have valid and enforceable patents, these patents still may not provide protection against competing products or processes sufficient to achieve our business objectives.
The issuance of a patent is not conclusive as to its inventorship, scope, ownership, priority, validity or enforceability. In that regard, third parties may challenge our patents in the courts or patent offices in the United States and abroad. Such challenges may result in loss of exclusivity or freedom to operate or in patent claims being narrowed, invalidated or held unenforceable, in whole or in part, which could limit our ability to stop others from using or commercializing similar or identical technology and products, or limit the duration of the patent protection of our technology and potential products. In addition, given the amount of time required for the development, testing and regulatory review of new product candidates, patents protecting such candidates might expire before or shortly after such candidates are commercialized.
57
A significant portion of our intellectual property portfolio currently comprises pending patent applications that have not yet been issued as granted patents. If our pending patent applications fail to issue our business will be adversely affected.
Our commercial success will depend significantly on maintaining and expanding patent protection for Rhopressa® and Rocklatan® and any product candidates or future product candidates, as well as successfully defending our current and future patents against third-party challenges. As of December 31, 2021, we owned 160 issued patents and 135 pending patent applications in the United States and certain foreign jurisdictions relating to Rhopressa®, Rocklatan®, product candidates as well as previously discontinued product candidates and other proprietary technology. See “Business—Intellectual Property” included elsewhere in this report for further information about our issued patents and patent applications. Our issued patents include 51 patents for composition of matter and method of use covering Rhopressa® in the United States and certain foreign jurisdictions. These patents also cover Rocklatan® to the extent that Rhopressa® forms a part of Rocklatan®. The remainder of our portfolio is made up of patents covering product candidates, implants, medical devices, syntheses of compounds, previously discontinued product candidates and other proprietary technology and pending patent applications that have not yet been issued by the U.S. Patent and Trademark Office (the “USPTO”).
There can be no assurance that our pending patent applications will result in issued patents in the United States or foreign jurisdictions in which such applications are pending. Even if patents do issue on any of these applications, there can be no assurance that a third party will not challenge their validity or enforceability, or that we will obtain sufficient claim scope in those patents to prevent a third party from competing successfully with our products.
We may not be able to enforce our intellectual property rights throughout the world.
The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States. Many companies have encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. The legal systems of some countries, particularly developing countries, do not favor the enforcement of patents and other intellectual property protection, especially those relating to life sciences. It may be difficult for us to stop the infringement of our patents or the misappropriation of these intellectual property rights in any foreign jurisdictions. For example, some foreign countries have compulsory licensing laws under which a patent owner must grant licenses to third parties. In addition, many countries limit the enforceability of patents against third parties, including government agencies or government contractors. In these countries, patents may provide limited or no benefit.
Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business. Accordingly, our efforts to protect our intellectual property rights in such countries may be inadequate. In addition, changes in the law and legal decisions by courts in the United States and foreign countries may affect our ability to obtain adequate protection for our technology and the enforcement of intellectual property.
We may infringe the intellectual property rights of others, which may prevent or delay our product development efforts and disrupt the commercialization of or increase the costs of commercializing Rhopressa® or Rocklatan® or any product candidates or future product candidates, if approved.
Our commercial success depends significantly on our ability to operate without infringing the patents and other intellectual property rights of third parties. If patents issued to other companies contain blocking, dominating or conflicting claims and such claims are ultimately determined to be valid, we may be required to obtain licenses to these patents or to develop or obtain alternative non-infringing technology and cease practicing those activities, including potentially manufacturing or selling any products deemed to infringe those patents. There could be issued patents of which we are not aware that Rhopressa®, Rocklatan® or any product candidates infringe. There also could be patents that we believe we do not infringe, but that we may ultimately be found to infringe.
Moreover, patent applications are in some cases maintained in secrecy until patents are issued. The publication of discoveries in the scientific or patent literature frequently occurs substantially later than the date on which the underlying discoveries were made and patent applications were filed. Because patents can take many years to issue, there may be currently pending applications of which we are unaware that may later result in issued patents that Rhopressa®, Rocklatan®, Rhokiinsa®, Roclanda® or any product candidates or future product candidates infringe. For example, pending applications may exist that claim or can be amended to claim subject matter that Rhopressa®, Rocklatan®, Rhokiinsa®, Roclanda® or any product candidates or future product candidates infringe. Competitors may file continuing patent applications claiming priority to already issued patents in the form of continuation, divisional, or continuation-in-part applications, in order to maintain the pendency of a patent family and attempt to cover Rhopressa®, Rocklatan®, Rhokiinsa®, Roclanda® or any product candidates or future product candidates.
58
Third parties may assert that we are employing their proprietary technology without authorization and may sue us for patent or other intellectual property infringement. These lawsuits are costly and could adversely affect our results of operations and divert the attention of managerial and scientific personnel. If we are sued for patent infringement, we would need to demonstrate that Rhopressa®, Rocklatan®, Rhokiinsa®, Roclanda® or any product candidates or future product candidates or methods either do not infringe the claims of the relevant patent or that the patent claims asserted are invalid or unenforceable, and we may not be able to do this. Proving invalidity is difficult. For example, in the United States, proving invalidity requires a showing of clear and convincing evidence to overcome the presumption of validity enjoyed by issued patents. Even if we are successful in these proceedings, we may incur substantial costs and the time and attention of our management and scientific personnel could be diverted in pursuing these proceedings, which could have a material adverse effect on us. In addition, we may not have sufficient resources to bring these actions to a successful conclusion. If a court holds that any third-party patents are valid, enforceable and cover our products or their use, the holders of any of these patents may be able to block our ability to commercialize Rhopressa®, Rocklatan®, Rhokiinsa®, Roclanda® or any product candidates or future product candidates, if approved, unless we acquire or obtain a license under the applicable patents or until the patents expire. We may not be able to enter into licensing arrangements or make other arrangements at a reasonable cost or on reasonable terms. Any inability to secure licenses or alternative technology could result in delays in the introduction of our products or lead to prohibition of the manufacture or sale of products by us. Even if we are able to obtain a license, it may be non-exclusive, thereby giving our competitors access to the same technologies licensed to us. We could be forced, including by court order, to cease commercializing the infringing technology or product. In addition, in any such proceeding or litigation, we could be found liable for monetary damages, including treble damages and attorneys’ fees if we are found to have willfully infringed a patent. A finding of infringement could prevent us from commercializing one or more of our current products and potential products or force us to cease some of our business operations, which could materially harm our business. Any claims by third parties that we have misappropriated their confidential information or trade secrets could have a similar negative impact on our business. In addition, any uncertainties resulting from the initiation and continuation of any litigation could have a material adverse effect on our ability to raise the funds necessary to continue our operations.
We may be subject to claims that we or our employees have misappropriated the intellectual property, including trade secrets, of a third party, or claiming ownership of what we regard as our own intellectual property.
Many of our employees were previously employed at universities, biotechnology companies or other pharmaceutical companies, including our competitors or potential competitors. Some of these employees, including members of our senior management, executed proprietary rights, non-disclosure and non-competition agreements in connection with such previous employment. Although we try to ensure that our employees do not use the intellectual property and other proprietary information or know-how of others in their work for us, we may be subject to claims that we or these employees have used or disclosed such intellectual property, including trade secrets or other proprietary information. Litigation may be necessary to defend against these claims. We are not aware of any threatened or pending claims related to these matters or concerning the agreements with members of our senior management, but litigation may be necessary in the future to defend against such claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management.
In addition, while we typically require our employees, consultants and contractors who may be involved in the development of intellectual property to execute agreements assigning such intellectual property to us, we may be unsuccessful in executing such an agreement with each party who in fact develops intellectual property that we regard as our own, which may result in claims by or against us related to the ownership of such intellectual property. If we fail in prosecuting or defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights. Even if we are successful in prosecuting or defending against such claims, litigation could result in substantial costs and be a distraction to our management and scientific personnel.
We may be unable to adequately prevent disclosure of trade secrets and other proprietary information.
We rely on trade secrets to protect our proprietary know-how and technological advances, especially where we do not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to protect. We rely in part on confidentiality agreements with our employees, consultants, outside scientific collaborators, sponsored researchers and other advisors to protect our trade secrets and other proprietary information. However, any party with whom we have executed such an agreement may breach that agreement and disclose our proprietary information, including our trade secrets. Accordingly, these agreements may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights. In addition, others may independently discover our trade secrets and proprietary information. Further, the FDA, as part of its Transparency Initiative, a proposal by the FDA to increase disclosure
59
and make data more accessible to the public, is currently considering whether to make additional information publicly available on a routine basis, including information that we may consider to be trade secrets or other proprietary information, and it is not clear at the present time how the FDA’s disclosure policies may change in the future, if at all. Failure to obtain or maintain trade secret protection could enable competitors to use our proprietary information to develop products that compete with our products or cause additional, material adverse effects upon our competitive business position and financial results.
Any lawsuits relating to infringement of intellectual property rights brought by or against us will be costly and time consuming and may adversely impact the price of our common stock.
We may be required to initiate litigation to enforce or defend our intellectual property. In the United States, once an ANDA filer notifies us of their filing of a Paragraph IV Certification (i.e., a certification that the proposed generic product will not infringe our patents or that our patents are alleged to be invalid), we would have 45 days in which to bring a patent infringement lawsuit to delay regulatory review of the ANDA and to defend our IP rights. The filing of such a lawsuit would trigger a 30-month stay of regulatory approval of the ANDA filer’s application. These lawsuits can be very time consuming and costly. There is a substantial amount of litigation involving patent and other intellectual property rights in the pharmaceutical industry generally. Such litigation or proceedings could substantially increase our operating expenses and reduce the resources available for development activities or any future sales, marketing or distribution activities.
In any infringement litigation, any award of monetary damages we receive may not be commercially valuable. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during litigation. Moreover, there can be no assurance that we will have sufficient financial or other resources to file and pursue such infringement claims, which typically last for years before they are resolved. Further, any claims we assert against a perceived infringer could provoke these parties to assert counterclaims against us alleging that we have infringed their patents. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their greater financial resources. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace.
In addition, our patents and patent applications could face other challenges, such as interference proceedings, opposition proceedings, re-examination proceedings, and other forms of post-grant review. Any of these challenges, if successful, could result in the invalidation of, or in a narrowing of the scope of, any of our patents and patent applications subject to challenge. Any of these challenges, regardless of their success, would likely be time consuming and expensive to defend and resolve and would divert our management and scientific personnel’s time and attention. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments, and if securities analysts or investors perceive these results to be negative, it could have a material adverse effect on the market price of our common stock.
We will need to obtain regulatory approval of any proposed product names, and any failure or delay associated with such approval may adversely affect our business.
We assigned the trade names Rhopressa® and Rocklatan® to our now FDA approved products. The EC granted Centralised MAs for Rhopressa® (which will be marketed under the trade name Rhokiinsa®) in November 2019 and for Rocklatan® (which will be marketed under the trade name Roclanda®) in January 2021. Any other names we intend to use for our product candidates or any future product candidates will require approval from the FDA and applicable non-U.S. regulatory authorities regardless of whether we have secured a formal trademark registration from the USPTO or applicable non-U.S. regulatory authorities. The FDA typically conducts a review of proposed product names, including an evaluation of the potential for confusion with other product names. The FDA may also object to a product name if it believes the name inappropriately implies medical claims or contributes to an overstatement of efficacy. Regulatory authorities outside the United States conduct their own investigations. If the FDA or applicable non-U.S. authorities object to any of our proposed product names for any product candidates or future product candidates, we may be required to adopt an alternative trade name.
If we do not obtain additional protection under the Hatch-Waxman Amendments and similar foreign legislation extending the terms of our patents for Rhopressa®, Rocklatan®, Rhokiinsa®, Roclanda® or any product candidates or future product candidates, our business may be materially harmed.
Depending upon the timing, duration and specifics of FDA regulatory approval for Rhopressa® and Rocklatan® and any product candidates or future product candidates, one or more of our U.S. patents may be eligible for limited PTE under the Drug Price Competition and Patent Term Restoration Act of 1984, referred to as the Hatch-Waxman Amendments. The Hatch-Waxman Amendments permit a patent extension term of up to five years as compensation for patent term lost during product development and the FDA regulatory review process. PTEs, however, cannot extend the remaining term of a patent beyond a total of 14 years from the date of product approval by the FDA.
60
The application for PTE is subject to approval by the USPTO, in conjunction with the FDA. It takes at least six months to obtain approval of the application for PTE. A PTE application pursuant to 35 USC §156 (section 156) was filed February 8, 2018, seeking an extension of U.S. patent number 8,394,826 (the “826 patent”). The ‘826 patent covers Rhopressa® and Rocklatan®, and is presently expected to expire November 20, 2030, though the date may be extended if the ‘826 patent PTE application is granted. To date there have been three official substantive actions on the ‘826 patent PTE application. On September 18, 2018, the USPTO confirmed that 826 patent is eligible for PTE under section 156. On May 13, 2019, the FDA confirmed that Rhopressa® was subject to the required FDA approval and that the PTE application was filed timely. On April 14, 2021, the USPTO transmitted a copy of the PTE application to the FDA, stating the USPTO considers the ’826 patent to be eligible for PTE, making the FDA’s determination of the applicable regulatory review period for Rhopressa® necessary. We expect the FDA and USPTO will complete the PTE application review in the next few years; however, it is not possible to predict with certainty when the PTE will become official, if at all.
Similarly, Europe provides a mechanism for patent owner to regain a portion of patent grant time lost due to product development and the European regulatory review process. Pursuant to Regulation (EC) No 469/2009 of the European Parliament, the patent owner may file for a Supplementary Protection Certificate (“SPC”) on a country-by-country basis in order to regain such lost patent grant time. Unlike the U.S. PTE, an SPC does not extend the expiration date of a European patent but is limited to the scope of the marketing authorisation. It provides to the patent owner all of the rights the European patent provided to the patent holder for up to five (5) years from the expiration of the European patent. Upon approval of Rhokiinsa® in Europe, Aerie has filed for SPCs in a number of E.U. countries for EP Patent 3053913. SPCs have been granted in Italy, Spain, Ireland and The Netherlands, and are presently pending in Germany, France, Belgium and Great Britain. Upon approval of Roclanda® in Europe, Aerie filed for SPCs in a number of EU Countries and Great Britain for EP Patent EP3461484. SPCs have been granted in France, Italy, Spain, Ireland, and the Netherlands, and are pending in Germany, France, Belgium and Great Britain.
Risks Related to Our Financial Position and Need for Additional Capital
We have limited revenue and may never become profitable.
We have a limited operating history and began commercializing our first product, Rhopressa®, in the United States in April 2018, and our second product, Rocklatan®, in the United States in May 2019. We have never been profitable and only have two products approved for commercial sale. Even though we received FDA approval, began commercial sales for these two products in the United States and received the Centralised MAs for Rhokiinsa® and Roclanda® from the EC, we are still in the process of obtaining additional regulatory approvals in jurisdictions outside the United States and there is no guarantee that either product will be approved in any such jurisdictions.
Our ability to generate product revenue depends on a number of factors, including our ability to:
•maintain an acceptable price for each of Rhopressa® and Rocklatan® in the United States;
•set acceptable net prices for our glaucoma products outside the United States that allow for adequate profitability, in a stand-alone or partnered environment;
•set an acceptable price for any product candidates or future product candidates, if approved, and obtain adequate coverage and reimbursement from third-party payers;
•manufacture or obtain commercial quantities of Rhopressa® and Rocklatan® and any product candidates or future product candidates, if approved, at acceptable cost levels;
•successfully market and sell Rhopressa® and Rocklatan® and any product candidates or future product candidates, if approved, in the United States and other jurisdictions; and
•successfully complete clinical development, and receive regulatory approval, for our product candidates and any future product candidates.
Our net product revenue may be impacted by our estimates for discounts and allowances, which estimates are based on current contractual and statutory requirements, invoices from CMS for the company funded portion of the coverage gap, known market events and trends, industry data, forecasted customer mix and lagged claims. In addition, because of the numerous risks and uncertainties associated with product development, commercialization and manufacturing, we are unable to precisely predict the timing or amount of increased expenses, or when, or if, we will be able to achieve or maintain profitability. In addition, our expenses could increase beyond expectations for a number of reasons, including if we are required by the FDA or other regulatory authorities to perform studies in addition to those that we currently anticipate. Even though we have begun
61
commercial sales of Rhopressa® and Rocklatan®, we are still incurring and anticipate continuing to incur significant costs associated with commercialization activities.
Our ability to become and remain profitable depends on our ability to generate revenue. Although we have generated revenues from the sales of our products, even if we were able to continue to generate revenues from our products and to generate revenues from product candidates or future product candidates, if approved, we may not become profitable and may need to obtain additional funding to continue operations. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce our operations. Even 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 our company and could materially impair our ability to raise funds, expand our business or continue our operations.
We have incurred net losses since inception and anticipate that we will continue to incur net losses until such a time when Rhopressa® and Rocklatan® generate adequate net revenues to cover operating costs and expenses, if at all.
We have incurred losses in each year since our inception in June 2005. Our net losses were $74.8 million, $183.1 million and $199.6 million for the years ended December 31, 2021, 2020 and 2019, respectively. As of December 31, 2021, we had an accumulated deficit of $1,153.9 million.
Investment in pharmaceutical product development is highly speculative because it entails substantial upfront capital expenditures and significant risk that a product candidate will fail to gain regulatory approval or become commercially viable. We have devoted the majority of our historical financial resources to research and development, including our non-clinical development activities and clinical trials. We have financed our operations primarily through the issuance of convertible debt, including the issuance of $316.25 million of Convertible Notes in September 2019 as well as the issuance and sale of common stock pursuant to our registration statements on Form S-3 and prior “at-the-market” sales agreements. Our products will continue to require significant marketing efforts and substantial investment to maintain and increase revenues. Any product candidates or future product candidates will require the completion of regulatory review, significant marketing efforts and substantial investment before they can provide us with any revenue.
We expect our research and development expenses to continue to be significant in connection with our ongoing and planned activities. In addition, as we launched Rhopressa® and Rocklatan® in 2018 and 2019, respectively, and expect to commercialize both products internationally, we have incurred and expect to continue to incur increased manufacturing, selling and marketing expenses. As a result, we expect to continue to incur operating losses until our products generate adequate commercial revenue to render Aerie profitable. These losses have had and will continue to have a material adverse effect on our stockholders’ equity, financial position, cash flows and working capital.
We may need to obtain additional financing to fund our operations and, if we are unable to obtain such financing, we may be unable to complete the development and commercialization of Rhopressa®, Rocklatan® or any product candidates or future product candidates.
Our operations have consumed substantial amounts of cash since inception. Through December 31, 2021, we have raised net proceeds of approximately $987.2 million from our IPO, debt financings and the issuance of common stock. We received a $50.0 million payment associated with the First Santen Agreement in the fourth quarter of 2020. In January 2022, we received a $90.0 million payment from Santen in connection with the Second Santen Agreement. We may need to obtain additional financing to fund our future operations. Additionally, we may need to obtain additional financing to conduct additional trials for the approval of Rhopressa® and Rocklatan® in additional jurisdictions or any product candidates or future product candidates, and for completing the development of any additional product candidates or technologies and executing our international expansion strategy. Moreover, our fixed expenses, such as rent and other contractual commitments, are substantial and are expected to increase in the future, and we also expect to incur increased expenses as we expand our employment base.
Our future funding requirements will depend on many factors, including, but not limited to:
•the amount of sales and other revenues from Rhopressa® and Rocklatan® and any product candidates or future product candidates, if approved, including the selling prices for such potential products and the availability of adequate third-party coverage and reimbursement;
•selling and marketing costs associated with Rhopressa® and Rocklatan® and any product candidates or future product candidates, if approved, including the cost and timing of expanding our marketing and sales capabilities;
•our commercial success with our commercialized products and any product candidates or future product candidates, if approved;
62
•the terms and timing of any collaborations, licensing or other arrangements that we have established and may establish;
•cash requirements of any future acquisitions and/or the development of other product candidates or technologies;
•the progress, timing, scope and costs of our clinical trials, including the ability to timely enroll patients in our planned and potential future clinical trials;
•the time and cost necessary to obtain regulatory approvals that may be required by regulatory authorities;
•the time and cost necessary to increase internal manufacturing capabilities or arrangements with third-party manufacturers;
•costs of any new business strategies;
•the costs of operating as a public company;
•the time and cost necessary to respond to technological and market developments; and
•the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights.
We believe that our existing cash, cash equivalents and investments of $139.8 million as of December 31, 2021, the $88.0 million upfront payment and the $2.0 million supplemental upfront payment associated with the Second Santen Agreement, both received from Santen in January 2022, and expected cash flows will be sufficient to support the product commercialization of Rhopressa® and Rocklatan® through at least the next twelve months from the date of this filing. We also intend to use these funds for general corporate purposes, including our clinical, regulatory and commercialization efforts beyond the United States, further development of other potential pipeline opportunities including activities to support execution of our dry eye and retina programs, our external business development efforts and our manufacturing activities, including the operation of our manufacturing plant in Ireland.
Until we can generate a sufficient amount of revenue, we may need to finance future cash needs through additional financings or other available sources. Additional funds may not be available when we need them on terms that are acceptable to us, or at all. If adequate funds are not available, we may be required to delay or reduce the scope of or eliminate one or more of our research or development programs or our commercialization or manufacturing efforts. We may seek to access the public or private capital markets whenever conditions are favorable, even if we do not have an immediate need for additional capital at that time. In addition, if we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams or product candidates or to grant licenses on terms that may not be favorable to us.
Our forecast of the period of time through which our financial resources will be adequate to support our operating requirements is a forward-looking statement and involves risks and uncertainties, and actual results could vary as a result of a number of factors, including the factors discussed elsewhere in this “Risk Factors” section. We have based this estimate on a number of assumptions that may prove to be incorrect and changing circumstances beyond our control may cause us to consume capital more rapidly than we currently anticipate. Our inability to obtain additional funding when we need it could seriously harm our business.
Our indebtedness and liabilities could limit the cash flow available for our operations, expose us to risks that could adversely affect our business, financial condition and results of operations and impair our ability to satisfy our obligations under the Convertible Notes.
As of December 31, 2021, we had $316.25 million in principal amount of indebtedness as a result of the issuance of the Convertible Notes which mature on October 1, 2024. We may also incur additional indebtedness to meet future financing needs. Interest payments, fees, covenants and restrictions under agreements governing our current or future indebtedness, including the indenture governing the Convertible Notes, could have important consequences, including the following:
•impairing our ability to successfully continue to commercialize Rhopressa® or Rocklatan® and commercialize any product candidates or future product candidates, which would prevent us from generating a source of revenue and becoming profitable;
•limiting our ability to obtain additional financing on satisfactory terms to fund our working capital requirements, capital expenditures, potential acquisitions, debt obligations and other general corporate
63
requirements, and making it more difficult for us to satisfy our obligations with respect to any such additional financing;
•increasing our vulnerability to general economic downturns, competition and industry conditions, which could place us at a competitive disadvantage compared to our competitors with no debt obligations or with debt obligations on more favorable terms;
•requiring the dedication of a substantial portion of our cash flow from operations to service our indebtedness, which will reduce the amount of cash available for other purposes;
•limiting our flexibility to plan for, or react to, changes in our business; and
•diluting the interests of our existing stockholders as a result of issuing shares of our common stock upon conversion of the Convertible Notes.
The occurrence of any one of these events could have an adverse effect on our business, financial condition, operating results or cash flows and ability to satisfy our obligations under the indenture governing the Convertible Notes and any other indebtedness.
Our business may not generate sufficient funds, and we may otherwise be unable to maintain sufficient cash reserves, to pay amounts due under our indebtedness, including the Convertible Notes, and our cash needs may increase in the future. In addition, the agreements governing indebtedness that we may incur in the future may contain financial and other restrictive covenants that limit our ability to operate our business, raise capital or make payments under our other indebtedness. If we fail to comply with these covenants or to make payments under our indebtedness when due, then we would be in default under that indebtedness, which could, in turn, result in that and our other indebtedness becoming immediately payable in full.
We may be unable to raise the funds necessary to repurchase the Convertible Notes for cash following a fundamental change, or to pay any cash amounts due upon conversion, and the terms of our then-existing borrowing arrangements may limit our ability to repurchase the Convertible Notes or pay cash upon their conversion.
Noteholders may require us to repurchase their Convertible Notes following a fundamental change at a cash repurchase price generally equal to the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest, if any. In addition, upon conversion, we will satisfy part or all of our conversion obligation in cash unless we elect to settle conversions solely in shares of our common stock. We may not have enough available cash or be able to obtain financing at the time we are required to repurchase the Convertible Notes or pay the cash amounts due upon conversion. In addition, applicable law, regulatory authorities and the agreements governing any of our then-existing borrowing arrangements may restrict our ability to repurchase the Convertible Notes or pay the cash amounts due upon conversion. If we fail to repurchase Convertible Notes or to pay the cash amounts due upon conversion when required, we will be in default under the indenture governing the Convertible Notes and may be in default under any other then-existing borrowing arrangements. A default under the indenture governing the Convertible Notes or the fundamental change itself could also lead to a default under any of our then-existing agreements governing our other indebtedness, which may result in that other indebtedness becoming immediately payable in full. We may not have sufficient funds to satisfy all amounts due under the Convertible Notes and any other then-existing indebtedness.
The accounting method for the Convertible Notes could adversely affect our reported financial condition and results.
The accounting method for reflecting the Convertible Notes on our balance sheet, accruing interest expense for the Convertible Notes and reflecting the underlying shares of our common stock in our reported diluted earnings per share may adversely affect our reported earnings and financial condition.
In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 470, Debt, an entity must separately account for the liability and equity components of convertible debt instruments (such as the Convertible Notes) that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer’s economic interest cost. ASC 470-20 requires the value of the conversion option of the Convertible Notes, representing the equity component, to be recorded as additional paid-in capital within stockholders’ equity in our consolidated balance sheets and as a discount to the Convertible Notes, which reduces their initial carrying value. In addition, under the treasury stock method, if the conversion value of the Convertible Notes exceeds their principal amount for a reporting period, then we will calculate our diluted earnings per share assuming that all the Convertible Notes were converted and that we issued shares of our common stock to settle the excess. However, if reflecting the Convertible Notes in diluted earnings per share in this manner is anti-dilutive, or if the conversion value of the Convertible Notes does not exceed their principal amount for a reporting period, then the shares of common stock underlying the Convertible Notes will not be reflected in our diluted earnings per share.
64
In August 2020, the FASB issued Accounting Standards Update (“ASU”) 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity (“ASU 2020-06”), which eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. This would reduce non-cash interest expense, and thereby decrease net loss (or increase net income). Additionally, the treasury stock method for calculating earnings per share will no longer be allowed for convertible debt instruments whose principal amount may be settled using shares and the if-converted method will be required.
ASU 2020-06 became effective beginning with our fiscal year ending December 31, 2022, including any interim periods within that fiscal year. Under ASU 2020-06, the Convertible Notes will be subject to the “if-converted” method for calculating diluted earnings per share. Accordingly, under the “if-converted” method, diluted earnings per share will be calculated assuming that all of the Convertible Notes were converted solely into shares of common stock at the beginning of the reporting period, unless the result would be anti-dilutive. This new method of calculating earnings per share may adversely affect our reported financial condition and results.
If any of the conditions to the convertibility of the Convertible Notes is satisfied, then we may be required under applicable accounting standards to reclassify the liability carrying value of the Convertible Notes as a current, rather than a long-term, liability. This reclassification could be required even if no noteholders convert their Convertible Notes and could materially reduce our reported working capital.
The capped call transactions may affect the value of our common stock.
In connection with the issuance of the Convertible Notes, we entered into capped call transactions with certain option counterparties. The capped call transactions are expected generally to reduce the potential dilution upon conversion of the Convertible Notes and/or offset any cash payments we are required to make in excess of the aggregate principal amount of converted Convertible Notes, as the case may be, with such reduction and/or offset subject to a cap. The option counterparties or their respective affiliates are expected to modify their hedge positions from time to time by entering into or unwinding various derivatives with respect to our common stock and/or purchasing or selling our common stock, the Convertible Notes or other securities or instruments of ours (if any) in secondary market transactions prior to the maturity of the Convertible Notes (and are likely to do so during any observation period related to a conversion of Convertible Notes or following any issuance of a notice of redemption with respect to the Convertible Notes). Any of these activities could adversely affect the market price of our common stock.
We do not make any representation or prediction as to the direction or magnitude of any potential effect that the transactions described above may have on the market price of the shares of our common stock.
We are subject to counterparty risk with respect to the capped call transactions.
The counterparties to the capped call transactions are financial institutions, and we are subject to the risk that one or more of the counterparties may default or otherwise fail to perform, or may exercise certain rights to terminate, their obligations under the capped call transactions. Our exposure to the credit risk of the option counterparties is not secured by any collateral. Global economic conditions have in the past resulted in the actual or perceived failure or financial difficulties of many financial institutions. If any option counterparty becomes subject to proceedings, we will become an unsecured creditor in those proceedings with a claim equal to our exposure at the time under any capped call transactions with that option counterparty. Our exposure will depend on many factors but, generally, our exposure will increase if the market price or the volatility of our common stock increases. In addition, upon a default or other failure to perform, or a termination of obligations, by a counterparty, the counterparty may fail to deliver the shares of common stock required to be delivered to us under the capped call transactions and we may suffer adverse tax consequences or experience more dilution than we currently anticipate with respect to our common stock. We can provide no assurances as to the financial stability or viability of the counterparties.
We may sell additional debt or equity securities at any time, which may result in dilution to our stockholders and impose restrictions on our business.
In order to raise additional funds to support our operations, business strategies and growth, or if we decide based on ongoing forecast updates, new strategic initiatives, market conditions or for other reasons that additional financings are desirable or needed, we may sell additional equity or debt securities. The issuance of additional equity would result in dilution to all of our stockholders. The incurrence of indebtedness would result in increased fixed payment obligations and could also result in restrictive covenants, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our
65
business. If we are unable to expand our operations or otherwise capitalize on our business opportunities, our business, financial condition and results of operations could be materially adversely affected.
Determining our income tax rate is complex and subject to uncertainty.
The computation of income tax provisions is complex, as it is based on the laws of federal, state, local and non-U.S. taxing jurisdictions and requires significant judgment on the application of complicated rules governing accounting for tax provisions under U.S. GAAP. Our provision for income tax can be materially impacted, for example, by the geographical mix of our profits and losses, changes in our business, such as internal restructuring and acquisitions, changes in tax laws and accounting guidance and other regulatory, legislative or judicial developments, transfer pricing policies, tax audit determinations, changes in our uncertain tax positions, changes in our capital structure and leverage, changes to our transfer pricing practices, tax deductions attributed to equity and other compensation and limitations on such deductions and changes in our need for a valuation allowance for deferred tax assets. In addition, relevant taxing authorities may disagree with our determinations as to the income and expenses attributable to specific jurisdictions. If such a disagreement were to occur, and our position was not sustained, we could be required to pay additional taxes, interest and penalties, which could result in one-time tax charges, higher effective tax rates and reduced cash flows than otherwise would be expected. For these reasons, our actual income taxes may be materially different than our provision for income tax.
Our ability to use our net operating loss carryforwards may be limited.
If we experience an “ownership change” for purposes of Section 382 of the Internal Revenue Code of 1986, as amended (“Section 382”), or similar state provisions, we may be subject to annual limits on our ability to utilize net operating loss carryforwards. An ownership change is, as a general matter, triggered by sales or acquisitions of our stock in excess of 50% on a cumulative basis during a three-year period by persons owning 5% or more of our total equity value.
As of December 31, 2021, we had U.S. federal and state net operating losses (“NOLs”) of approximately $635.1 million and $616.3 million, respectively. If not utilized, U.S. federal NOLs that arose before 2018 and state NOLs begin to expire at various dates beginning in 2031 and 2023, respectively. U.S. federal NOLs that arose on or after January 1, 2018 can be carried forward indefinitely to be utilized against future income, but can only be used to offset a maximum of 80% of our federal taxable income in any year. As of December 31, 2021, we also had foreign NOLs of $66.0 million which are available solely to offset taxable income of our foreign subsidiaries, subject to any applicable limitations under foreign law. Our U.S. federal, state and foreign NOLs are included as deferred tax assets and have been fully offset by a valuation allowance as of December 31, 2021.
Changes to the United States tax laws could materially impact our financial position and results of operations.
We are subject to income and non-income-based taxes in the United States under federal, state and local jurisdictions and in certain foreign jurisdictions in which we operate. Tax laws, regulations and administrative practices in these jurisdictions may be subject to significant change, with or without advance notice. For example, in 2021, there have been numerous changes proposed to U.S. federal income tax law, including an increase to the U.S. corporate tax rate, modifications of the provisions addressing taxation of international business operations and the imposition of a global minimum tax. Such changes may adversely affect our effective tax rates, cash flows, financial position and results of operations.
Our international operations subject us to potentially adverse tax consequences.
We generally conduct our international operations through wholly-owned subsidiaries and report our taxable income, if any, in various jurisdictions worldwide based upon our business operations in those jurisdictions. Our intercompany relationships are subject to complex transfer pricing regulations administered by taxing authorities in various jurisdictions. The relevant taxing authorities may disagree with any of our determinations including as to the income and expenses attributable to specific jurisdictions and the statutory domiciles of our intellectual property. If such a disagreement were to occur, and our position was not sustained, we could be required to pay additional taxes, interest and penalties, which could result in one-time tax charges, higher effective tax rates and reduced cash flows.
Risks Related to Our Business Operations and Industry
The widespread outbreak of an illness or any other communicable disease, or any other public health crisis, such as COVID-19, could adversely affect our business, results of operations and financial condition.
We could be negatively impacted by the widespread outbreak of an illness or any other communicable disease, or any other public health crisis that results in economic and trade disruptions, including the disruption of global supply chains. In December 2019, there was an outbreak of a new strain of COVID-19 and on March 11, 2020, the World Health Organization declared
66
COVID-19 a pandemic. The COVID-19 pandemic and its variants continue to negatively impact the global economy, disrupt global supply chains and workforce participation due to curtailment of travel and “stay at home” restrictions by various governments worldwide and create significant volatility and disruption of financial markets. Although state and local governments began to ease COVID-19 restrictions in the second quarter of 2021, as we have seen with the onset of the Delta and Omicron variants, the extent to which COVID-19 continues to impact our business will depend on future developments that are highly uncertain and cannot be predicted.
The COVID-19 pandemic has affected demand for our products because quarantines or other government restrictions on movements have caused and continue to cause changes in demand. While a majority of eye-care professionals’ offices returned to in-person appointments in the second half of 2021, patients may still not visit their eye-care professionals for an extended period of time due to logistical issues or safety concerns, resulting in fewer new diagnoses or prescriptions as the COVID-19 pandemic continues to progress. Additionally, patients may continue to change the quantities in, or the frequency with, which they order our products. Our sales force is also limited in its ability to meet with current and potential prescribers, which may negatively affect sales. Our current efforts to utilize virtual tools to remain in contact with eye-care professionals, in addition to face-to-face meetings, may not be adequate to address any negative effect on sales. If the overall economy is negatively affected, including by entering into a recession, current and potential patients may alter their spending patterns and may have less disposable income with which to spend on prescriptions, amongst other changes. The changes in eye-care professional and patient behavior have had, and could continue to have, a material adverse effect on our results of operations.
The progress of the COVID-19 pandemic may disrupt our clinical operations and regulatory approvals. We are in the process of advancing our products towards approval in jurisdictions outside the United States and advancing our product candidates towards regulatory approval. We also have applications for regulatory approval pending. We cannot be certain as to how the progress of the COVID-19 pandemic will continue to affect our clinical operations or the timing of regulatory approvals.
The extent of the impact of the COVID-19 pandemic on our operational and financial performance will depend on future developments, including the duration and spread of COVID-19 and its variants; the continued availability and efficacy of vaccines and treatments for COVID-19 and its variants; the effect on eye-care professionals and patients and demand for our products; our ability to sell and provide our products, including as a result of people staying home, the health and safety of our employees and any closures of our offices and our manufacturing plant in Athlone, Ireland, our eye-care professionals’ offices and regulatory agencies, all of which are uncertain and cannot be predicted. In addition, any adverse conditions discussed above in the financial and credit markets due to the market conditions described above may limit the availability of liquidity or increase the cost of such liquidity, which could adversely affect our business, financial position and results of operations. COVID-19, and the volatile economic conditions stemming from the pandemic, as well as reactions to future pandemics or new variants of COVID-19, could also precipitate or aggravate the other risk factors that we identify in this section, including our ability to achieve market acceptance of our products, our competitiveness, our reliance on third parties, our dependence on key personnel, our risks related to security breaches and other cybersecurity risks and our manufacturing capabilities. An extended period of global supply chain and economic disruption could materially adversely affect our business, our results of operations, our access to sources of liquidity, our financial condition and the price of our common stock.
We depend upon our key personnel and our ability to attract and retain employees.
Our future growth and success depend on our ability to recruit, retain, manage and motivate our employees. We are highly dependent on our senior management team and our scientific founders, as well as the other principal members of our management and scientific teams. Although we have formal employment agreements with our executive officers, these agreements do not prevent them from terminating their employment with us at any time. The loss of the services of any member of our senior management or scientific team or the inability to hire or retain experienced management personnel could adversely affect our ability to execute our business plan and harm our operating results.
Because of the specialized scientific and managerial nature of our business, we rely heavily on our ability to attract and retain qualified scientific, technical and managerial personnel. In particular, the loss of a member of our senior management could be detrimental to us if we cannot recruit suitable replacements in a timely manner. We do not currently carry “key person” insurance on the lives of members of executive management. The competition for qualified members of senior management and other personnel in the pharmaceutical field is intense. Due to this intense competition, we may be unable to continue to attract and retain qualified members of senior management and other personnel necessary for the development of our business or to recruit suitable replacement personnel. Furthermore, as we continue to expand our commercialization efforts, particularly on a global scale, we may not be able to attract and retain qualified members of senior management, which could adversely affect our ability to execute our business plan and harm our operating results.
67
We also rely on consultants and advisors, including scientific and clinical advisors, to assist us in formulating our research and development and commercialization strategy. Our consultants and advisors may be employed by employers other than us and may have commitments under consulting or advisory contracts with other entities that may limit their availability to us.
We are currently searching for new members of our senior management team and there are no assurances concerning the timing or outcome of our search.
We are currently searching for a new Chief Financial Officer, a head of commercial operations and a Chief Medical Officer; however, the marketplace for attracting senior executives, particularly in the pharmaceutical industry, is competitive and identifying and hiring a new executive may take several months or longer. Although we anticipate a smooth transition, any changes to members of our senior management may be disruptive to our operations, including by diverting our Board of Directors and management’s time and attention and a decline in employee morale. There are no assurances concerning the timing or outcome of our search for new members of our senior management team. If there are any delays in this process, our business could be negatively impacted.
Our employees may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements and insider trading, which could significantly harm our business.
We are exposed to the risk of employee fraud or other misconduct. Misconduct by employees could include intentional failures to comply with the regulations of the FDA and non-U.S. regulators, provide accurate information to the FDA and non-U.S. regulators, comply with healthcare fraud and abuse laws and regulations in the United States and abroad, report financial information or data accurately or disclose unauthorized activities to us. In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, misconduct, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Employee misconduct could also involve the improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to our reputation. We adopted a code of conduct, but it is not always possible to identify and deter employee misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to comply with these laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of significant fines or other sanctions.
Our business may be negatively impacted by macroeconomic conditions.
Various macroeconomic factors could adversely affect our business and the results of our operations and financial condition, including changes in inflation, interest rates and foreign currency exchange rates and overall economic conditions and uncertainties, including those resulting from the current and future conditions in the global financial markets. For instance, if inflation or other factors were to significantly increase our business costs, it may not be feasible to pass through price increases to patients. Interest rates, the liquidity of the credit markets and the volatility of the capital markets could also affect the value of our investments and our ability to liquidate our investments in order to fund our operations.
Interest rates and the ability to access credit markets could also adversely affect the ability of patients, payers and distributors to purchase, pay for and effectively distribute Rhopressa® or Rocklatan® or any product candidates or future product candidates, if approved. Similarly, these macroeconomic factors could affect the ability of our contract manufacturers, sole-source or single-source suppliers, collaboration partners or licensees to remain in business or otherwise develop, manufacture or supply product. Failure by any of them to remain in business could affect our ability to manufacture Rhopressa® or Rocklatan® or any product candidates or future product candidates, if approved, or develop additional product candidates or technologies.
If we engage in acquisitions or licenses in the future, we will incur a variety of costs and we may never realize the anticipated benefits of such acquisitions or licenses.
We may attempt to acquire or license businesses, technologies, services, products, product candidates or implants in the future that we believe are a strategic fit with our business. For example, in October 2017, we acquired the rights to use PRINT® technology and certain other assets from Envisia. Further, in August 2018 we entered into an Amended and Restated Collaborative Research, Development, and License Agreement with DSM, which provides for (i) a worldwide exclusive license for all ophthalmic indications to DSM’s polyesteramide polymer technology, (ii) continuation of the collaborative research initiatives through the end of 2020, including the transfer of DSM’s formulation technology to Aerie during that time and (iii) access to a preclinical latanoprost implant. Additionally, in late 2019 we acquired Avizorex, a Spanish ophthalmic pharmaceutical company developing therapeutics for the treatment of dry eye disease. We expended considerable capital in
68
connection with these acquisitions. While we believe these acquisition will provide material benefits to our business, to date, there has been no commercial return. We have no present agreement regarding any material acquisitions. If we do undertake any additional acquisitions or additional licenses, the process of integrating an acquired or licensed business, technology, service, product or product candidate into our business may result in unforeseen operating difficulties and expenditures, including diversion of resources and management’s attention from our core business. In addition, we may fail to retain key executives and employees of the companies we acquire, which may reduce the value of the acquisition or give rise to additional integration costs. Future acquisitions or licenses could result in additional issuances of equity securities that would dilute the ownership of existing stockholders. Future acquisitions or licenses could also result in the incurrence of debt, actual or contingent liabilities or the amortization of expenses related to intangible assets, any of which could adversely affect our operating results.
We have limited experience identifying, negotiating and implementing acquisitions or licenses of additional businesses, technologies, services, products or product candidates, which is a lengthy and complex process. The market for acquiring or licensing businesses, technologies, services, products or product candidates is intensely competitive, and other companies, including some with substantially greater financial, marketing and sales resources, may also pursue strategies to acquire or license businesses, technologies, products or product candidates that we may consider attractive. In addition, companies that perceive us to be a competitor may be unwilling to assign or license rights to us.
We have limited resources to identify and execute the acquisition or licensing of additional businesses, technologies, services, products or product candidates and integrate them into our current infrastructure. Moreover, we may devote resources to potential acquisitions or licensing opportunities that are never completed, or we may fail to realize the anticipated benefits of such efforts. We may not be able to acquire or license the rights to additional businesses, technologies, services, products or product candidates on terms that we find acceptable, or at all. In particular, any product candidate that we acquire or license may require additional development efforts prior to commercial sale, including extensive clinical testing and approval by the FDA and applicable foreign regulatory authorities. All product candidates are prone to risks of failure typical of pharmaceutical product development, including the possibility that a product candidate will not be shown to be sufficiently safe and effective for approval by regulatory authorities.
Business interruptions could delay the development of our potential products and our manufacturing activities and could disrupt our potential sales.
Our principal executive office and research facility is located in Durham, North Carolina, our regulatory, commercial support and other administrative activities are located in Irvine, California and our clinical, finance and legal operations are located in Bedminster, New Jersey. We also lease space for a manufacturing plant in Athlone, Ireland, and small offices in Ireland, the United Kingdom and Japan. We are vulnerable to natural disasters, such as severe storms, and other adverse events that could disrupt our operations. We carry limited insurance for natural disasters and other adverse events, and we may not carry sufficient business interruption insurance to compensate us for losses that may occur. Any losses or damages we incur could have a material adverse effect on our business operations.
Our business and operations would suffer in the event of system failures, cyber-attacks or other security breaches.
Despite the implementation of security measures, our internal computer systems, and those of our CROs, sales force, collaborators and other third parties on which we rely, are vulnerable to damage from computer viruses, unauthorized access, malware, ransomware, natural disasters, terrorism, war, telecommunication and electrical failures, cyber-attacks or cyber-intrusions over the Internet, attachments to emails, persons inside our organization, or persons with access to systems inside our organization. The risk of a security breach or disruption, particularly through cyber-attacks or cyber-intrusions, including by computer hackers, foreign governments and cyber terrorists, has generally increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. Computer hackers may attempt to penetrate our computer systems and, if successful, misappropriate our proprietary and confidential information including e-mails and other electronic communications. In addition, an employee, supplier, collaboration partner or other third party with whom we do business may attempt to obtain such information and may purposefully or inadvertently cause a breach involving such information. If such an event were to occur and cause interruptions in our operations, it could result in a material disruption of our drug development programs, manufacturing activities and/or commercialization efforts, damage our reputation, provide competitors with valuable information and subject us to additional liabilities, including criminal penalties and civil sanctions. We have not been subject to cyber-attacks or other cyber incidents to date which, individually or in the aggregate, have been material to our business, but the actions we take to prevent or detect the risk of cyber incidents and protect our information technology networks and infrastructure may be insufficient to prevent or detect a major cyber-attack or other cyber incident in the future.
69
In addition, there is a risk created by our lack of redundancy across our systems and if any of these events were to occur, this could result in a loss of materials that would be difficult to replace, such as proprietary information including intellectual property and business information and/or customer, supplier, employee, business partner and, in certain instances, patient personally identifiable information. For example, the loss of clinical trial data from completed or ongoing or planned clinical trials could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. Likewise, we rely on third parties to manufacture Rhopressa® and Rocklatan®, and similar events relating to their systems could also have a material adverse effect on our business. 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 the commercialization of Rhopressa® and Rocklatan® and the further development of any product candidates or future product candidates could be delayed.
Our actual or perceived failure to comply with U.S. federal, state, and foreign governmental regulations and other legal obligations related to privacy, data protection and information security could harm our reputation and business.
In the ordinary course of our business, we collect and store sensitive data, including intellectual property, our proprietary business information, data about our clinical participants, suppliers and business partners and personally identifiable information. The secure storage, maintenance, and transmission of and access to this information is important to our operations and reputation. Any access, disclosure or other loss of information could result in legal claims or proceedings, disruption of our operations and damage to our reputation, all of which could materially adversely affect our business. In addition, we are subject to various U.S. federal and state and international privacy and security regulations. For example, HIPAA mandates, among other things, the adoption of uniform standards for the electronic exchange of information in common healthcare transactions, as well as standards relating to the privacy and security of individually identifiable health information, which require the adoption of administrative, physical and technical safeguards to protect such information. In addition, many U.S. states have enacted comparable laws addressing the privacy and security of health information, some of which are more stringent than HIPAA.
The California Consumer Privacy Act (“CCPA”) took effect in January 2020 and became enforceable in July 2020. The CCPA created new individual privacy rights for California consumers (as the word is broadly defined in the law) and placed increased privacy and security obligations on many organizations that handle personal information of consumers or households. The CCPA requires covered companies to provide new disclosure to consumers about such companies’ data collection, use and sharing practices, provide such consumers a new right to opt-out of certain sales or transfers of personal information, and provides consumers with a new cause of action for certain data breaches. Additionally, California voters voted to approve the California Privacy Rights Act (“CPRA”) in November 2020, which modifies the CCPA significantly, potentially resulting in further uncertainty and requiring us to incur additional costs and expenses in an effort to comply. The CCPA and CPRA may impact our business activities and increase our compliance costs and potential liability. Many similar privacy laws have been proposed at the federal level and in other states, such as Virginia and Colorado, which have instituted privacy and data security laws, rules, and regulations, and all of which may have potentially conflicting requirements that would make compliance challenging.
With our increasing international presence, we are also subject to the laws of jurisdictions outside the United States. Privacy and data protection laws may be interpreted and applied differently from country to country and may create inconsistent or conflicting requirements, which could increase the costs incurred by us in complying with such laws. The E.U. member states, Switzerland, Japan and other countries have established, or are in the process of establishing, legal frameworks for privacy and data security that impose significant compliance obligations with which our customers, our vendors or we must comply. For example, the E.U. General Data Protection Regulation (the “GDPR”), which became effective on May 25, 2018, imposes strict requirements on data controllers and processors of personal data. The GDPR is wide-ranging in scope and imposes numerous requirements, including requirements relating to processing sensitive data (including health, biometric and genetic information), obtaining consent of the individuals to whom the personal data relates, providing information to individuals regarding data processing activities, implementing safeguards to protect the security and confidentiality of personal data, providing notification of data breaches and taking certain measures when engaging third-party processors. In addition, the GDPR grants individuals an express right to seek legal remedies in the event the individual believes his or her rights have been violated. Further, the GDPR imposes strict rules on the transfer of personal data out of the European Union, including to the United States and other regions.
The GDPR imposes new fines and penalties for a breach of requirements, which may result in significant fines of up to 4% of annual global revenues, or €20.0 million, whichever is greater. Compliance with the GDPR is a rigorous and time-intensive process that has increased our cost of doing business and required us to change our business practices, in particular as regards data processing in the context of clinical trials. As a result of the implementation of the GDPR, we were required to put in place additional mechanisms to ensure compliance with the new data protection rules, although there is a risk that the measures will not be implemented correctly or that individuals within our business will not be fully compliant with the new procedures. If
70
there are any breaches of these measures, we could face significant administrative and monetary sanctions as well as reputational damage, which may have a material adverse effect on our business.
Our disclosure controls and procedures and our systems to implement such disclosure controls and procedures may not prevent or detect all errors or acts of fraud.
As a public company, we are subject to the periodic reporting requirements of the Exchange Act. Our disclosure controls and procedures are designed to reasonably assure that information required to be disclosed by us in reports we file or submit under the Exchange Act is accumulated and communicated to management, and recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. We believe that any disclosure controls and procedures or internal controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control system, misstatements due to error or fraud may occur and not be detected.
If product liability lawsuits are successfully brought against us, our insurance may be inadequate and we may incur substantial liability.
We face an inherent risk of product liability claims as a result of the clinical testing of our product candidates. We face an additional risk from our commercial sales of Rhopressa® and Rocklatan® and will face further risk to the extent we commercialize any product candidates or future product candidates, if approved. We maintain primary product liability insurance and excess product liability insurance that cover our clinical trials, and we have and plan to maintain insurance against product liability lawsuits for commercial sale of Rhopressa® and Rocklatan® and any product candidates or future product candidates, if approved. Historically, the potential liability associated with product liability lawsuits for pharmaceutical products has been unpredictable. Although we believe that our current insurance is a reasonable estimate of our potential liability and represents a commercially reasonable balancing of the level of coverage as compared to the cost of the insurance, we may be subject to claims in connection with our clinical trials or commercial use of Rhopressa® or Rocklatan® or any product candidates or future product candidates, if approved, for which our insurance coverage may not be adequate, and the cost of any product liability litigation or other proceeding, even if resolved in our favor, could be substantial.
For example, we may be sued if any product we develop allegedly causes injury or is found to be otherwise unsuitable during clinical testing, manufacturing, marketing or sale. Any such product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability or a breach of warranties. Large judgments have been awarded in class action lawsuits based on drugs that had unanticipated adverse effects. Claims could also be asserted under state consumer protection acts. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of Rhopressa® or Rocklatan® or any product candidates or future product candidates, if approved. Regardless of the merits or eventual outcome, liability claims may result in:
•reduced resources of our management to pursue our business strategy;
•decreased demand for Rhopressa® or Rocklatan® or any product candidates or future product candidates, if approved;
•injury to our reputation and significant negative media attention;
•withdrawal of clinical trial participants;
•termination of clinical trial sites or entire trial programs;
•initiation of investigations by regulators;
•product recalls, withdrawals or labeling, marketing or promotional restrictions;
•significant costs to defend resulting litigation;
•diversion of management and scientific resources from our business operations;
•substantial monetary awards to trial participants or patients;
•loss of revenue; and
71
•the inability to commercialize any products that we may develop.
We increased our insurance coverage when each of Rhopressa® and Rocklatan® received FDA approval. However, the product liability insurance we will need to maintain in connection with the continued commercial sales of Rhopressa® and Rocklatan® and any product candidates or future product candidates if and when they receive regulatory approval, may be unavailable in adequate amounts or at a reasonable cost. In addition, insurance coverage is becoming increasingly expensive. If we are unable to obtain or maintain sufficient insurance coverage at an acceptable cost or to otherwise protect against potential product liability claims, it could inhibit the continued commercial production and sale of Rhopressa® or Rocklatan® or any product candidates or future product candidates if and when they obtain regulatory approval, which could materially adversely affect our business, financial condition, results of operations, cash flows and prospects.
Additionally, we do not carry insurance for all categories of risk that our business may encounter. Some of the policies we currently maintain include general liability, employment practices liability, property, auto, workers’ compensation, products liability and directors’ and officers’ insurance. We do not know, however, if we will be able to maintain insurance with adequate levels of coverage. Any significant uninsured liability may require us to pay substantial amounts, which would materially adversely affect our financial position, cash flows and results of operations.
The failure by the U.S. Congress to timely approve a budget for the federal government and its agencies, including the FDA, could have a material adverse effect on our business.
On an annual basis, the U.S. Congress must approve budgets that govern spending by the federal agencies, including the FDA. If Congress cannot agree on a budget, or if the President vetoes a budget approved by Congress, then the federal government may be shut down and non-essential federal employees, including many FDA employees, may be furloughed. Such a shutdown would prevent the FDA from performing many of its duties, which are crucial to our business. For example, on December 22, 2018, due to a lapse in appropriations for the federal government, most of the federal government was shut down, including many functions of the FDA, and most federal employees were furloughed for several weeks. Any future government shutdown could affect, among other things, the FDA approval process of one or more of our product candidates or future product candidates, or the ability of the FDA to inspect a manufacturing facility supporting our business, each of which could have a material adverse effect on our business.
Risks Related to Ownership of Our Common Stock
The market price of our common stock has been, and may continue to be, highly volatile.
Our stock price has been volatile and is likely to continue to be volatile. The following factors, in addition to other factors described elsewhere in this “Risk Factors” section, may have a significant impact on the market price of our common stock:
•overall company profitability and ability to generate positive cash flows;
•our ability to maintain adequate product supply to meet demand at an acceptable per unit cost;
•our ability to obtain regulatory approval in jurisdictions outside the United States;
•our ability to obtain and maintain successful collaboration arrangements;
•the results of our testing and clinical trials for our product candidates and future product candidates;
•announcements of therapeutic innovations or new products by us or our competitors;
•adverse actions taken by regulatory agencies with respect to our clinical trials, manufacturing supply chain or sales and marketing activities;
•any adverse changes to our relationships with manufacturers, suppliers or licensees;
•the results of our efforts to develop, acquire or license additional product candidates or technologies;
•changes in laws or regulations;
•any intellectual property infringement actions in which we may become involved;
•actual or anticipated fluctuations in our quarterly or annual operating results;
•changes in financial estimates or recommendations by securities analysts;
•trading volume of our common stock;
72
•sales of our common stock by us or our stockholders in the future;
•general economic and market conditions and overall fluctuations in the capital markets;
•changes in accounting principles; and
•the loss of any of our key scientific or management personnel.
In addition, the stock market, in general, and pharmaceutical and biotechnology companies have historically experienced price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. Broad market and industry factors may negatively affect the market price of our common stock, regardless of our actual operating performance. Further, any decline in the financial markets and related factors beyond our control may cause our stock price to decline rapidly and unexpectedly.
Any securities litigation could result in substantial damages and may divert management’s time and attention from our business.
A putative securities class action lawsuit was filed against us and certain of our officers and directors in 2015, which has now concluded. If our stock price experiences volatility, we may be the subject of additional securities litigation in the future. Litigation of this type could result in substantial costs and diversion of management’s attention and resources, which could adversely impact our business. Monitoring and defending against legal actions is time-consuming for our management and detracts from our ability to fully focus on our business activities. Any adverse determination in litigation could also subject us to significant liabilities.
Certain of our existing stockholders, executive officers and directors own a significant percentage of our common stock and may be able to influence or control matters submitted to our stockholders for approval.
Our officers and directors, and stockholders who own more than 5% of our outstanding common stock, beneficially own approximately 24.3% of our common stock as of December 31, 2021. 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 ownership concentration. Some of our stockholders may be able to influence or determine matters requiring stockholder approval. The interests of these stockholders may not always coincide with our interests or the interests of other stockholders.
This may also prevent or discourage unsolicited acquisition proposals or offers for our common stock that other stockholders may feel are in their best interest, and certain of our existing stockholders may act in a manner that advances their best interests and not necessarily those of other stockholders, including seeking a premium value for their common stock, and might affect the prevailing market price for our common stock.
Additionally, under certain circumstances, our amended and restated certificate of incorporation renounces any interest or expectancy that we have in, or in being offered an opportunity to participate in, corporate opportunities that are presented to certain entities or their affiliates and certain other related parties (whether or not any such person is our director). These provisions will apply even if the opportunity is one that we might reasonably have pursued or had the ability or desire to pursue if granted the opportunity to do so.
Sales of a substantial number of shares of our common stock in the public market could cause our stock price to fall.
Sales of a substantial number of shares of our common stock in the public market or the perception that these sales might occur, could depress the market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities. We are unable to predict the effect that sales may have on the prevailing market price of our common stock.
If securities or industry analysts do not publish or cease publishing research or reports about us, our business or our market, or if they adversely change their recommendations or publish negative reports regarding our business or our stock, our stock price and trading volume could decline.
The trading market for our common stock may be influenced by the research and reports that industry or securities analysts may publish about us, our business, our market or our competitors. We do not have any control over these analysts and we cannot provide any assurance that analysts will continue to cover us or provide favorable coverage. If any of the analysts who may cover us adversely change their recommendation regarding our stock, or provide more favorable relative recommendations about our competitors, our stock price could decline. If any analyst who may cover us were to cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.
73
Because we do not intend to declare cash dividends on our shares of common stock in the foreseeable future, stockholders must rely on appreciation of the value of our common stock for any return on their investment.
We currently anticipate that we will retain future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends in the foreseeable future. In addition, the terms of any future debt agreements may preclude us from paying dividends. As a result, we expect that only appreciation of the price of our common stock, if any, will provide a return to investors for the foreseeable future.
The requirements associated with being a public company require significant company resources and management attention.
We are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act of 2002, as amended (the “Sarbanes-Oxley Act”), the listing requirements of The Nasdaq Global Market, and other applicable securities rules and regulations. The Exchange Act requires that we file annual, quarterly and current reports with respect to our business and financial condition and maintain effective disclosure controls and procedures and internal control over financial reporting. In addition, subsequent rules implemented by the SEC and The Nasdaq Global Market may also impose various additional requirements on public companies. We have made, and will continue to make, changes to our corporate governance standards, disclosure controls and financial reporting and accounting systems to continue to meet our reporting obligations. However, the measures we take may not be sufficient to satisfy our obligations as a public company, which could subject us to delisting of our common stock, fines, sanctions and other regulatory action and potentially civil litigation.
We are subject to Section 404(b) of the Sarbanes-Oxley Act (“Section 404”), which requires that our independent registered public accounting firm provide an attestation report on the effectiveness of our internal control over financial reporting, among other additional requirements. Compliance with Section 404 is costly and time consuming for management and could result in the detection of internal control deficiencies. Moreover, if we have a material weakness in our internal controls over financial reporting, we may not detect errors on a timely basis, and our financial statements may be materially misstated. We or our independent registered public accounting firm may not be able to conclude on an ongoing basis that we have effective internal controls over financial reporting, which could harm our operating results, cause investors to lose confidence in our reported financial information and cause the trading price of our common stock to fall. Any failure to file accurate and timely quarterly and annual reports that we are required to file with the SEC under the Exchange Act could result in sanctions, lawsuits, delisting of our shares from The Nasdaq Global Market or other adverse consequences that would materially harm our business.
Some provisions of our charter documents and Delaware law may have anti-takeover effects that could discourage an acquisition of us by others, even if an acquisition would be beneficial to our stockholders and may prevent attempts by our stockholders to replace or remove our current management.
Provisions in our amended and restated certificate of incorporation and our bylaws, as well as provisions of the Delaware General Corporation Law (“DGCL”), could make it more difficult for a third party to acquire us or increase the cost of acquiring us, even if doing so would benefit our stockholders, including transactions in which stockholders might otherwise receive a premium for their shares. These provisions include:
•establishing a classified board of directors such that not all members of the board are elected at one time;
•allowing the authorized number of our directors to be changed only by resolution of our board of directors;
•limiting the removal of directors by the stockholders;
•authorizing the issuance of “blank check” preferred stock, the terms of which may be established and shares of which may be issued without stockholder approval;
•prohibiting stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of our stockholders;
•eliminating the ability of stockholders to call a special meeting of stockholders;
•establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted upon at stockholder meetings; and
•requiring the approval of the holders of at least 75% of the votes that all our stockholders would be entitled to cast to amend or repeal our bylaws.
These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the
74
members of our management. In addition, we are subject to Section 203 of the DGCL, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with an interested stockholder for a period of three years following the date on which the stockholder became an interested stockholder, unless such transactions are approved by our board of directors. This provision could have the effect of delaying or preventing a change of control, whether or not it is desired by or beneficial to our stockholders.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our principal executive office and research facility is located in Durham, North Carolina, our regulatory, commercial support and other administrative activities are located in Irvine, California, and our clinical, finance and legal operations are located in Bedminster, New Jersey. We also lease space for a manufacturing plant in Athlone, Ireland. Our Durham, North Carolina, facility consists of approximately 61,000 square feet of laboratory and office space under a lease that expires in June 2029, and our Irvine, California, location consists of approximately 27,000 square feet of office space under a lease that expires in October 2027. Our Bedminster, New Jersey, location consists of approximately 34,000 square feet of office space under a lease that expires in October 2029. Our manufacturing plant in Athlone, Ireland, consists of approximately 30,000 square feet of interior floor space and is under lease through at least September 2037. There are also small offices in Ireland, the United Kingdom and Japan. We may require additional space and facilities as our business expands.
ITEM 3. LEGAL PROCEEDINGS
We may periodically become subject to legal proceedings and claims arising in connection with our business. As of December 31, 2021, we are not a party to any material pending legal or administrative proceedings and, to our knowledge, no such proceedings are threatened or contemplated.
ITEM 4. MINE SAFETY DISCLOSURES
None.
75
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock is traded on The Nasdaq Global Market under the symbol “AERI.”
Stockholders
As of February 18, 2022, we had 48,391,874 shares of common stock outstanding held by approximately 207 stockholders of record. The actual number of stockholders is greater than this number of record holders, and includes stockholders who are beneficial owners, but whose shares are held in “street” name by brokers and other nominees. This number of holders of record also does not include stockholders whose shares may be held in trust by other entities.
Stock Performance Graph
The following graph illustrates a comparison of the five-year cumulative total stockholder return on our common stock since December 31, 2016 to two indices: the NASDAQ Composite Index and the NASDAQ Biotechnology Index. The graph assumes an initial investment of $100 on December 31, 2016, in our common stock and in each index. It also assumes reinvestment of dividends, if any. Historical stockholder return shown is not necessarily indicative of future performance, and we do not make or endorse any predictions as to future stockholder returns.
*This performance graph shall not be deemed “soliciting material” or be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any of our filings under the Securities Act, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.
Dividend Policy
We have not declared or paid any cash dividends on our capital stock in the last two fiscal years. We currently anticipate that we will retain future earnings, if any, for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends in the foreseeable future. In addition, the terms of our current and any future debt
76
agreements may preclude us from paying dividends. As a result, we anticipate that only appreciation of the price of our common stock, if any, will provide a return to investors for at least the foreseeable future.
Purchase of Equity Securities
We did not purchase any of our equity securities during the period covered by this report.
Recent Sales of Unregistered Securities
None.
Use of Proceeds from Registered Securities
None.
ITEM 6. [RESERVED]
77
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following management’s discussion and analysis should be read in conjunction with our audited financial statements and related notes that appear elsewhere in this Annual Report on Form 10-K. This management’s discussion and analysis contains forward-looking statements that involve risks and uncertainties. Please see “Special Note Regarding Forward-Looking Statements” for additional factors relating to such statements, and see “Risk Factors” in Part I, Item 1A of this report for a discussion of certain risk factors applicable to our business, financial condition and results of operations. Past operating results are not necessarily indicative of operating results in any future periods. Refer to Item 7. of our Form 10-K issued on February 26, 2021 for prior year discussion related to fiscal 2020.
Overview
We are a pharmaceutical company focused on the discovery, development and commercialization of first-in-class ophthalmic therapies for the treatment of patients with eye diseases and conditions including open-angle glaucoma, dry eye, DME and wet AMD.
U.S. Commercialization of the Glaucoma Franchise
Our strategy is to grow the market share of our FDA approved glaucoma franchise products, Rhopressa® and Rocklatan® in the United States. Both Rhopressa® and Rocklatan® are being sold to national and regional U.S. pharmaceutical distributors, and patients have access to them through pharmacies across the United States. We have obtained broad formulary coverage for Rhopressa® and Rocklatan® for the lives covered under commercial plans and Medicare Part D plans. Our commercial team responsible for sales of Rhopressa® and Rocklatan® is targeting select eye-care professionals who treat glaucoma throughout the United States.
| Rhopressa® is a once-daily eye drop designed to reduce elevated IOP in patients with open-angle glaucoma or ocular hypertension. Rhopressa® is taken in the evening and has shown in preclinical and clinical trials to be effective in reducing IOP, with a favorable safety profile. The active ingredient in Rhopressa®, netarsudil, is an Aerie-owned ROCK inhibitor. Rhopressa® increases the outflow of aqueous humor through the TM, which accounts for approximately 80% of fluid drainage from the healthy eye and is the diseased tissue responsible for elevated IOP in glaucoma. Using this MOA, we believe that Rhopressa® represents the first of a new drug class for reducing IOP in patients with glaucoma in over 20 years. | |||||||
| Rocklatan® is a once-daily fixed-dose combination of Rhopressa® and latanoprost, a commonly prescribed drug for the treatment of patients with open-angle glaucoma or ocular hypertension. Rocklatan® is also taken in the evening, and similar to Rhopressa®, has shown in preclinical and clinical trials to be highly effective in reducing IOP, with a favorable safety profile. Based on our clinical data, we believe that Rocklatan® has the potential to provide a greater IOP-reducing effect than any glaucoma medication currently marketed in the United States. | |||||||
Efforts Outside the United States
In addition to growing the market share of Rhopressa® and Rocklatan® in the United States, our strategy also includes developing business opportunities outside of the United States and we continue to make progress in our efforts to commercialize Rhopressa® and Rocklatan® in Europe, Japan and other regions of the world.
We have partnered and have collaboration agreements in place with Santen to develop and commercialize our products in Japan, East Asia, as well as Europe, China, India, the Middle East, CIS, Africa, parts of Latin America and the Oceania countries. The First Santen Agreement was executed in October 2020 to advance our clinical development and ultimately commercialize Rhopressa® and Rocklatan® in Japan and East Asia. The Second Santen Agreement was executed in December 2021 to develop and commercialize Rhopressa® and Rocklatan® in Europe, China, India, the Middle East, CIS, Africa, parts of Latin America and the Oceania countries.
78
In Europe, Rhopressa® and Rocklatan® will be marketed under the names Rhokiinsa® and Roclanda®, respectively. Rhokiinsa® and Roclanda® were granted a Centralised MA by the EC in November 2019 and January 2021, respectively. In April 2021, Roclanda® received marketing authorisation from the MHRA in Great Britain.
In Japan, we reported positive topline results for our Phase 3 clinical trial of netarsudil ophthalmic solution 0.02% in October 2021, the first of three expected Phase 3 clinical trials in Japan. The results evaluated netarsudil 0.02% versus ripasudil 0.4% and showed that netarsudil 0.02% once daily was superior to ripasudil 0.4% twice daily in lowering IOP after four weeks (p<0.0001), the primary endpoint of the study. The medications were safe and well tolerated. The most common treatment emergent adverse event was conjunctival hyperemia, which is treatable. A second, confirmatory Phase 3 study, required for approval in Japan, is underway. Santen is taking the lead on next steps in preparation for registration in Japan. Clinical trials for Rocklatan® have not yet begun.
Glaucoma Product Manufacturing
We have a sterile fill production facility in Athlone, Ireland, for the production of our FDA approved products and clinical supplies, with the intent of having the Athlone manufacturing plant supply our ophthalmic products in all markets for which we received regulatory approval and are commercialized. The Athlone manufacturing plant began manufacturing commercial supplies of Rocklatan® in the first quarter of 2020 and Rhopressa® in the third quarter of 2020 for distribution to the United States. Shipments of commercial supply of Rocklatan® and Rhopressa® from the Athlone manufacturing plant to the United States commenced in the second half of 2020, respectively. In addition, the Athlone manufacturing plant has manufactured clinical supplies of Rhopressa® for the Phase 3 clinical trials in Japan as well as registration batches to support product approval in Japan. We expect to commence shipments of Rhopressa® to Santen pursuant to the Second Santen Agreement in the fourth quarter of 2022 for its sales to third parties in early 2023.
As the Athlone manufacturing plant commenced operations in early 2020, it has not reached full capacity. We expect that the Athlone manufacturing plant will have adequate capacity to produce for the markets included in the Santen Agreements, as needed, which include Europe, Japan, East Asia and certain other regions of the world, if approved for commercial distribution in those markets. The Athlone manufacturing plant manufactures most of our ongoing needs for Rhopressa® and Rocklatan® in the United States. We may continue to use contract manufacturers to produce commercial supplies of Rhopressa® and Rocklatan® for distribution in the United States, but at reduced levels as a result of the Athlone manufacturing plant commencing manufacturing operations.
Product Candidates and Pipeline
Our strategy includes enhancing our longer-term commercial potential by identifying and advancing additional product candidates through our internal discovery efforts, our entry into potential research collaborations or in-licensing arrangements or our acquisition of additional ophthalmic products, technologies or product candidates that complement our current product portfolio.
Dry Eye Program
We are developing AR-15512 ophthalmic solution for the treatment of patients with dry eye disease. In September 2021, we reported topline results of our Phase 2b clinical study, named COMET-1, for AR-15512. We completed a dose ranging study evaluating two concentrations of AR-15512 (0.0014% and 0.003%) in a 90-day trial with 369 subjects. The COMET-1 clinical study achieved statistical significance for multiple pre-specified and validated signs and symptoms. The greatest efficacy was demonstrated with the higher concentration 0.003% formulation, which we plan to advance to Phase 3 studies. The study did not achieve statistical significance at the pre-determined primary endpoints at Day 28. We gained alignment with the FDA in the first quarter of 2022 on the results of the Phase 2b clinical trial and confirmed the design of the Phase 3 trials, which we currently expect to initiate in the second quarter of 2022.
Retina Program
Furthermore, we are currently developing two sustained-release implants focused on retinal diseases, AR-1105 and AR-14034 SR. For AR-1105, we completed a large Phase 2 clinical trial for patients with macular edema due to RVO in July 2020 and reported topline results indicating sustained efficacy of up to six months. We have received advice from regulatory agencies in both Europe and the United States regarding clinical and regulatory pathways for Phase 3 clinical trials. We are currently evaluating Phase 3 development options as well as partnership opportunities. In addition, we are also working to advance our preclinical sustained-release retinal implant, AR-14034 SR, for which we anticipate filing an IND with the FDA in the second half of 2022.
79
Pipeline
We own over 4,000 ROCK inhibitor molecules that provide a basis for further research and development opportunities. We discovered and developed the active ingredient in Rhopressa® and Rocklatan® and netarsudil through a rational drug design approach that coupled medicinal chemistry with high content screening of compounds in proprietary cell-based assays. We selected and formulated netarsudil for preclinical in vivo testing following a detailed characterization of over 3,000 synthesized ROCK inhibitors, a number that has since grown to approximately 4,000. We evaluate this library on an ongoing basis for additional development opportunities. Early-stage evaluations of these molecules are underway for other ophthalmic indications. We continue to evaluate external business development opportunities to provide access to technologies developed outside of Aerie to complement our internal research and development efforts.
Impact of the COVID-19 Pandemic
In December 2019, there was an outbreak of a new strain of COVID-19 and on March 11, 2020, the World Health Organization declared COVID-19 a pandemic. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and workforce participation due to “shelter-in-place” restrictions by various governments worldwide and created significant volatility and disruption of financial markets.
The health and safety of our employees, patients, prescribers and community are of utmost importance during this time. We are complying with all requirements and mandates from various agencies and governments and we continue to monitor applicable federal and state regulations, including with respect to vaccination mandates and required weekly testing of unvaccinated employees. We have taken precautionary measures to protect our employees and our stakeholders and adapted company policy to maintain the continuity of our business. We have continued to operate effectively as most of our manufacturing plant personnel are working at the manufacturing plant with precautionary measures in place, while the balance of our workforce has the option to work remotely or to return to the office in accordance with state and local mandates. We may take further actions as government authorities require or recommend or as we determine to be in the best interest of our employees.
We continue to see eye-care professionals’ offices returning to full capacity and are using traditional in-person office meetings to remain in contact with eye-care professionals, while adhering to strict national guidelines with social distancing, as appropriate. We have seen a majority of eye-care professionals’ offices back to pre-COVID-19 capacity. For those eye-care professionals’ offices that are operating at reduced capacity, we are using a combination of in-person and virtual tools and resources to remain in contact with eye-care professionals. Furthermore, Aerie territory managers are experiencing successful engagement with eye-care professionals through traditional face-to-face office meetings or, when necessary, virtual resources. Our sales force is interactively communicating with physicians via different technological platforms and local peer-to-peer educational meetings are primarily being implemented via webinars when in-person meetings are not available.
Many geographic communities have resumed in-person speaker programs, while adhering to strict national guidelines with social distancing, as appropriate. As part of the support of the eye-care community, our territory managers are either delivering or arranging for delivery of product samples to the eye-care professionals’ offices when needed.
Given the easing of certain COVID-19 restrictions during the second quarter of 2021, in accordance with state and local government mandates, traditional face-to-face office meetings and in-person peer-to-peer education meetings have increased during the period to near pre-COVID levels.
We have not observed any disruptions to date in the supply chain for the production of Rhopressa® and Rocklatan®. We believe we have more than two years of starting materials and API in inventory, with the exception of starting material 6AIQ which we currently have one year of supply and an additional two years on order to deliver in 2022, and adequate supply of finished product on hand to support our commercial efforts for at least the next six months. Production of Rhopressa® and Rocklatan® is continuing.
Financial Overview
Our cash, cash equivalents and investments totaled $139.8 million as of December 31, 2021. In January 2022, we received a $90 million payment from Santen in connection with the Second Santen Agreement. We believe that our cash, cash equivalents and investments and projected cash flows from revenues will provide sufficient resources for our current ongoing needs through at least the next twelve months from the date of this filing, though there may be need for additional financing activity as we continue to grow, in addition to our aggregate principal amount of $316.25 million of Convertible Notes which mature on October 1, 2024. We continue to evaluate our product candidates and pipeline for collaboration and licensing opportunities. See “—Liquidity and Capital Resources” below and Note 10 to our consolidated financial statements included elsewhere in this report for further discussion.
80
We have incurred net losses since our inception in June 2005. Until 2018, when we commenced commercial operations, our business activities were primarily limited to developing product candidates, raising capital and performing research and development activities. As of December 31, 2021, we had an accumulated deficit of $1,153.9 million. We recorded net losses of $74.8 million, $183.1 million and $199.6 million for the years ended December 31, 2021, 2020 and 2019, respectively. Our capital resources and business efforts are largely focused on activities relating to the commercialization of Rhopressa® and Rocklatan®, advancing our product candidates and pipeline, international expansion and operating our manufacturing plant in Athlone, Ireland.
We expect to incur operating losses until such a time when Rhopressa® or Rocklatan® or any current or future product candidates, if approved, or proceeds in connection with collaboration and licensing arrangements, generate sufficient cash flows for us to achieve profitability. Accordingly, we may be required to obtain further funding through debt or equity offerings or other sources. Adequate additional funding may not be available to us on acceptable terms, or at all. If we are unable to raise capital when needed or on acceptable terms, we may be forced to delay, reduce or eliminate our research and development programs or commercialization or manufacturing efforts.
Product Revenues, Net
Rhopressa® and Rocklatan®, our glaucoma franchise products, were launched in the United States in April 2018 and May 2019, respectively. We commenced generating product revenues from sales of Rhopressa® and Rocklatan® during the second quarter of 2018 and 2019, respectively. Product affordability for the patient drives consumer acceptance, and this is generally managed through coverage by Third-party Payers and such product may be subject to rebates and discounts payable directly to those Third-party Payers. Our product revenues are recorded net of provisions relating to estimates for (i) trade discounts and allowances, such as discounts for prompt payment and distributor fees, (ii) estimated rebates to Third-party Payers, estimated payments for Medicare Part D prescription drug program coverage gap (commonly called the “donut hole”), patient co-pay program coupon utilization, chargebacks and other discount programs and (iii) reserves for expected product returns. These estimates reflect current contractual and statutory requirements, known market events and trends, industry data, forecasted customer mix and lagged claims. Actual amounts may ultimately differ from these estimates. If actual results vary, estimates may be adjusted in the period such change in estimate becomes known, which may have an impact on earnings in the period of adjustment.
We will not generate any revenues from any product candidates or future product candidates unless and until we obtain regulatory approval and commercialize such products.
Licensing Revenues
Licensing revenues consist of the upfront license fee and supplemental upfront payment earned from the licensing of our intellectual property. We recognize revenues from license fees when the license is considered a right to use the intellectual property and we have provided all necessary information to the licensee to benefit from the license and the license term had begun. If it is probable that a significant reversal in the amount of cumulative revenue recognized will occur, we record the upfront license fees in deferred revenue, non-current until the uncertainty is resolved.
Cost of Goods Sold
Cost of goods sold consists of direct and indirect costs to procure and manufacture product sold, including third-party manufacturing costs. Prior to receiving FDA approval, these costs for Rhopressa® and Rocklatan® were expensed as pre-approval commercial manufacturing expenses (as defined below). We began capitalizing inventory costs for Rhopressa® and Rocklatan® after receipt of FDA approval. In January 2020 and September 2020, we received FDA approval to produce Rocklatan® and Rhopressa®, respectively, at the Athlone manufacturing plant for commercial distribution in the United States. Shipments of commercial supply of Rocklatan® and Rhopressa® from the Athlone manufacturing plant to the United States commenced in the second half of 2020. Production costs related to underutilized capacity at the manufacturing plant in Athlone, Ireland, are not included in the cost of inventory but are charged directly to cost of goods sold in our consolidated statements of operations and comprehensive loss in the period incurred. We expect cost of goods sold in 2022 to continue to be unfavorably impacted by production costs due to the underutilization at the Athlone manufacturing plant as a result of the Athlone manufacturing plant having become operational in early 2020 and has not reached full capacity. We expect the underutilization to continue to have an unfavorable impact on cost of goods sold that will decrease over time as the manufacturing plant reaches full capacity.
81
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of employee-related expenses, including salaries, benefits and stock-based compensation for all officers and employees in general management, sales and marketing, finance and administration. Other significant expenses include selling and marketing expenses, facilities expenses, shipping and handling costs and professional fees for audit, tax, legal and other services.
Pre-approval Commercial Manufacturing Expenses
Pre-approval commercial manufacturing expenses consist of costs incurred for commercial-related manufacturing activities for Rhopressa® and Rocklatan® prior to FDA approval. These costs include those associated with the manufacturing of inventory in anticipation of commercial launch, expenses associated with the establishment of both our manufacturing plant in Athlone, Ireland, and our additional API and drug product contract manufacturers as well as employee-related expenses, which includes salaries, benefits and stock-based compensation for commercial-related manufacturing personnel prior to regulatory approval.
We obtained regulatory approval to produce Rocklatan® and Rhopressa® in January 2020 and September 2020, respectively, in our Athlone, Ireland, plant for commercial distribution in the United States as well as approval for our additional drug product contract manufacturers during early 2020.
Research and Development Expenses
We expense research and development costs to operations as incurred. Research and development expenses consist primarily of costs incurred for the research and development of our preclinical and clinical candidates, which include:
•employee-related expenses, including salaries, benefits, travel and stock-based compensation expense for research and development personnel;
•expenses incurred under agreements with CROs, contract manufacturing organizations and service providers that assist in conducting clinical trials and preclinical studies;
•costs associated with any collaboration arrangements, licenses or acquisitions of preclinical molecules, product candidates or technologies;
•costs associated with preclinical activities and development activities;
•costs associated with regulatory operations; and
•depreciation expense for assets used in research and development activities.
Our expenses related to clinical trials are based on estimates of patient enrollment and related expenses at clinical investigator sites as well as estimates for the services received and efforts expended pursuant to contracts with research institutions, consultants and CROs that assist in conducting and managing clinical trials. We accrue expenses related to clinical trials based on contracted amounts applied to the level of patient enrollment and activity according to the protocol. If future timelines or contracts are modified based upon changes in the clinical trial protocol or scope of work to be performed, we modify our estimates of accrued expenses accordingly on a prospective basis. Historically, such modifications have not been material.
Other expense, net
Other expense, net primarily includes interest expense, interest income, foreign exchange gains and losses and other income and expense. Interest expense consists of interest expense under the Convertible Notes, including the amortization of debt discounts and issuance costs incurred. Interest income primarily consists of interest earned on our cash, cash equivalents and investments. See “—Liquidity and Capital Resources” below and Note 10 to our consolidated financial statements included elsewhere in this report for further discussion. Foreign exchange gains and losses are primarily due to the remeasurement of our lease liabilities, which are denominated in a foreign currency and held by a subsidiary with a U.S. dollar functional currency. Also included in other income and expense are changes in the fair value of equity securities and research and development tax credit refunds.
Income Tax Expense
Income tax expense primarily includes branch taxes of our non-U.S. subsidiaries.
82
Critical Accounting Policies and Use of Estimates
Our management’s discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The preparation of consolidated financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, costs and expenses and related disclosures. We evaluate our estimates and judgments on an ongoing basis. Significant estimates include assumptions used in the determination of revenue recognition and stock-based compensation. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Our significant accounting policies are more fully described in Note 2 to our consolidated financial statements included elsewhere in this report. The following accounting policies are the most critical in fully understanding and evaluating our reported financial results and affect significant judgments and estimates that we use in the preparation of our financial statements.
Revenue Recognition
Revenue transactions are accounted for under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC Topic 606”). In accordance with ASC Topic 606, we recognize revenue when our customers obtain control of our product for an amount that reflects the consideration we expect to receive from our customers in exchange for that product. To determine revenue recognition for contracts that are determined to be in scope of ASC Topic 606, we perform the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy the performance obligation. We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services transferred to our customer. Once the contract is determined to be within the scope of ASC Topic 606, we assess the goods or services promised within each contract and determine those that are performance obligations and assess whether each promised good or service is distinct. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when the performance obligation is satisfied.
Product Revenues
Aerie’s customers include a limited number of national and select regional wholesalers (the “distributors”). These distributors subsequently resell the product, primarily to retail pharmacies that dispense the product to patients. We expense incremental costs of obtaining a contract as and when incurred if the expected amortization period of the asset that would have been recognized is one year or less or the amount is immaterial. Product affordability for the patient drives consumer acceptance, and this is generally managed through coverage by Third-party Payers and such product may be subject to rebates and discounts payable directly to those Third-party Payers.
Net product revenues for the year ended December 31, 2021 were generated through sales of Rhopressa® and Rocklatan® in the United States. Product revenue is recorded net of trade discounts, allowances, commercial and government rebates, co-pay program coupons, chargebacks, U.S. government funding requirements for the coverage gap (commonly called the “donut hole”) portion of the Medicare Part D program and estimated returns and other incentives, discussed below. These reserves are classified as either reductions of accounts receivable or as current liabilities. Amounts billed or invoiced are included in accounts receivable, net on the consolidated balance sheet. We did not have any contract assets (unbilled receivables) at December 31, 2021, as customer invoicing generally occurs before or at the time of revenue recognition. We did not have any contract liabilities at December 31, 2021, as we did not receive payments in advance of fulfilling our performance obligations to our customers.
Net product revenue is typically recognized when the distributors obtain control of our products, which occurs at a point in time, typically upon delivery of products to the distributors. For the year ended December 31, 2021, three distributors accounted for 36.9%, 31% and 30.9% of total revenues, respectively. We evaluate the creditworthiness of each of our distributors to determine whether it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur. We do not assess whether a contract has a significant financing component if the expectation is such that the period between the transfer of the promised goods to the customer and the receipt of payment will be less than one year. Standard credit terms do not exceed 75 days.
83
We calculate our net product revenue based on the wholesale acquisition cost that we charge our distributors for Rhopressa® and Rocklatan® less provisions for (i) trade discounts and allowances, such as discounts for prompt payment and distributor fees, (ii) estimated rebates to Third-party Payers, estimated payments for Medicare Part D donut hole, patient co-pay program coupon utilization, chargebacks and other discount programs and (iii) reserves for expected product returns. The estimates of reserves established for variable consideration reflect current contractual and statutory requirements, known market events and trends, industry data, forecasted customer mix and lagged claims. Provisions for revenue reserves reduced product revenues by $247.1 million and $202.2 million in aggregate for the years ended December 31, 2021 and 2020, respectively, a significant portion of which related to commercial and Medicare Part D rebates. The transaction price, which includes variable consideration reflecting the impact of discounts and allowances, may be subject to constraint and is included in the net product revenues only to the extent that it is probable that a significant reversal of the amount of the cumulative revenues recognized will not occur in a future period. Actual amounts may ultimately differ from these estimates. If actual results vary, estimates may be adjusted in the period such change in estimate becomes known, which could have an impact on earnings in the period of adjustment.
Trade Discounts and Allowances: We generally provide discounts on sales of Rhopressa® and Rocklatan® to our distributors for prompt payment and pay fees for distribution services and for certain data that distributors provide to us. We expect our distributors to earn these discounts and fees, and accordingly deduct the full amount of these discounts and fees from our gross product revenues at the time such revenues are recognized.
Rebates, Chargebacks and Other Discounts: We contract with Third-party Payers for coverage and reimbursement of Rhopressa® and Rocklatan®. We estimate the rebates and chargebacks we expect to be obligated to provide to Third-party Payers and deduct these estimated amounts from our gross product revenue at the time the revenue is recognized. We estimate the rebates and chargebacks that we expect to be obligated to provide to Third-party Payers based upon (i) our contracts and negotiations with these Third-party Payers, (ii) estimates regarding the payer mix for Rhopressa® and Rocklatan® based on third-party data and utilization, (iii) inventory held by distributors and (iv) estimates of inventory held at the retail channel. Other discounts include our co-pay assistance programs for commercially-insured patients meeting certain eligibility requirements. The calculation of the accrual for co-pay assistance is based on an estimate of claims and the cost per claim that we expect to pay associated with product that has been recognized as revenue.
Product Returns: We estimate the amount of Rhopressa® and Rocklatan® that will be returned and deduct these estimated amounts from our gross revenue at the time the revenue is recognized. We currently estimate product returns based on historical information regarding returns of Rhopressa® and Rocklatan® as well as historical industry information regarding rates for comparable pharmaceutical products and product portfolios, the estimated remaining shelf life of Rhopressa® and Rocklatan® shipped to distributors, and contractual agreements with our distributors intended to limit the amount of inventory they maintain. Reporting from the distributors includes distributor sales and inventory held by distributors, which provide us with visibility into the distribution channel to determine when product would be eligible to be returned.
Contract Revenues from License Agreements
In the normal course of business, we conduct research and development activities pursuant to which we may license certain rights of our intellectual property to third parties. The terms of these arrangements typically include payment for a combination of one or more of the following: upfront license fees; development, regulatory and sales-based milestone payments; clinical or commercial supply services and royalties on net sales of licensed products.
In determining the appropriate amount of revenue to be recognized as we fulfill our obligations under such agreements, the five steps outlined in “—Revenue Recognition” above are performed. As part of the accounting for these arrangements, judgment is used to determine: (a) the performance obligations based on the determination under step (ii) above; (b) the transaction price under step (iii) above; (c) the stand-alone selling price for each performance obligation identified in the contract for the allocation of transaction price under step (iv) above; and (d) in some circumstances when control transfers and the appropriate measure of progress in order to recognize revenue under step (v) above. Judgment is used to determine whether milestones or other variable consideration, should be included in the transaction price as described further below. The transaction price is allocated to each performance obligation on a relative stand-alone selling price basis, for which we recognize revenue as or when the performance obligations under the contract are satisfied. Amounts received prior to revenue recognition are recorded as deferred revenue. Amounts expected to be recognized as revenue within the 12 months following the balance sheet date are classified as current portion of deferred revenue in the accompanying consolidated balance sheets. Amounts not expected to be recognized as revenue within the 12 months following the balance sheet date are classified as deferred revenue, non-current.
Upfront license fees: If the license to our intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, revenue is recognized from upfront license fees allocated to the license when the
84
license is transferred to the licensee and the licensee is able to use and benefit from the license. For licenses that are bundled with other promises, we determine whether the combined performance obligation is satisfied over time or at a point in time.
Development, regulatory or commercial milestone payments: At the inception of each arrangement that includes payments based on the achievement of certain development, regulatory and sales-based or commercial events, we evaluate whether the milestones are considered probable of being achieved and estimate the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within our or the licensee’s control, such as regulatory approvals, are not considered probable of being achieved until uncertainty associated with the approvals has been resolved. At the end of each subsequent reporting period, we will re-evaluate the probability of achieving such development and regulatory milestones and any related constraint, and if necessary, adjust our estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis and recorded as part of license revenues from collaborations during the period of adjustment.
Clinical or commercial supply services: Arrangements that include a promise for the future supply of drug product for either clinical development or commercial supply at the licensee’s discretion are generally considered as customer options. We assess if these options provide a material right to the licensee and if so, they would be accounted for as separate performance obligations.
Sales-based milestone payments and royalties: For arrangements that include sales-based royalties, including milestone payments based on the volume of sales, we will determine whether the license is deemed to be the predominant item to which the royalties or sales-based milestones relate and if such is the case, we will recognize revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied).
Upfront payments and fees may require deferral of revenue recognition to a future period until we perform our obligations under these arrangements or when it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with any variable consideration is subsequently resolved. Amounts payable to us are recorded as accounts receivable when our right to consideration is unconditional. We do not assess whether a contract has a significant financing component if the expectation at contract inception is such that the period between payment by the customer and the transfer of the promised goods or services to the customer will be one year or less.
See Note 3 to our consolidated financial statements included elsewhere in this report for further discussion.
Stock-Based Compensation
We recognize compensation costs related to stock options granted to employees ratably over the requisite service period, which in most cases is the vesting period of the award for employees, based on the estimated fair value of the awards on the date of grant. The estimated fair value of stock options is determined using the Black-Scholes option pricing model. Compensation expense for options granted to non-employees is determined as the fair value of consideration received or the fair value of the equity instruments issued, whichever is more reliably measured. The fair value of restricted stock awards (“RSAs”) and restricted stock units (“RSU”), including restricted stock awards with non-market performance and service conditions (“PSAs”), are determined based on the fair value of our common stock on the date of grant. Compensation expense related to RSAs and RSUs are recognized ratably over the vesting period. As the PSAs have multiple performance conditions, compensation expense is recognized for each vesting tranche over the respective requisite service period of each tranche if and when we deem it probable that the performance conditions will be satisfied. Compensation expense for stock purchase rights under our employee stock purchase plan is measured and recognized on the date that we become obligated to issue shares of our common stock and is based on the difference between the fair value of our common stock and the purchase price on such date. The fair value of the stock appreciation rights (“SARs”) is estimated using the Black-Scholes option pricing model and is marked to market through stock-based compensation expense. SARs are liability-based awards as they may only be settled in cash.
Significant Factors, Assumptions and Methodologies Used in Determining Fair Value
Determining the appropriate fair value measurement of stock-based awards requires the use of subjective assumptions. We estimate the fair value of options to purchase common stock using the Black-Scholes option pricing model, which is affected by our common stock fair values as well as assumptions regarding a number of other subjective variables. These other variables include the expected term of the options, our expected stock price volatility over the expected term of the options, risk-free interest rates and expected dividends.
We estimate the fair value of stock options at the grant date using the following assumptions:
85
•Fair Value of our Common Stock. The fair value for our underlying common stock is determined using the closing price on the date of grant as reported on The Nasdaq Global Market.
•Volatility. We calculate expected volatility based on our historical volatility in combination with reported data for a selected group of similar publicly traded companies, or guideline peer group, for which the relevant historical information is available. We selected representative companies from the pharmaceutical industry with similar characteristics to us, including stage of product development and commercialization.
•Expected Term. We used the simplified method as prescribed by the SEC Staff Accounting Bulletin No. 107, Share-Based Payment, as we do not have sufficient historical exercise and post-vesting termination data to provide a reasonable basis upon which to estimate the expected term of stock options granted to employees. The simplified method is based on the vesting period and the contractual term for each grant, or for each vesting-tranche for awards with graded vesting. The midpoint between the vesting date and the maximum contractual expiration date is used as the expected term under this method.
•Risk-free Rate. The risk-free interest rate is based on the yields of U.S. Treasury securities with maturities similar to the expected time to exercise.
•Forfeiture. Forfeitures are recognized in the period in which they occur.
•Dividend Yield. Except for a one-time cash dividend related to the spin-off of certain non-core intellectual property that occurred in 2012, we have never declared or paid any cash dividends and do not presently plan to pay cash dividends in the foreseeable future.
Key weighted average assumptions utilized in the fair value calculation for the underlying common stock as of December 31, 2021, 2020 and 2019 appear in the table below.
| YEAR ENDED DECEMBER 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Expected term (years) | 6.0 | 6.0 | 6.0 | ||||||||||||||
| Expected stock price volatility | 68 | % | 74 | % | 74 | % | |||||||||||
| Risk-free interest rate | 1.0 | % | 0.9 | % | 1.9 | % | |||||||||||
| Dividend yield | — | — | — | ||||||||||||||
86
Results of Operations
Comparison of the Years Ended December 31, 2021 and 2020
The following table summarizes the results of our operations for the years ended December 31, 2021 and 2020:
| YEAR ENDED DECEMBER 31, | CHANGE | % CHANGE | |||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||
| Product revenues, net | $ | 112,134 | $ | 83,138 | $ | 28,996 | 35 | % | |||||||||||||||
| Licensing revenues | 82,000 | — | 82,000 | * | |||||||||||||||||||
| Total revenues, net | 194,134 | 83,138 | 110,996 | * | |||||||||||||||||||
| Costs and expenses: | |||||||||||||||||||||||
| Cost of goods sold | 26,846 | 25,333 | 1,513 | 6 | % | ||||||||||||||||||
| Selling, general and administrative | 137,805 | 137,184 | 621 | — | % | ||||||||||||||||||
| Pre-approval commercial manufacturing | — | 2,304 | (2,304) | (100) | % | ||||||||||||||||||
| Research and development | 75,837 | 74,007 | 1,830 | 2 | % | ||||||||||||||||||
| Total costs and expenses | 240,488 | 238,828 | 1,660 | 1 | % | ||||||||||||||||||
| Loss from operations | (46,354) | (155,690) | 109,336 | (70) | % | ||||||||||||||||||
| Other expense, net | (27,863) | (22,166) | (5,697) | 26 | % | ||||||||||||||||||
| Loss before income taxes | $ | (74,217) | $ | (177,856) | $ | 103,639 | (58) | % | |||||||||||||||
| Income tax expense | $ | 593 | $ | 5,245 | $ | (4,652) | (89) | % | |||||||||||||||
| Net loss | $ | (74,810) | $ | (183,101) | $ | 108,291 | (59) | % | |||||||||||||||
*Percentage not meaningful
Product revenues, net
Product revenues, net were $112.1 million and $83.1 million for the years ended December 31, 2021 and 2020, respectively. Revenues recorded during the year ended December 31, 2021 relate to sales of our U.S. glaucoma franchise products, Rhopressa® and Rocklatan®. The year-over-year revenue increase is primarily due to higher volumes and higher net sales per unit, which was mostly attributable to renegotiating wholesaler agreements. Our sales volumes have increased each successive quarter in 2021 compared to the volumes in the corresponding quarters in 2020 for our glaucoma franchise products.
Licensing revenues
Licensing revenues were $82.0 million for the year ended December 31, 2021 and consisted of (i) $80.0 million of the $88.0 million upfront license fee associated with the Second Santen Agreement (“Europe Upfront Payment”) and (ii) the $2.0 million supplemental upfront payment earned in connection with the Second Santen Agreement. We recorded $8.0 million of the total $88.0 million Europe Upfront Payment in deferred revenue, non-current in our consolidated balance sheet until we have certainty around events that permit the commercialization of our franchised products in China as required under the Second Santen Agreement.
Cost of goods sold
Cost of goods sold was $26.8 million and $25.3 million for the years ended December 31, 2021 and 2020, respectively. Our gross margin percentage (over product revenues, net) was 76.1% and 69.5% for the years ended December 31, 2021 and 2020, respectively. Our cost of goods sold and gross margin percentage for the years ended December 31, 2021 and 2020 were unfavorably impacted by costs due to underutilized capacity at the Athlone manufacturing plant which increased cost of goods sold by $17.0 million and $17.0 million and lowered the gross margin percentage by 15.1% and 20.4%, respectively. We expect the underutilization to continue to have an unfavorable impact on cost of goods sold that will decrease over time as the Athlone manufacturing plant reaches full capacity. We received FDA approval to produce Rocklatan® and Rhopressa® in January 2020 and September 2020, respectively, at the Athlone manufacturing plant for commercial distribution in the United States. Prior to this approval, costs incurred for commercial-related manufacturing activities for both products were recorded to pre-approval commercial manufacturing expenses.
87
Selling, general and administrative expenses
Selling, general and administrative expenses were $137.8 million and $137.2 million for the years ended December 31, 2021 and 2020, respectively. Selling, general and administrative expenses increased by $0.6 million primarily due to higher sales and marketing expenses as well as travel expenses as a result of the easing of COVID-19 related travel restrictions, partially offset by lower overall employment-related expenses, including stock-based compensation.
Pre-approval commercial manufacturing expenses
Pre-approval commercial manufacturing expenses were zero and $2.3 million for the years ended December 31, 2021 and 2020, respectively. We received regulatory approval in January 2020 and September 2020 to produce Rocklatan® and Rhopressa®, respectively, at our Athlone manufacturing plant. The cost of Rocklatan® and Rhopressa® produced by the Athlone manufacturing plant for commercial distribution following regulatory approval was capitalized as inventory or expensed to cost of goods sold. Further, we received regulatory approval for our additional Rocklatan® drug product contract manufacturer, which began to supply commercial product in the first quarter of 2020. The cost of commercial Rocklatan® produced by the additional contract manufacturer following regulatory approval was capitalized as inventory.
Research and development expenses
Our direct research and development expenses are tracked on a program-by-program basis and consist primarily of costs incurred for the research and development of our preclinical and clinical product candidates, which include but are not limited to: (1) expenses incurred under agreements with contract research organizations, contract manufacturing organizations and service providers that assist in conducting clinical and preclinical studies; (2) costs associated with any collaboration arrangements, licenses or acquisitions of preclinical molecules, product candidates or technologies; and (3) costs associated with our preclinical activities, development activities and regulatory operations. We do not allocate employee-related expenses, stock-based compensation or facility expenses, including depreciation or other indirect costs, to specific programs because these costs are deployed across multiple programs.
| YEAR ENDED DECEMBER 31, | CHANGE | % CHANGE | |||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||
| Direct research and development expenses by program: | |||||||||||||||||||||||
Rhopressa® | $ | 6,327 | $ | 3,199 | $ | 3,128 | 98 | % | |||||||||||||||
Rocklatan® | 376 | 6,009 | (5,633) | (94) | % | ||||||||||||||||||
| AR-15512 | 9,867 | 5,948 | 3,919 | 66 | % | ||||||||||||||||||
Retina programs (1) | 7,273 | 4,943 | 2,330 | 47 | % | ||||||||||||||||||
Other direct research and development program costs (2) | 1,601 | 334 | 1,267 | * | |||||||||||||||||||
| Total direct research and development program costs | 25,444 | 20,433 | 5,011 | 25 | % | ||||||||||||||||||
| Employee-related costs | 25,080 | 27,831 | (2,751) | (10) | % | ||||||||||||||||||
| Stock-based compensation | 7,573 | 10,221 | (2,648) | (26) | % | ||||||||||||||||||
Other indirect costs (3) | 17,740 | 15,522 | 2,218 | 14 | % | ||||||||||||||||||
| Research and development expenses | $ | 75,837 | $ | 74,007 | $ | 1,830 | 2 | % | |||||||||||||||
(1) Consists of AR-1105, AR-13503 SR and AR-14034 SR in 2021. Consists of AR-1105 and AR-13503 SR in 2020.
(2) Other direct research development program costs primarily includes AR-6121.
(3) Consists primarily of other indirect costs incurred for the research and development of preclinical and clinical product candidates, including expenses associated with our research facilities such as lab supplies, depreciation and other research facility related costs. Also included in these costs are travel expenses, which were higher in 2021 as a result of the easing of COVID-19 related travel restrictions.
Research and development expenses were $75.8 million and $74.0 million for the years ended December 31, 2021 and 2020, respectively, and increased by $1.8 million for the year ended December 31, 2021 compared to the year ended December 31, 2020. The increase primarily relates to a $3.9 million increase in spend for the development of AR-15512 due to our Phase 2b clinical study, COMET-1, which we reported topline results in September 2021. Additionally, there was an increase of $3.1
88
million in expenses associated with Rhopressa®, respectively, as described below, as well as a $2.3 million increase in spend related to the development of our retina program.
These increases were partially offset by a decrease of $5.6 million in expenses associated with Rocklatan® due to lower costs related to the Mercury 3 registration trial in Europe and a decrease of $5.4 million in employee-related expenses, including stock-based compensation.
Furthermore, expenses for Rhopressa® increased by $3.1 million for the year ended December 31, 2021 compared to the year ended December 31, 2020, driven by ongoing costs for the Rhopressa® Phase 3 clinical trial in Japan. Santen’s portion of these shared costs related to conducting the first Rhopressa® Phase 3 clinical trial in Japan were recorded as deferred revenue, non-current in the condensed consolidated balance sheets. In October 2021, we reported positive topline results in this Phase 3 clinical trial, which is the first of three expected in Japan. Under the terms of the First Santen Agreement, Santen is responsible for the development and cost of the remaining two Phase 3 studies.
Other expense, net
Other expense, net consists of the following:
| YEAR ENDED DECEMBER 31 | CHANGE | % CHANGE | |||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||
| Interest income | $ | 139 | $ | 1,984 | $ | (1,845) | (93) | % | |||||||||||||||
| Interest expense | (28,904) | (26,476) | (2,428) | 9 | % | ||||||||||||||||||
| Other income | 902 | 2,326 | (1,424) | (61) | % | ||||||||||||||||||
| Other expense, net | $ | (27,863) | $ | (22,166) | $ | (5,697) | 26 | % | |||||||||||||||
Other expense, net increased by $5.7 million for the year ended December 31, 2021 compared to the year ended December 31, 2020.
Interest expense increased by $2.4 million during the year ended December 31, 2021 due to the amortization of debt discounts and issuance costs associated with the Convertible Notes which were issued in September 2019.
Other income decreased by $1.4 million during the year ended December 31, 2021 primarily due to $2.3 million in realized loss on equity securities sold as of March 31, 2021 offset by an increase in the unrealized gain from foreign exchange and an increase in the realized gain from foreign exchange.
Interest income decreased by $1.8 million during the year ended December 31, 2021 and related to interest income on our cash, cash equivalents and investments.
Income tax expense
Income tax expense consists of the following:
| YEAR ENDED DECEMBER 31 | CHANGE | % CHANGE | |||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||
| Income tax expense | $ | 593 | $ | 5,245 | $ | (4,652) | (89) | % | |||||||||||||||
Income tax expense decreased by $4.7 million for the year ended December 31, 2021 compared to the year ended December 31, 2020, primarily due to $5.0 million in withholding taxes incurred in the fourth quarter of 2020 related to the $50.0 million upfront payment made by Santen pursuant to the First Santen Agreement.
89
Liquidity and Capital Resources
Since our inception, we have funded operations primarily through the sale of equity securities and the issuance of convertible notes. In addition, we generate cash flow from product revenues related to sales of Rhopressa® and Rocklatan® in the United States. Further, we entered into the Second Santen Agreement in December 2021 which included the Europe Upfront Payment of $88.0 million which we received in January 2022 and a supplemental upfront payment of $2.0 million. This was an expansion of the First Santen Agreement pursuant to which Santen made an upfront payment of $50.0 million (the “Japan Upfront Payment”) in the fourth quarter of 2020.
We have incurred losses and experienced negative operating cash flows since our inception and anticipate that we will continue to incur losses until such a time when our current products and any future products, if commercialized, generate adequate revenues to render us profitable. We will not generate any revenue from any current or future product candidates unless and until we obtain regulatory approval and commercialize such products.
Sources of Liquidity
During years ended December 31, 2021 and 2020, we have:
•entered into the First Santen Agreement in October 2020 to advance our clinical development and ultimately commercialize Rhopressa® and Rocklatan® in Japan and East Asia. Pursuant to the First Santen Agreement, Santen made the $50.0 million Japan Upfront Payment in the fourth quarter of 2020, which was recognized in deferred revenue, non-current in our consolidated balance sheets. See Note 3 to our consolidated financial statements included elsewhere in this report for additional information; and
•entered into the Second Santen Agreement in December 2021, which expanded the territories of the First Santen Agreement to include Europe, China, India, the Middle East, CIS, parts of Latin America, the Oceania countries and certain other regions. Pursuant to the Second Santen Agreement, Santen paid the $88.0 million Europe Upfront Payment and $2.0 million supplemental upfront payment in January 2022, of which $82.0 million was recognized as licensing revenues in our consolidated statement of operations and comprehensive loss for the year ended December 31, 2021. See Note 3 to our consolidated financial statements included elsewhere in this report for additional information.
We also have outstanding $316.25 million aggregate principal amount of Convertible Notes which mature on October 1, 2024.
As of December 31, 2021, our principal sources of liquidity were our cash, cash equivalents and investments, which totaled approximately $139.8 million. In January 2022, we received a $90.0 million payment from Santen in connection with the Second Santen Agreement. See Note 3 to our consolidated financial statements included elsewhere in this report for additional information. We believe that our cash, cash equivalents and investments and projected cash flows from revenues will provide sufficient resources for our current ongoing needs through at least the next twelve months. See “—Operating Capital Requirements.” We continue to evaluate our product candidates and pipeline for collaboration and licensing opportunities.
Cash Flows
The following table summarizes our sources and uses of cash:
| YEAR ENDED DECEMBER 31, | ||||||||||||||
| 2021 | 2020 | |||||||||||||
| Net cash (used in) provided by: | (in thousands) | |||||||||||||
| Operating activities | $ | (99,154) | $ | (64,690) | ||||||||||
| Investing activities | (18,201) | 73,179 | ||||||||||||
| Financing activities | 2,972 | (859) | ||||||||||||
| Net (decrease) increase in cash and cash equivalents | $ | (114,383) | $ | 7,630 | ||||||||||
Operating Activities
During the year ended December 31, 2021, net cash used in operating activities of $99.2 million related to a net loss of $74.8 million, adjusted for non-cash items of $68.2 million primarily related to amortization and accretion, stock-based compensation expense and depreciation and $92.6 million related to changes in operating assets and liabilities which primarily consisted of the $90.0 million licensing receivable related to the Second Santen Agreement received in January 2022.
90
During the year ended December 31, 2020, net cash used in operating activities of $64.7 million related to a net loss of $183.1 million, adjusted for non-cash items of $73.5 million primarily related to stock-based compensation expense, amortization and accretion and depreciation and net cash inflows of $44.9 million related to changes in operating assets and liabilities. The changes in operating assets and liabilities included the $50.0 million Japan Upfront Payment in deferred revenue as of December 31, 2020.
Investing Activities
During the year ended December 31, 2021, our investing activities used net cash of $18.2 million primarily related to purchases of available-for-sale investments of $132.4 million and purchases of property, plant and equipment of $3.3 million, primarily related to our manufacturing plant in Athlone, Ireland, partially offset by sales and maturities of investments of $117.5 million.
During the year ended December 31, 2020, our investing activities provided net cash of $73.2 million primarily related to sales and maturities of investments of $192.9 million, which were partially offset by purchases of available-for-sale investments of $116.6 million and purchases of property, plant and equipment of $3.1 million, primarily related to the completion of the build-out of our manufacturing plant in Athlone, Ireland.
Financing Activities
During the year ended December 31, 2021, our financing activities provided net cash of $3.0 million primarily related to net proceeds from the issuance of common stock for stock-based compensation arrangements.
During the year ended December 31, 2020, our financing activities used net cash of $0.9 million, primarily related to tax payments made on employees’ behalf through withholding of shares on restricted stock.
Operating Capital Requirements
We expect to incur ongoing operating losses until such a time when Rhopressa®, Rocklatan®, Rhokiinsa® or Roclanda® or any product candidates or future product candidates, if approved, generate sufficient cash flows to achieve profitability.
Our principal liquidity requirements are for: working capital; operating expenses including for commercialization and manufacturing activities; expenses associated with developing our pipeline opportunities, including pursuing strategic growth opportunities; costs associated with executing our international expansion strategy, including clinical and potential commercialization activities in certain geographical regions around the world; contractual obligations; and capital expenditures.
We believe that our cash, cash equivalents and investments and projected cash flows from revenues will provide sufficient resources to support our operations through at least the next twelve months from the date of this filing. We are required to make semi-annual interest payments in cash in arrears on the Convertible Notes at a rate of 1.50% per annum on April 1 and October 1 of each year, which began on April 1, 2020.
Our future funding requirements will depend on many factors, including, but not limited to the following:
•commercial performance of Rhopressa®, Rocklatan®, Rhokiinsa® or Roclanda® or any current or future product candidates, if approved;
•costs of commercialization activities for Rhopressa®, Rocklatan®, Rhokiinsa® or Roclanda® and any current or future product candidates, if approved;
•costs of building inventory to support sales growth and other associated working capital needs;
•costs, timing and outcome of seeking regulatory approval;
•timing and costs of our ongoing and future clinical trials and preclinical studies including those related to our international expansion;
•costs of any follow-on development or products, including the exploration and/or development of any additional indications or additional opportunities for new ophthalmic product candidates, delivery alternatives and new therapeutic areas;
•terms and timing of any acquisitions, collaborations or other arrangements;
•costs related to the Convertible Notes; and
•costs related to filing and prosecuting patent applications, maintaining and protecting our intellectual property rights and defending against intellectual property related claims.
91
We based our projections on assumptions that may prove to be incorrect or unreliable or may change due to circumstances beyond our control, and as a result, we may consume our available capital resources earlier than we originally projected. Accordingly, we may be required to obtain further funding through debt or equity offerings or other sources. If such funding is required, we cannot guarantee that it will be available to us on favorable terms, if at all.
Income Taxes and Net Operating Loss Carryforwards
We have incurred significant net operating losses (“NOLs”) since our inception in June 2005. We expect to continue to incur U.S. NOLs until such a time when Rhopressa® or Rocklatan® or any other product, if approved in the future, generates adequate revenues to render Aerie profitable. We launched Rhopressa® in the United States at the end of April 2018 and Rocklatan® in May 2019. As a result, we commenced generating product revenues related to sales of Rhopressa® in the second quarter of 2018 and Rocklatan® in the second quarter of 2019; however, we did not generate U.S. taxable income in 2018 through 2021. The NOLs may be utilized to offset taxable income generated in the future.
As of December 31, 2021, we had federal and state NOL carryforwards of approximately $635.1 million and $616.3 million, respectively. Federal NOLs that arose prior to 2018 and state NOLs will begin to expire at various dates beginning in 2031 and 2023, respectively. Federal NOLs that arose on or after January 1, 2018, can be carried forward indefinitely to be utilized against future income, but can only be used to offset a maximum of 80% of our federal taxable income in any year. As of December 31, 2021, we had foreign NOL carryforwards of $66.0 million, which are available solely to offset taxable income of our foreign subsidiaries, subject to any applicable limitations under foreign law.
NOLs and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service and may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant stockholders over a three-year period in excess of 50%, as defined under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended. This could limit the amount of tax attributes that can be utilized annually to offset future taxable income or tax liabilities. The amount of the annual limitation is determined based on the value of our company immediately prior to the ownership change. Subsequent ownership changes may further affect the limitation in future years. State NOLs and tax credit carryforwards may be subject to similar limitations under state laws.
In December 2017, the Tax Act was signed into law and enacted significant changes to the Internal Revenue Code of 1986, as amended. This new tax legislation, among other changes, reduced the federal corporate income tax rate from 35% to 21% effective January 1, 2018. The Tax Act also repealed the corporate alternative minimum tax (“AMT”) for tax years beginning after December 31, 2017 and provides that existing AMT credit carryovers are refundable in tax years beginning after December 31, 2017. Many provisions in the Tax Act were generally effective in tax years beginning in 2018. The Tax Act eliminated the expensing of R&D costs beginning in 2022 and would require these costs to be amortized over five years if the R&D activities are performed in the United States and 15 years if the activities are performed outside of the United States. This may result in us having more taxable income for the 2022 tax year and into the future which can be offset by existing net operating losses. Legislation has been introduced to delay the application of this new amortization requirement for five years until tax years beginning after 2025. The prospects for this legislation are uncertain. We will continue to analyze additional information and guidance related to certain aspects of the Tax Act in assessing the potential impact in the future. On March 27, 2020, the President of the United States signed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which is aimed at providing emergency assistance and health care for individuals, families, and businesses affected by the COVID-19 pandemic and generally supporting the U.S. economy. The CARES Act, among other things, includes several business tax provisions which include, but are not limited to modifications of federal net operating loss carrybacks and deductibility, changes to prior year refundable alternative minimum tax liabilities, increase of limitations on business interest deductions from 30 percent to 50 percent of earnings before interest, taxes, depreciation, and amortization, technical corrections of the classification of qualified improvement property making them eligible for bonus depreciation, increase of the limits on charitable contribution deductions from 10 percent to 25 percent of adjusted taxable income, modifications of the treatment of federal loans, loan guarantees, and other investments, suspension of industry specific excise taxes, deferral of the company portion of Old Age, Survivors, and Disability Insurance Program (“OASDI”), and implementation of a refundable employee retention tax credit. The CARES Act did not have a material impact on our consolidated financial statements as of and for the year ended December 31, 2020. We will continue to monitor additional guidance issued by the U.S. Treasury Department and the Internal Revenue Service.
The CARES Act provides for the delay in the required deposit of the employer portion of the OASDI payroll tax from the date of enactment through the end of 2020. Of the taxes that we deferred, 50 percent of the deferred payroll taxes in the amount of $0.7 million were deposited by the end of 2021 and the remaining 50 percent are required to be deposited by the end of 2022. As of December 31, 2021, we have deferred $0.7 million payroll taxes related to the employer portion of the OASDI tax.
92
Outstanding Indebtedness
In September 2019, we issued an aggregate principal amount of $316.25 million of Convertible Notes. The Convertible Notes are senior, unsecured obligations with interest payable semi-annually in cash in arrears at a rate of 1.50% per annum on April 1 and October 1 of each year, which began on April 1, 2020. The Convertible Notes will mature on October 1, 2024 unless they are redeemed, repurchased or converted prior to such date. Prior to April 1, 2024, the Convertible Notes will be convertible at the option of holders only during certain periods and upon satisfaction of certain conditions. On and after April 1, 2024, the Convertible Notes will be convertible at the option of the holders any time until the close of business on the second scheduled trading day immediately preceding the maturity date. Upon conversion, the Convertible Notes may be settled in shares of our common stock, cash or a combination, thereof, at our election. We currently intend to settle the principal and interest amounts of the Convertible Notes in cash.
See Note 10 to our consolidated financial statements included elsewhere in this report for more information.
Contractual Obligations and Commitments
Our lease obligations are primarily related to our principal executive office and research facility in Durham, North Carolina, and corporate offices in Bedminster, New Jersey, Irvine, California and other foreign offices, and expire through October 2029. Additionally, we are leasing approximately 30,000 square feet of interior floor space related to our manufacturing plant in Athlone, Ireland. We are permitted to terminate the lease agreement beginning in September 2027. Refer to Note 8 to our consolidated financial statements included in this report for further information.
In September 2019, we issued Convertible Notes, which mature on October 1, 2024 and bear interest at a rate of 1.50% per annum. Refer to Note 10 to our consolidated financial statements included in this report for further information.
We have purchase obligations that consist primarily of non-cancelable commitments under our contract manufacturing agreements.
We have agreements with third-parties with contingent milestone payments that are potentially payable by us, as more fully described in Note 13 to our consolidated financial statements included elsewhere in this report. These payments are contingent upon achieving certain development and/or regulatory milestones that may or may not ever be achieved. Therefore, our requirement to make such payments in the future, if at all, as well as the timing of any such payments is highly uncertain.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements as defined under SEC regulations.
Recent Accounting Pronouncements
See Note 2 to our consolidated financial statements included elsewhere in this report regarding the impact of certain recent accounting pronouncements on our consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Given the short-term nature of our cash and cash equivalents and investments, we do not believe that a change in market interest rates would have a material impact on our financial condition or results of operations. We do not currently engage in any hedging activities against changes in interest rates.
We face market risks attributable to fluctuations in foreign currency exchange rates and exposure on the remeasurement of foreign currency-denominated monetary assets or liabilities into U.S. dollars. In particular, our operations and subsidiary in Ireland may enter into certain obligations or transactions in Euros or other foreign currencies but has a U.S. dollar functional currency. We do not currently have a foreign currency hedging program. To date and during the year ended December 31, 2021, foreign currency exposure and foreign currency financial instruments have not been material.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this item are set forth beginning at page F-1 of this report and are incorporated herein by reference.
93
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and our principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15(d)-15(e)), as of the end of the period covered by this report. Based upon the evaluation, our principal executive officer and our principal financial officer concluded that, as of December 31, 2021, the disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) under the Exchange Act as a process designed by, or under the supervision of, our principal executive officer and principal financial officer and effected by our Board of Directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external reporting purposes in conformity with generally accepted accounting principles and includes those policies and procedures that:
•pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
•provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
•provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision of and with the participation of our principal executive officer and our principal financial officer, our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2021 based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). Based on this assessment, management concluded that our internal control over financial reporting was effective as of December 31, 2021.
The effectiveness of our internal control over financial reporting as of December 31, 2021 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
94
ITEM 9B. OTHER INFORMATION
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not Applicable.
95
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is incorporated by reference to the information set forth in the sections titled “Information About Our Board of Directors,” “Information about Director Nominees,” “Information about Directors Continuing in Office,” “Information About Our Executive Officers,” “Delinquent Section 16(a) Reports,” “Code of Business Conduct and Ethics” and “Information about the Board of Directors and Corporate Governance - Audit Committee” in our Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the information set forth in the sections titled “Executive Compensation,” “Director Compensation” and “Information about the Board of Directors and Corporate Governance - Compensation Committee Interlocks and Insider Participation” in our Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated by reference to the information set forth in the sections titled “Securities Authorized for Issuance under Equity Compensation Plans” and “Security Ownership of Certain Beneficial Owners and Management” in our Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated by reference to the information set forth in the sections titled “Board of Directors’ Independence” and “Transactions with Related Persons” in our Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by reference to the information set forth in the section titled “Independent Registered Public Accounting Firm Fees and Services” in our Proxy Statement.
96
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
The financial statement schedules and exhibits filed as part of this Annual Report on Form 10-K are as follows:
(a)(1) Financial Statements
See “Index to Consolidated Financial Statements” beginning on page F-1 of this report.
(a)(2) Financial Statement Schedules
Financial statement schedules have been omitted because the required information is not present, or not present in amounts sufficient to require submission of the schedules, or because the required information is provided in the financial statements or notes thereto.
(a)(3) Exhibits
The exhibits required to be filed as part of this report are listed in the Exhibit Index attached hereto and are incorporated herein by reference.
ITEM 16. FORM 10-K SUMMARY
None.
97
EXHIBIT INDEX
| EXHIBIT NO. | EXHIBIT DESCRIPTION | |||||||
| 3.1 | ||||||||
| 3.2 | ||||||||
| 4.1 | ||||||||
| 4.2 | ||||||||
| 4.3* | ||||||||
| 10.1# | ||||||||
| 10.2# | ||||||||
| 10.3# | ||||||||
| 10.4# | ||||||||
| 10.5# | ||||||||
| 10.6# | ||||||||
| 10.7# | ||||||||
| 10.8# | ||||||||
| 10.9# | ||||||||
| 10.10# | ||||||||
| 10.11# | ||||||||
| 10.12# | ||||||||
98
| 10.13# | ||||||||
| 10.14# | ||||||||
| 10.15# | ||||||||
| 10.16# | ||||||||
| 10.16.1# | ||||||||
| 10.17# | ||||||||
| 10.17.1# | ||||||||
| 10.18# | ||||||||
| 10.18.1# | ||||||||
| 10.19# | ||||||||
| 10.20# | ||||||||
| 10.21# | ||||||||
| 10.22# | ||||||||
| 10.23# | ||||||||
| 10.24 | ||||||||
| 10.25 | ||||||||
99
10.26† | ||||||||
10.27† | ||||||||
10.28† | ||||||||
10.29††* | ||||||||
10.30† | ||||||||
| 10.31# | ||||||||
| 10.32# | ||||||||
10.33†† | ||||||||
| 10.34# | ||||||||
10.35††* | ||||||||
| 10.36#* | ||||||||
| 10.37#* | ||||||||
| 10.38#* | ||||||||
| 10.39#* | ||||||||
| 10.40#* | ||||||||
| 21.1 | ||||||||
| 23.1* | ||||||||
| 31.1* | ||||||||
| 31.2* | ||||||||
100
| 32.1*** | ||||||||
| 32.2*** | ||||||||
| 101.INS** | Inline XBRL Instance Document. | |||||||
| 101.SCH** | Inline XBRL Taxonomy Extension Schema Document. | |||||||
| 101.CAL** | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | |||||||
| 101.LAB** | Inline XBRL Taxonomy Extension Label Linkbase Database. | |||||||
| 101.PRE** | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | |||||||
| 101.DEF** | Inline XBRL Taxonomy Extension Definition Linkbase Document. | |||||||
| 104* | Cover Page Interactive Data File. | |||||||
| † | Certain portions of this exhibit have been omitted and separately filed with the SEC pursuant to a request for confidential treatment which has been granted by the SEC. | ||||
| †† | In accordance with Item 601(a)(5) of Regulation S-K, certain schedules (or similar attachments) to this exhibit have been omitted from this filing. The registrant will provide a copy of any omitted schedule to the Securities and Exchange Commission or its staff upon request. In accordance with Item 601(b)(10)(iv) of Regulation S-K, certain provisions or terms of this exhibit have been redacted. The registrant will provide an unredacted copy of the exhibit on a supplemental basis to the Securities and Exchange Commission or its staff upon request. | ||||
| # | Exhibit is a management contract or compensatory plan or arrangement. | ||||
| * | Filed herewith. | ||||
| ** | Attached as Exhibit 101 to this report are the following formatted in Inline XBRL (Extensible Business Reporting Language): | ||||
(i) Consolidated Balance Sheets at December 31, 2021 and 2020, (ii) Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2021, 2020 and 2019 (iii) Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2021, 2020 and 2019 (iv) Consolidated Statements of Cash Flows for the years ended December 31, 2021, 2020 and 2019 and (v) Notes to Consolidated Financial Statements. | |||||
| *** | Furnished herewith. | ||||
101
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| AERIE PHARMACEUTICALS, INC. | |||||||||||||||||
| Date: February 25, 2022 | By: | /S/ RAJ KANNAN | |||||||||||||||
| Raj Kannan | |||||||||||||||||
| Chief Executive Officer and Director | |||||||||||||||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated.
| SIGNATURE | TITLE | DATE | ||||||||||||
/S/ RAJ KANNAN | Chief Executive Officer and Director (Principal Executive Officer) | February 25, 2022 | ||||||||||||
| Raj Kannan | ||||||||||||||
/S/ BENJAMIN F. MCGRAW III, PHARM.D. | Interim Executive Chair of the Board (Principal Financial Officer) | February 25, 2022 | ||||||||||||
| Benjamin F. McGraw, III, Pharm.D. | ||||||||||||||
/S/ JEFFREY M. CALABRESE, CPA | Vice President, Finance (Principal Accounting Officer) | February 25, 2022 | ||||||||||||
Jeffrey M. Calabrese, CPA | ||||||||||||||
/S/ GERALD D. CAGLE, PH.D. | Director | February 25, 2022 | ||||||||||||
Gerald D. Cagle, Ph.D. | ||||||||||||||
/S/ RICHARD CROARKIN | Director | February 25, 2022 | ||||||||||||
Richard Croarkin | ||||||||||||||
/S/ MECHIEL M. DU TOIT | Director | February 25, 2022 | ||||||||||||
Mechiel M. du Toit | ||||||||||||||
/S/ PETER J. MCDONNELL, M.D. | Director | February 25, 2022 | ||||||||||||
Peter J. McDonnell, M.D. | ||||||||||||||
/S/ DAVID W. GRYSKA | Director | February 25, 2022 | ||||||||||||
David W. Gryska | ||||||||||||||
/S/ JULIE MCHUGH | Director | February 25, 2022 | ||||||||||||
Julie McHugh | ||||||||||||||
102
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AERIE PHARMACEUTICALS, INC.
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Aerie Pharmaceuticals, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Aerie Pharmaceuticals, Inc. and its subsidiaries (the “Company”) as of December 31, 2021 and 2020, and the related consolidated statements of operations and comprehensive loss, of stockholders’ equity and of cash flows for each of the three years in the period ended December 31, 2021, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
F-2
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Provisions for Revenue Reserves – Commercial and Medicare Part D Rebates
As described in Notes 2 and 3 to the consolidated financial statements, product revenues are recorded net of provisions. Such provisions include estimated rebates to third-party payers and estimated payments for the Medicare Part D prescription drug program. Management estimates the rebates it expects to be obligated to provide to third-party payers and deducts these estimated amounts from its gross product revenue at the time the revenue is recognized. Provisions for revenue reserves reduced product revenues by $247.1 million in aggregate for the year ended December 31, 2021, a significant portion of which related to commercial and Medicare Part D rebates. Management estimates the reserves based on contractual and statutory requirements, known market events and trends, industry data, forecasted customer mix, and lagged claims.
The principal considerations for our determination that performing procedures relating to provisions for revenue reserves – commercial and Medicare Part D rebates is a critical audit matter are the significant judgments made by management due to the significant measurement uncertainty involved in developing these provisions, as the provisions are based on assumptions developed using forecasted customer mix and lagged claims. This in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures relating to these assumptions.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to rebates for the commercial and Medicare Part D programs, including controls over the assumptions used to estimate the provisions for these rebates. These procedures also included, among others, (i) developing an independent estimate of the commercial and Medicare Part D rebates by utilizing third-party data on forecasted customer mix, the terms of the specific rebate programs, and the trend of lagged claims; (ii) comparing the independent estimate to the rebates recorded by management; and (iii) testing a sample of actual rebate claims paid and evaluating those claims for consistency with the contractual terms of the Company’s rebate agreements.
/s/ PricewaterhouseCoopers LLP
Florham Park, New Jersey
February 24, 2022
We have served as the Company’s auditor since 2011.
F-3
AERIE PHARMACEUTICALS, INC.
Consolidated Balance Sheets
(in thousands, except share and per share data)
| DECEMBER 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Assets | |||||||||||
| Current assets | |||||||||||
| Cash and cash equivalents | $ | 37,187 | $ | 151,570 | |||||||
| Short-term investments | 102,614 | 88,794 | |||||||||
| Accounts receivable, net | 68,828 | 56,022 | |||||||||
| Inventory | 40,410 | 27,059 | |||||||||
| Licensing receivable | 90,000 | — | |||||||||
| Prepaid expenses and other current assets | 16,611 | 8,310 | |||||||||
| Total current assets | 355,650 | 331,755 | |||||||||
| Property, plant and equipment, net | 51,472 | 54,260 | |||||||||
| Operating lease right-of-use assets | 22,669 | 14,084 | |||||||||
| Other assets | 1,600 | 1,946 | |||||||||
| Total assets | $ | 431,391 | $ | 402,045 | |||||||
| Liabilities and Stockholders’ Equity | |||||||||||
| Current liabilities | |||||||||||
| Accounts payable | $ | 8,285 | $ | 8,826 | |||||||
| Accrued expenses and other current liabilities | 112,341 | 90,723 | |||||||||
| Operating lease liabilities | 4,365 | 4,923 | |||||||||
| Total current liabilities | 124,991 | 104,472 | |||||||||
| Convertible notes, net | 234,527 | 210,373 | |||||||||
| Deferred revenue, non-current | 64,315 | 50,858 | |||||||||
| Operating lease liabilities, non-current | 21,751 | 10,206 | |||||||||
| Other non-current liabilities | 3,140 | 2,168 | |||||||||
| Total liabilities | 448,724 | 378,077 | |||||||||
Commitments and contingencies (Note 13) | |||||||||||
| Stockholders’ (deficit) equity | |||||||||||
Preferred stock, $0.001 par value; 15,000,000 shares authorized as of December 31, 2021 and December 31, 2020; None issued and outstanding | — | — | |||||||||
Common stock, $0.001 par value; 150,000,000 shares authorized as of December 31, 2021 and December 31, 2020; 48,444,473 and 46,821,644 shares issued and outstanding as of December 31, 2021 and December 31, 2020, respectively | 48 | 47 | |||||||||
| Additional paid-in capital | 1,136,656 | 1,103,074 | |||||||||
| Accumulated other comprehensive loss | (126) | (52) | |||||||||
| Accumulated deficit | (1,153,911) | (1,079,101) | |||||||||
| Total stockholders’ (deficit) equity | (17,333) | 23,968 | |||||||||
| Total liabilities and stockholders’ (deficit) equity | $ | 431,391 | $ | 402,045 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-4
AERIE PHARMACEUTICALS, INC.
Consolidated Statements of Operations and Comprehensive Loss
(in thousands, except share and per share data)
YEAR ENDED DECEMBER 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Product revenues, net | $ | 112,134 | $ | 83,138 | $ | 69,888 | |||||||||||
| Licensing revenues | 82,000 | — | — | ||||||||||||||
| Total revenues, net | 194,134 | 83,138 | 69,888 | ||||||||||||||
| Costs and expenses: | |||||||||||||||||
| Cost of goods sold | 26,846 | 25,333 | 4,833 | ||||||||||||||
| Selling, general and administrative | 137,805 | 137,184 | 138,402 | ||||||||||||||
| Pre-approval commercial manufacturing | — | 2,304 | 22,767 | ||||||||||||||
| Research and development | 75,837 | 74,007 | 91,378 | ||||||||||||||
| Total costs and expenses | 240,488 | 238,828 | 257,380 | ||||||||||||||
| Loss from operations | (46,354) | (155,690) | (187,492) | ||||||||||||||
| Other expense, net | (27,863) | (22,166) | (12,179) | ||||||||||||||
| Loss before income taxes | (74,217) | (177,856) | (199,671) | ||||||||||||||
| Income tax expense (benefit) | 593 | 5,245 | (90) | ||||||||||||||
| Net loss | $ | (74,810) | $ | (183,101) | $ | (199,581) | |||||||||||
| Net loss per common share—basic and diluted | $ | (1.61) | $ | (3.99) | $ | (4.39) | |||||||||||
| Weighted average number of common shares outstanding—basic and diluted | 46,336,346 | 45,897,255 | 45,427,154 | ||||||||||||||
| Net loss | $ | (74,810) | $ | (183,101) | $ | (199,581) | |||||||||||
| Unrealized (loss) gain on available-for-sale investments | (74) | 40 | (92) | ||||||||||||||
| Comprehensive loss | $ | (74,884) | $ | (183,061) | $ | (199,673) | |||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-5
AERIE PHARMACEUTICALS, INC.
Consolidated Statements of Stockholders’ (Deficit) Equity
(in thousands, except share data)
| COMMON STOCK | ADDITIONAL PAID-IN CAPITAL | ACCUMULATED OTHER COMPREHENSIVE LOSS | ACCUMULATED DEFICIT | TOTAL | |||||||||||||||||||||||||||||||
| SHARES | AMOUNT | ||||||||||||||||||||||||||||||||||
| Balances at December 31, 2018 | 45,478,883 | $ | 45 | $ | 924,180 | $ | — | $ | (696,419) | $ | 227,806 | ||||||||||||||||||||||||
| Issuance of common stock upon exercise of stock options and warrants | 612,759 | — | 3,140 | — | — | 3,140 | |||||||||||||||||||||||||||||
| Issuance of common stock upon exercise of stock purchase rights | 42,611 | — | 979 | — | — | 979 | |||||||||||||||||||||||||||||
| Issuance of common stock for restricted stock awards, net | 330,416 | 1 | (2,630) | — | — | (2,629) | |||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 45,551 | — | — | 45,551 | |||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | (92) | — | (92) | |||||||||||||||||||||||||||||
Equity component of Convertible Notes, net of issuance costs of $3,725 | — | — | 124,666 | — | — | 124,666 | |||||||||||||||||||||||||||||
Payment for capped call share options | — | — | (32,890) | — | — | (32,890) | |||||||||||||||||||||||||||||
| Net loss | — | — | — | — | (199,581) | (199,581) | |||||||||||||||||||||||||||||
| Balances at December 31, 2019 | 46,464,669 | 46 | 1,062,996 | (92) | (896,000) | 166,950 | |||||||||||||||||||||||||||||
| Issuance of common stock upon exercise of stock options and warrants | 51,333 | 1 | 171 | — | — | 172 | |||||||||||||||||||||||||||||
| Issuance of common stock upon exercise of stock purchase rights | 60,857 | — | 724 | — | — | 724 | |||||||||||||||||||||||||||||
| Issuance of common stock for restricted stock awards, net | 244,785 | — | (1,754) | — | — | (1,754) | |||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 40,937 | — | — | 40,937 | |||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | 40 | — | 40 | |||||||||||||||||||||||||||||
| Net loss | — | — | — | — | (183,101) | (183,101) | |||||||||||||||||||||||||||||
| Balances at December 31, 2020 | 46,821,644 | 47 | 1,103,074 | (52) | (1,079,101) | 23,968 | |||||||||||||||||||||||||||||
| Issuance of common stock upon exercise of stock options | 1,135,607 | 1 | 3,490 | — | — | 3,491 | |||||||||||||||||||||||||||||
| Issuance of common stock upon exercise of stock purchase rights | 119,414 | — | 1,176 | — | — | 1,176 | |||||||||||||||||||||||||||||
| Issuance of common stock for restricted stock awards, net | 367,808 | — | (1,695) | — | — | (1,695) | |||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 30,611 | — | — | 30,611 | |||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | (74) | — | (74) | |||||||||||||||||||||||||||||
| Net loss | — | — | — | — | (74,810) | (74,810) | |||||||||||||||||||||||||||||
| Balances at December 31, 2021 | 48,444,473 | 48 | 1,136,656 | (126) | (1,153,911) | (17,333) | |||||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-6
AERIE PHARMACEUTICALS, INC.
Consolidated Statements of Cash Flows
(in thousands)
| YEAR ENDED DECEMBER 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Cash flows from operating activities | |||||||||||||||||
| Net loss | $ | (74,810) | $ | (183,101) | $ | (199,581) | |||||||||||
| Adjustments to reconcile net loss to net cash used in operating activities | |||||||||||||||||
| Depreciation | 6,399 | 6,366 | 5,138 | ||||||||||||||
| Amortization and accretion | 31,101 | 27,792 | 12,976 | ||||||||||||||
| Acquisition of assets expensed to research and development | — | — | 10,171 | ||||||||||||||
| Stock-based compensation | 29,524 | 40,095 | 45,093 | ||||||||||||||
| Other non-cash | 1,194 | (732) | (271) | ||||||||||||||
| Changes in operating assets and liabilities | |||||||||||||||||
| Accounts receivable, net | (12,806) | (17,668) | (35,639) | ||||||||||||||
| Inventory | (12,101) | (5,166) | (10,257) | ||||||||||||||
Prepaid, current and other assets(1) | (7,285) | 340 | (2,144) | ||||||||||||||
| Licensing receivable | (90,000) | — | — | ||||||||||||||
| Accounts payable, accrued expenses and other current liabilities | 21,580 | 22,536 | 28,766 | ||||||||||||||
| Operating lease liabilities | (5,407) | (6,010) | (4,682) | ||||||||||||||
| Deferred revenue | 13,457 | 50,858 | — | ||||||||||||||
| Net cash used in operating activities | (99,154) | (64,690) | (150,430) | ||||||||||||||
| Cash flows from investing activities | |||||||||||||||||
| Acquisition of assets | — | — | (7,835) | ||||||||||||||
| Purchase of available-for-sale investments | (132,361) | (116,591) | (165,454) | ||||||||||||||
| Proceeds from sales and maturities of investments | 117,451 | 192,870 | — | ||||||||||||||
| Purchase of property, plant and equipment | (3,291) | (3,100) | (9,958) | ||||||||||||||
| Net cash (used in) provided by investing activities | (18,201) | 73,179 | (183,247) | ||||||||||||||
| Cash flows from financing activities | |||||||||||||||||
| Proceeds from loan | — | 8,274 | — | ||||||||||||||
| Repayment of loan | — | (8,274) | — | ||||||||||||||
| Proceeds related to issuance of common stock for stock-based compensation arrangements, net | 2,972 | (859) | 684 | ||||||||||||||
| Proceeds from exercise of warrants | — | — | 761 | ||||||||||||||
| Proceeds from convertible notes, net of issuance costs | — | — | 308,349 | ||||||||||||||
| Payments of issuance costs | — | — | (1,769) | ||||||||||||||
| Payment for capped call options | — | — | (32,890) | ||||||||||||||
| Other financing | — | — | (336) | ||||||||||||||
| Net cash provided by (used in) financing activities | 2,972 | (859) | 274,799 | ||||||||||||||
| Net change in cash and cash equivalents | (114,383) | 7,630 | (58,878) | ||||||||||||||
| Cash and cash equivalents, at beginning of period | 151,570 | 143,940 | 202,818 | ||||||||||||||
| Cash and cash equivalents, at end of period | $ | 37,187 | $ | 151,570 | $ | 143,940 | |||||||||||
| Supplemental disclosures | |||||||||||||||||
| Cash paid for interest | $ | 4,744 | $ | 5,034 | $ | 6,496 | |||||||||||
| Cash paid for income taxes | $ | — | $ | 4,987 | $ | — | |||||||||||
| Non-cash investing and financing activities: | |||||||||||||||||
| Liabilities incurred from Avizorex Asset Acquisition | $ | — | $ | — | $ | 1,186 | |||||||||||
| Purchases of property, plant and equipment in accounts payable and accrued expense and other current liabilities | $ | 922 | $ | 374 | $ | 771 | |||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-7
AERIE PHARMACEUTICALS, INC.
Notes to the Consolidated Financial Statements
1. The Company
Aerie Pharmaceuticals, Inc. (“Aerie”), with its wholly-owned subsidiaries, Aerie Distribution, Inc., Aerie Pharmaceuticals Limited, Aerie Pharmaceuticals Ireland Limited and Avizorex Pharma S.L. (“Aerie Distribution,” “Aerie Limited,” “Aerie Ireland Limited” and “Avizorex,” respectively, together with Aerie, the “Company”), is a pharmaceutical company focused on the discovery, development and commercialization of first-in-class ophthalmic therapies for the treatment of patients with eye diseases and conditions including open-angle glaucoma, dry eye, diabetic macular edema (“DME”) and wet age-related macular degeneration (“AMD”). The Company has its principal executive offices in Durham, North Carolina, and operates as one business segment.
U.S. Commercialization of the Glaucoma Franchise
The Company has developed and commercialized two U.S. Food and Drug Administration (“FDA”) approved products, Rhopressa® (netarsudil ophthalmic solution) 0.02% (“Rhopressa®”) and Rocklatan® (netarsudil/latanoprost ophthalmic solution) 0.02%/0.005% (“Rocklatan®”), which are sold in the United States and comprise its glaucoma franchise. Rhopressa® is a once-daily eye drop designed to reduce elevated intraocular pressure (“IOP”) in patients with open-angle glaucoma or ocular hypertension. Rocklatan® is a once-daily fixed-dose combination of Rhopressa® and latanoprost, a commonly prescribed drug for the treatment of patients with open-angle glaucoma or ocular hypertension. The Company is commercializing Rhopressa®, which was launched in the United States in April 2018, and Rocklatan®, which was launched in the United States in May 2019.
Efforts Outside the United States
In addition to actively promoting Rhopressa® and Rocklatan® in the United States, the Company is also developing business opportunities outside of the United States and has made progress in its efforts to commercialize Rhopressa® and Rocklatan® in Europe, Japan and other regions of the world.
The Company partnered and has collaboration agreements in place with Santen Pharmaceuticals Co., Ltd. (“Santen Pharmaceuticals”) and Santen SA (“Santen SA” and, together with Santen Pharmaceuticals, “Santen”) to develop and commercialize its products in Japan and South Korea, Indonesia, Malaysia, Philippines, Singapore, Thailand, Vietnam and Taiwan (collectively, “East Asia”), as well as Europe, China, India, the Middle East, Commonwealth of Independent States (“CIS”), Africa, parts of Latin America and the Oceania countries. The initial Collaboration and License Agreement with Santen was executed in October 2020 (the “First Santen Agreement”) to advance the Company’s clinical development and ultimately commercialize Rhopressa® and Rocklatan® in Japan and East Asia. The second Collaboration and License Agreement with Santen (the “Second Santen Agreement” and, together with the First Santen Agreement, “Santen Agreements”) was executed in December 2021 to develop and commercialize Rhopressa® and Rocklatan® in Europe, China, India, the Middle East, CIS, Africa, parts of Latin America and the Oceania countries. See Note 3 for additional information.
In Europe, Rhopressa® and Rocklatan® will be marketed under the names Rhokiinsa® and Roclanda®, respectively. Rhokiinsa® and Roclanda® were granted a Centralised Marketing Authorisation (“Centralised MA”) by the European Commission (“EC”) in November 2019 and January 2021, respectively. In April 2021, Roclanda® received marketing authorisation from the Medicines and Healthcare Products Regulatory Agency (“MHRA”) in Great Britain.
In Japan, in October 2021, the Company reported positive topline results for its Phase 3 clinical trial of netarsudil ophthalmic solution 0.02%, the first of three expected Phase 3 clinical trials in Japan. A second, confirmatory Phase 3 study, required for approval in Japan, is underway. Santen is taking the lead on next steps in preparation for registration in Japan. Clinical trials for Rocklatan® in Japan have not yet begun.
Glaucoma Product Manufacturing
The Company has a sterile fill production facility in Athlone, Ireland, for the production of its FDA approved products and clinical supplies, which was completed in the second quarter of 2019. The Company received FDA approval to produce Rocklatan® and Rhopressa® at the Athlone manufacturing plant for commercial distribution in the United States in January 2020 and September 2020, respectively. The Athlone manufacturing plant began manufacturing commercial supplies of Rocklatan® in the first quarter of 2020 and Rhopressa® in the third quarter of 2020 for distribution to the United States. Shipments of commercial supply of Rocklatan® and Rhopressa® from the Athlone manufacturing plant to the United States
F-8
commenced in the second half of 2020. In addition, the Athlone manufacturing plant has manufactured clinical supplies of Rhopressa® for the Phase 3 clinical trials in Japan as well as registration batches to support product approval in Japan.
Product Candidates and Pipeline
The Company is furthering the development of its product candidates focused on dry eye and retinal diseases, as described below.
Dry Eye Program
The Company is developing AR-15512 ophthalmic solution for the treatment of patients with dry eye disease. The active ingredient in AR-15512 is a potent and selective agonist of the TRPM8 ion channel, a cold sensor and osmolarity sensor that regulates tear production and blink rate. In addition, activating the TRPM8 receptor may reduce ocular discomfort by promoting a cooling sensation.
In September 2021, the Company reported topline results of its Phase 2b clinical study, named COMET-1, for AR-15512. The Company completed a dose ranging study evaluating two concentrations of AR-15512 (0.0014% and 0.003%) in a 90-day trial with 369 subjects. The COMET-1 clinical study achieved statistical significance for multiple pre-specified and validated signs and symptoms. The greatest efficacy was demonstrated with the higher concentration 0.003% formulation, which the Company plans to advance to Phase 3 studies. The study did not achieve statistical significance at the pre-determined primary endpoints at Day 28.
Retina Program
The Company is currently developing two sustained-release implants focused on retinal diseases, AR-1105 and AR-14034 SR. For AR-1105, a dexamethasone steroid implant, the Company completed a large Phase 2 clinical trial for patients with macular edema due to retinal vein occlusion (“RVO”) in July 2020 and reported topline results indicating sustained efficacy of up to six months.
The preclinical sustained-release implant AR-14034 SR is being designed to deliver the active ingredient axitinib, a potent small molecule pan-vascular endothelial growth factor (“VEGF”) receptor inhibitor. AR-14034 SR has the potential to provide a duration of effect of approximately one year with a once per-year injection. It may potentially be used to treat DME, wet AMD and related diseases of the retina.
Liquidity
The Company commenced generating product revenues related to the sales in the United States of Rhopressa® in the second quarter of 2018 and Rocklatan® in the second quarter of 2019. The Company’s activities prior to the commercial launch of Rhopressa® had primarily consisted of developing product candidates, raising capital and performing research and development activities. The Company has incurred losses and experienced negative operating cash flows since inception. The Company had previously funded its operations primarily through the sale of equity securities and issuance of convertible notes prior to generating product revenues. In September 2019, the Company issued an aggregate principal amount of $316.25 million of 1.50% convertible senior notes due 2024 (the “Convertible Notes”). See Note 10 for additional information. Further, the Company entered into the First Santen Agreement and Second Santen Agreement in October 2020 and December 2021, respectively, pursuant to which Santen made upfront payments of $50 million and $88 million, respectively. In December 2021, the Company also earned a $2 million supplemental upfront payment associated with the Second Santen Agreement. The upfront payments associated with the Second Santen Agreement were received in January 2022. See Note 3 for additional information. As of December 31, 2021, the Company had $139.8 million in cash, cash equivalents and investments. The Company believes that its cash, cash equivalents and investments, and projected cash flows from revenues will provide sufficient resources to support its operations, including interest payments for its Convertible Notes, through at least the next twelve months from the date of this filing. The Company continues to evaluate collaboration and licensing opportunities related to its pipeline products.
The Company expects to incur ongoing operating losses until such a time when Rhopressa® or Rocklatan® or any current or future product candidates, if approved, generate sufficient cash flows for the Company to achieve profitability. Accordingly, the Company may be required to obtain further funding through debt or equity offerings or other sources. Adequate additional funding may not be available to the Company on acceptable terms, or at all. If the Company is unable to raise capital when needed or on acceptable terms, it may be forced to delay, reduce or eliminate its research and development programs or commercialization and manufacturing efforts.
F-9
2. Significant Accounting Policies
Basis of Presentation and Consolidation
The Company’s consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The consolidated financial statements include the accounts of Aerie and its wholly-owned subsidiaries. All intercompany accounts, transactions and profits have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of income and expenses during the reporting periods. Significant items subject to such estimates and assumptions include revenue recognition and stock-based compensation. On March 11, 2020, the World Health Organization declared the coronavirus (“COVID-19”) outbreak a pandemic. The full extent to which COVID-19 will directly or indirectly impact the Company’s business, results of operations and financial condition, including net product revenue, cost and expenses, reserves and allowances, manufacturing and clinical trials, may still not be known and will depend on future developments that continue to be uncertain, including as a result of new information that may emerge concerning COVID-19 and the actions taken to contain or treat it, as well as the economic impact on eye-care professionals, patients, third parties and markets. Actual results could differ from the Company’s estimates.
Segment Information
Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief operating decision-maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company views its operations and manages its business as one operating segment.
Concentration of Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash, cash equivalents and investments. The Company’s cash and cash equivalents, which include short-term highly liquid investments with original maturities of three months or less, are held at several financial institutions. The Company’s investment policy permits investments in U.S. federal government and federal agency securities, corporate bonds or commercial paper, money market instruments, and certain qualifying money market mutual funds, and places restrictions on credit ratings, maturities, and concentration by type and issuer. The Company is exposed to credit risk in the event of a default by the financial institutions holding its cash, cash equivalents and investments to the extent recorded on the consolidated balance sheet.
The Company relies on its manufacturing plant in Athlone, Ireland, and its contract manufacturers to produce commercial supplies of Rhopressa® and Rocklatan®, as well as its third-party manufacturers to produce the active pharmaceutical ingredient (“API”). The Company may rely on a combination of internal manufacturing and third-party manufacturers for its current and future product candidates. The Athlone manufacturing plant manufactures most of the Company’s needs for Rhopressa® and Rocklatan® in the United States. See Note 1 for additional information.
As the Athlone manufacturing plant commenced operations in early 2020, it has not reached full capacity. The Company expects that the Athlone manufacturing plant will have adequate capacity to produce for the markets included in the Santen Agreements, as needed which include Europe, Japan, East Asia and certain other regions, if approved for commercial distribution in those markets. The Company may continue to use contract manufacturers to produce commercial supplies of Rhopressa® and Rocklatan® for distribution in the United States, but at reduced levels as a result of the Athlone manufacturing plant commencing manufacturing operations.
In addition to the current contract manufacturers, the Company obtained FDA approval for an additional Rhopressa® drug product contract manufacturer, which began to supply commercial product in the second quarter of 2019. Further, the Company obtained FDA approval for an additional API contract manufacturer, which began to supply commercial API in the second quarter of 2019. The Company also received FDA approval of an additional Rocklatan® drug product contract manufacturer, which began to supply commercial product in the first quarter of 2020. Latanoprost, used in the manufacture of Rocklatan®, is available in commercial quantities from multiple reputable third-party manufacturers.
Revenue Recognition
The Company accounts for its revenue transactions under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC Topic 606”). In accordance with
F-10
ASC Topic 606, the Company recognizes revenues when its customers obtain control of its product for an amount that reflects the consideration it expects to receive from its customers in exchange for that product. To determine revenue recognition for contracts that are determined to be in scope of ASC Topic 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies the performance obligation. The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. Once the contract is determined to be within the scope of ASC Topic 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when such performance obligation is satisfied.
Product Revenues
Aerie’s customers include a limited number of national and select regional wholesalers (the “distributors”). These distributors subsequently resell the product, primarily to retail pharmacies that dispense the product to patients. Net product revenue is typically recognized when distributors obtain control of the Company’s products, which occurs at a point in time, typically upon delivery of product to the distributors. The Company evaluates the creditworthiness of each of its distributors to determine whether it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur. The Company does not assess whether a contract has a significant financing component if the expectation is such that the period between the transfer of the promised goods to the customer and the receipt of payment will be less than one year. Standard credit terms do not exceed 75 days. The Company expenses incremental costs of obtaining a contract as and when incurred if the expected amortization period of the asset that would have been recognized is one year or less or the amount is immaterial. Shipping and handling costs related to the Company’s product sales are included in selling, general and administrative expenses.
The Company’s net product revenues through December 31, 2021 were generated through sales of Rhopressa® and Rocklatan®. Product revenues are recorded net of trade discounts, allowances, commercial and government rebates, co-pay program coupons, chargebacks, U.S. government funding requirements for the coverage gap (commonly called the “donut hole”) portion of the Medicare Part D program and estimated returns and other incentives. These reserves are classified as either reductions of accounts receivable or as current liabilities. The estimates of reserves established for variable consideration reflect current contractual and statutory requirements, known market events and trends, industry data, forecasted customer mix and lagged claims. The transaction price, which includes variable consideration reflecting the impact of discounts and allowances, may be subject to constraint and is included in the net product revenues only to the extent that it is probable that a significant reversal of the amount of the cumulative revenues recognized will not occur in a future period. Actual amounts may ultimately differ from these estimates. If actual results vary, estimates may be adjusted in the period such change in estimate becomes known, which could have an impact on earnings in the period of adjustment. See Note 3 for additional information.
Contract Revenues from License Agreements
In the normal course of business, the Company conducts research and development activities pursuant to which the Company may license certain rights of its intellectual property to third parties. The terms of these arrangements typically include payment to the Company for a combination of one or more of the following: upfront license fees; development, regulatory and sales-based milestone payments; clinical or commercial supply services and royalties on net sales of licensed products.
The Company would first assess any arrangements under ASC Topic 808, Collaborative Arrangements (“ASC Topic 808”) to determine whether the agreement (or part of the agreement) represents a collaborative arrangement based on the risks and rewards and activities of the parties. The Company accounts for collaborative arrangements (or elements within the contract that are deemed part of a collaborative arrangement), which represent a collaborative relationship and not a customer relationship, outside the scope of ASC Topic 606.
For arrangements within the scope of ASC Topic 606, in determining the appropriate amount of revenue to be recognized as it fulfills its obligations under its agreements, the Company performs the five steps outlined in “—Revenue Recognition” above. As part of the accounting for these arrangements, the Company must use judgment to determine: (a) the performance obligations based on the determination under step (ii) above; (b) the transaction price under step (iii) above; (c) the stand-alone selling price for each performance obligation identified in the contract for the allocation of transaction price under step (iv) above; and (d) in some circumstances when control transfers and the appropriate measure of progress in order to recognize revenue under step (v) above. The Company uses judgment to determine whether milestones or other variable consideration should be included in the transaction price as described further below. The transaction price is allocated to each performance obligation on a relative stand-alone selling price basis, for which the Company recognizes revenue as or when the performance
F-11
obligations under the contract are satisfied. Amounts received prior to revenue recognition are recorded as deferred revenue. Amounts expected to be recognized as revenue within the 12 months following the balance sheet date are classified as current portion of deferred revenue in the Company’s consolidated balance sheets. Amounts not expected to be recognized as revenue within the 12 months following the balance sheet date are classified as deferred revenue, non-current.
Upfront license fees: If the license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company will recognize revenue from upfront license fees allocated to the license when the license is transferred to the licensee and the licensee is able to use and benefit from the license. For licenses that are bundled with other promises, the Company determines whether the combined performance obligation is satisfied over time or at a point in time.
Development, regulatory or commercial milestone payments: At the inception of each arrangement that includes payments based on the achievement of certain development, regulatory and sales-based or commercial events, the Company evaluates whether the milestones are considered probable of being achieved and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within the Company’s or the licensee’s control, such as regulatory approvals, are not considered probable of being achieved until uncertainty associated with the approvals has been resolved. At the end of each subsequent reporting period, the Company will re-evaluate the probability of achieving such development and regulatory milestones and any related constraint, and if necessary, adjust the Company’s estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis and recorded as part of license revenues from collaborations during the period of adjustment.
Clinical or commercial supply services: Arrangements that include a promise for the future supply of drug product for either clinical development or commercial supply at the licensee’s discretion are generally considered as customer options. The Company assesses if these options provide a material right to the licensee and if so, they would be accounted for as separate performance obligations.
Sales-based milestone payments and royalties: For arrangements that include sales-based royalties, including milestone payments based on the volume of sales, the Company will determine whether the license is deemed to be the predominant item to which the royalties or sales-based milestones relate and if such is the case, the Company will recognize revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied).
Upfront payments and fees may require deferral of revenue recognition to a future period until the Company performs its obligations under these arrangements or when it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with any variable consideration is subsequently resolved. Amounts payable to the Company are recorded as accounts receivable when the Company’s right to consideration is unconditional. The Company does not assess whether a contract has a significant financing component if the expectation at contract inception is such that the period between payment by the customer and the transfer of the promised goods or services to the customer will be one year or less.
See Note 3 for additional information.
Cash Equivalents
The Company’s cash and cash equivalents are held at several financial institutions. The Company considers money market accounts and short-term highly liquid investments with original maturities of three months or less to be cash equivalents.
Credit Losses
Trade accounts receivable: The allowance for doubtful accounts is based on the Company’s assessment of the collectability of customer accounts. The Company regularly reviews the allowance by considering factors such as historical experience, creditworthiness of its customers, the age of the accounts receivable balances and current economic conditions that may affect a customer’s ability to pay.
Available-for-sale investments: The Company’s investments in debt securities can consist of U.S. federal government and federal agency securities, corporate bonds or commercial paper, money market instruments and certain qualifying money market mutual funds. The investments are short-term in nature and are rated investment grade by at least one bond credit rating service.
F-12
Inventories
Inventories are stated at the lower of cost or net realizable value. The Company determines the cost of inventory using the first-in, first-out (“FIFO”) method. The Company analyzes its inventory levels at least quarterly and writes down inventory that is expected to expire prior to being sold, inventory in excess of expected sales requirements and inventory that fails to meet commercial sale specifications, with a corresponding charge to cost of goods sold. The determination of whether inventory costs will be realizable requires estimates by management of future expected inventory requirements based on sales forecasts. If actual net realizable value is less than the estimated amount or if actual market conditions are less favorable than the Company’s projections, additional inventory write-downs may be required. Charges for inventory write-downs are not reversed if it is later determined that the product is saleable.
Prior to the date the Company obtains regulatory approval for its product candidates or its manufacturing facilities such as its manufacturing plant in Athlone, Ireland, manufacturing costs related to commercial production are expensed as pre-approval commercial manufacturing expense in the Company’s consolidated statements of operations and comprehensive loss. Once regulatory approval is obtained, the Company capitalizes such costs as inventory in its consolidated balance sheets.
Property, Plant and Equipment, Net
Property, plant and equipment are recorded at historical cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the related assets. Construction-in-progress reflects amounts incurred for property, plant or equipment construction or improvements that have not been yet placed in service and are not depreciated or amortized, which primarily relates to the completion of the Company’s manufacturing plant in Athlone, Ireland. Repairs and maintenance are expensed when incurred. Upon retirement or sale, the cost of the assets disposed of and the related accumulated depreciation are removed from the accounts, and any resulting gain or loss is included in the determination of net loss.
Estimated useful lives by major asset category are as follows:
| Manufacturing equipment | 10 years | ||||
| Laboratory equipment | 7 years | ||||
| Furniture and fixtures | 5 years | ||||
| Software, computer and other equipment | 3 years | ||||
| Leasehold improvements | Lower of estimated useful life or term of lease | ||||
Leases
The Company accounts for its lease transactions under FASB ASC Topic 842, Leases (“ASC Topic 842”). In accordance with ASC Topic 842, the Company determines if an arrangement is a lease at inception. For each lease, the lease term is determined at the commencement date and includes renewal options and termination options when it is reasonably certain that the Company will exercise that option. Operating leases with lease terms greater than one year are included in operating lease right-of-use (“ROU”) assets and current and non-current operating lease liabilities in the Company’s consolidated balance sheets.
Operating lease ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term using an estimated rate of interest the Company would have to pay to borrow equivalent funds on a collateralized basis at the lease commencement date. The operating lease ROU assets are based on the liability adjusted for any prepaid or deferred rent and lease incentives. The incremental borrowing rate was utilized to discount lease payments over the expected term given that the Company’s operating leases do not provide an implicit rate. The Company estimates the incremental borrowing rate to reflect the profile of secured borrowing over the expected term of the leases based on the information available at the later of the date of adoption or the lease commencement date. Rent expense for the operating lease is recognized on a straight-line basis over the lease term.
The Company’s lease agreements have lease and non-lease components, which are generally accounted for as a single lease component. Non-lease components include lease operating expenses, which are variable costs under the Company’s current leases. For vehicle leases, the Company accounts for the lease and non-lease components as a single lease component and applies a portfolio approach to effectively account for the operating lease ROU assets and liabilities.
F-13
Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by a comparison of the carrying amount of an asset or asset group to estimated undiscounted future cash flows expected to be generated by the asset or asset group. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset. For the years ended December 31, 2021, 2020 and 2019, no such impairment losses have been recorded by the Company.
Acquisitions
The Company evaluates acquisitions to determine whether the acquisition is a business combination or an acquisition of assets under ASC Topic 805. Business combinations are accounted for using the acquisition method of accounting, whereby assets acquired and liabilities assumed are recorded as of the acquisition date at their respective fair values and excess of the fair value of the consideration transferred over the fair value of the net assets acquired is recorded as goodwill. In an asset acquisition that does not constitute a business, no goodwill is recognized, and the net assets acquired are generally recorded at cost. Significant judgment is required in estimating the fair value of intangible assets and in a determination of whether an acquisition is a business combination or an acquisition of assets. The fair value estimates are based on available historical information and on future expectations and assumptions deemed reasonable by management, but are inherently uncertain.
The consolidated statement of operations and comprehensive loss for the year ended December 31, 2019 includes the impact of the acquisition of assets from Avizorex. See Note 13 for additional information.
Research and Development Costs
Research and development costs are charged to expense as incurred and include, but are not limited to:
•employee-related expenses including salaries, benefits, travel and stock-based compensation expense for research and development personnel;
•expenses incurred under agreements with contract research organizations (“CROs”), contract manufacturing organizations and service providers that assist in conducting clinical and preclinical studies;
•costs associated with any collaboration arrangements, licenses or acquisitions of preclinical molecules, product candidates or technologies;
•costs associated with preclinical activities and development activities;
•costs associated with regulatory operations; and
•depreciation expense for assets used in research and development activities.
Costs for certain development activities, such as clinical studies, are recognized based on an evaluation of the progress to completion of specific tasks using data such as patient enrollment, clinical site activations, or information provided to the Company by its vendors on their actual costs incurred. Payments for these activities are based on the terms of the individual arrangements, which may differ from the patterns of costs incurred, and are reflected in the consolidated financial statements as prepaid expenses or accrued expenses as deemed appropriate. No material adjustments to these estimates have been recorded in these consolidated financial statements.
Research and development costs also include the cost of in-process research and development (“IPR&D”) projects acquired as part of an asset acquisition that have no alternative future use. Milestone payments due to third parties in connection with research and development activities prior to regulatory approval are expensed as incurred, while milestone payments due to third parties upon, or subsequent to, regulatory approval are capitalized and amortized over the estimated useful life.
Stock-Based Compensation
Stock-based compensation for awards granted to employees and non-employees is measured at grant date, based on the estimated fair value of the award. The Company estimates the fair value of options to purchase common stock and stock appreciation rights (“SARs”) using a Black-Scholes option pricing model. The Black-Scholes option pricing model utilizes assumptions including expected term, volatility, a risk-free interest rate and an expected dividend yield. The Company utilized the guidance set forth in the Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin 107, Share-Based Payment (“SAB 107”), to determine the expected term of options, as it does not have sufficient historical exercise and post-vesting termination data to provide a reasonable basis upon which to estimate the expected term of stock options granted to
F-14
employees. The simplified method utilizes the midpoint between the vesting date and the maximum contractual expiration date as the expected term. Volatility is based on the historical volatility of the Company as well as several public entities that are similar to the Company. The risk-free interest rate is based on the yields of U.S. Treasury securities with maturities similar to the expected term. The Company uses an expected dividend yield of zero as it does not expect to pay cash dividends for the foreseeable future. Upon issuance and at each reporting period, the fair value of each SARs award is estimated using the Black-Scholes option pricing model and is marked to market through stock-based compensation expense. SARs are liability-based awards as they may only be settled in cash.
The fair value of restricted stock awards (“RSAs”) and restricted stock units (“RSUs”), including restricted stock awards with non-market performance and service conditions (“PSAs”) are determined based on the fair value of Aerie’s common stock on the date of grant. Compensation expense related to RSAs and RSUs are recognized ratably over the vesting period. As the PSAs have multiple performance conditions, compensation expense is recognized for each vesting tranche over the respective requisite service period of each tranche if and when the Company’s management deems it probable that the performance conditions will be satisfied. Stock-based compensation related to stock options, RSAs, RSUs and PSAs is expensed on a straight-line basis over the relevant vesting period, although the Company may recognize a cumulative true-up adjustment related to PSAs once a condition becomes probable of being satisfied if the related service period had commenced in a prior period. All stock-based compensation expense is recorded between selling, general and administrative, pre-approval commercial manufacturing, research and development costs and cost of goods sold in the consolidated statements of operations and comprehensive loss based upon the underlying employees’ roles within the Company. A change in the terms or conditions of a share-based payment award is accounted for as a modification (that is, an exchange of the original award for a new award), unless the award’s fair value, vesting conditions, and classification as an equity or liability instrument are the same as immediately before and after the change. The Company accounts for forfeitures as they occur.
Investments
The Company determines the appropriate classification of its investments in debt and equity securities at the time of purchase. The Company’s investments are comprised of debt securities, including commercial paper and corporate bonds, that are classified as available-for-sale in accordance with ASC Topic 320, Investments—Debt and Equity Securities. The Company classifies investments available to fund current operations as current assets on its consolidated balance sheets. Investments are classified as long-term assets on the consolidated balance sheets if (i) the Company has the intent and ability to hold the investments for a period of at least one year and (ii) the contractual maturity date of the investments is greater than one year.
Available-for-sale investments in debt securities are recorded at fair value, with unrealized gains or losses included in comprehensive loss on the consolidated statements of operations and comprehensive loss and in accumulated other comprehensive loss on the consolidated balance sheets.
The Company’s investments also included equity securities, which in accordance with the fair value hierarchy described below are recorded at fair value using Level l inputs in the Company’s consolidated balance sheets and the subsequent changes in fair values are recorded in other income (expense), net in the Company’s consolidated statements of operations and comprehensive loss.
Realized gains and losses, interest income earned on the Company’s cash, cash equivalents and investments, and amortization or accretion of discounts and premiums on investments are included within other income (expense), net in the Company’s consolidated statements of operations and comprehensive loss. Realized gains and losses are determined using the specific identification method and are included as a component of other income (expense), net.
The Company reviews investments in debt securities for other-than-temporary impairment whenever the fair value of an investment is less than the amortized cost and evidence indicates that an investment’s carrying amount is not recoverable within a reasonable period of time. The Company did not recognize any impairments on its investments during the years ended December 31, 2021, 2020 or 2019.
Fair Value Measurements
The Company records certain financial assets and liabilities at fair value in accordance with the provisions of ASC Topic 820, Fair Value Measurements and Disclosures. As defined in the guidance, fair value, defined as an exit price, represents the amount that would be received to sell an asset or pay to transfer a liability in an orderly transaction between market participants. As a result, fair value is a market-based approach that should be determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering these assumptions, the guidance defines a three-tier value hierarchy that prioritizes the inputs used in the valuation methodologies in measuring fair value.
•Level 1—Unadjusted quoted prices in active, accessible markets for identical assets or liabilities.
F-15
•Level 2—Other inputs that are directly or indirectly observable in the marketplace.
•Level 3—Unobservable inputs that are supported by little or no market activity.
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The Company’s cash equivalents are carried at fair value according to the fair value hierarchy described above. The Company’s investments were valued utilizing Level 2 inputs and the Convertible Notes were valued utilizing Level 2 inputs as of December 31, 2021. There were no transfers between the different levels of the fair value hierarchy in 2021 or in 2020.
Convertible Notes Transaction
The Company separately accounts for the liability and equity components of convertible notes transactions that can be settled in cash by allocating the proceeds from issuance between the liability component and the embedded conversion option in accordance with accounting for convertible debt instruments that may be settled in cash (including partial cash settlement) upon conversion. The value of the equity component is calculated by first measuring the fair value of the liability component, using the interest rate of a similar liability that does not have a conversion feature, as of the issuance date. The difference between the proceeds from the convertible debt issuance and the amount measured as the liability component is recorded as the equity component with a corresponding discount recorded on the debt. The Company recognizes amortization of the resulting discount using the effective interest method as interest expense on the consolidated statements of operations and comprehensive loss. The equity component is not remeasured as long as it continues to meet the conditions for equity classification. The Company allocates issuance costs incurred to the liability and equity components. Issuance costs attributable to the liability component are amortized to expense on an effective interest basis over the respective term of the convertible notes, and issuance costs attributable to the equity component are netted with the respective equity component in additional paid-in capital.
In September 2019, the Company bought capped call options from financial institutions to minimize the impact of potential dilution of Aerie common stock upon conversion of the Convertible Notes. The capped call options meet the definition of a derivative in accordance with ASC 815, Derivatives and Hedging (“ASC 815”), however, qualify for derivative scope exception under ASC 815 for instruments indexed to a company’s own stock. Accordingly, the premiums for the capped call options were recorded as additional paid-in capital in the Company’s consolidated balance sheet as the options are settleable in Aerie common stock at the election of the Company. See Note 10 for additional information.
Comprehensive Loss
Comprehensive loss is comprised of net loss and other comprehensive loss. Other comprehensive loss includes changes in stockholders’ equity that are excluded from net income (loss), specifically changes in unrealized gains and losses on the Company’s available-for-sale debt securities.
Income Taxes
Deferred tax assets or liabilities are recorded for temporary differences between financial statement and tax basis of assets and liabilities, using enacted rates in effect for the year in which the differences are expected to reverse. A valuation allowance is recorded if it is more likely than not that a deferred tax asset will not be realized. The Company has provided a full valuation allowance on its deferred tax assets as of December 31, 2021 and 2020. See Note 11 for additional information.
As of December 31, 2021 and 2020, the Company had no uncertain tax positions. The Company recognizes the impact of an uncertain tax position in the consolidated financial statements only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities. The Company’s policy is to record interest and penalties on uncertain tax positions as income tax expense. The Company did not recognize interest or penalties on uncertain tax positions for the years ended December 31, 2021, 2020 or 2019.
The Company is subject to global intangible low-taxed income (“GILTI”), an incremental tax on non-U.S. income. The Company’s policy is to account for the tax effects of these provisions in the period that is subject to such tax.
Adoption of New Accounting Standards
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which simplifies the accounting for income taxes by removing certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new ASU also simplifies aspects of the accounting for franchise taxes and enacted
F-16
changes in tax laws or rates. These changes aim to improve the overall usefulness of disclosures to financial statement users and reduce unnecessary costs to companies when preparing the disclosures. The guidance became effective for the Company beginning on January 1, 2021. The adoption of ASU 2019-12 did not have a material impact on its consolidated financial statements and disclosures.
Recently Issued Accounting Standards
In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity (“ASU 2020-06”). This ASU simplifies the complexity associated with applying GAAP for certain financial instruments with characteristics of liabilities and equity. More specifically, the amendments focus on the guidance for convertible instruments and derivative scope exception for contracts in an entity’s own equity. Under ASU 2020-06, the embedded conversion features are no longer separated from the host contract for convertible instruments with conversion features that are not required to be accounted for as derivatives under Topic 815, or that do not result in substantial premiums accounted for as paid-in capital. Consequently, a convertible debt instrument, such as the Company’s 1.50% Convertible Senior Notes, will be accounted for as a single liability measured at its amortized cost, as long as no other features require bifurcation and recognition as derivatives. The new guidance also requires the if-converted method to be applied for all convertible instruments and requires additional disclosures. The guidance is effective for the Company beginning January 1, 2022, and will be applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date. The impact of adopting ASU 2020-06 on January 1, 2022, will be comprised of a $124.7 million decrease to additional paid-in capital, a $76.7 million increase to convertible notes, net to reduce debt discounts and a $48.0 million decrease to accumulated deficit. Upon adoption of ASU 2020-06, the Company’s interest expense will decrease which primarily relates to no longer recognizing discount amortization, partially offset by an increase in amortization of debt issuance costs.
Net Loss per Common Share
Basic net loss per common share (“Basic EPS”) is calculated by dividing the net loss by the weighted average number of shares of common stock outstanding for the period, without consideration for potentially dilutive securities with the exception of warrants for common stock with a $0.05 exercise price, which are exercisable for nominal consideration and are therefore included in the calculation of the weighted-average number of shares of common stock as common stock equivalents. Diluted net loss per share (“Diluted EPS”) gives effect to all dilutive potential shares of common stock outstanding during the periods presented. Diluted EPS is calculated by dividing the net loss by the weighted average number of shares of common stock outstanding for the period, including the dilutive effect of stock options, unvested restricted stock and restricted stock units using the treasury stock method. The Company intends to pay cash upon conversion of the Convertible Notes, and consequently does not include the conversion value of the Convertible Notes in the diluted earnings per share computation. For Diluted EPS, net loss used in calculating Basic EPS may be adjusted for certain items related to the dilutive securities. Given that the Company recorded a net loss for the periods presented, there is no difference between the basic and diluted net loss per share since the effect of common stock equivalents would be anti-dilutive and are, therefore, excluded from the net loss per share calculations.
The potential common stock equivalents that have been excluded from the computation of Diluted EPS consist of the following:
3. Revenue Recognition
Product Revenues
Net product revenues for the years ended December 31, 2021, 2020 and 2019 were generated from sales of Rhopressa® and Rocklatan®, the Company’s glaucoma franchise products, which were commercially launched in the United States in April 2018 and May 2019, respectively. For the year ended December 31, 2021, three distributors accounted for 36.9%, 31.0% and
F-17
30.9% of total revenues, respectively. For the year ended December 31, 2020, three distributors accounted for 37.4%, 32.4% and 28.8% of total revenues, respectively. For the year ended December 31, 2019, three distributors accounted for 36.5%, 33.3% and 28.0% of total revenues, respectively. Product affordability for the patient drives consumer acceptance, and this is generally managed through coverage by third-party payers, such as government or private healthcare insurers and pharmacy benefit managers (“Third-party Payers”) and such product may be subject to rebates and discounts payable directly to those Third-party Payers.
Product revenues are recorded net of trade discounts, allowances, rebates, chargebacks, estimated returns and other incentives in the consolidated statements of operations and comprehensive loss, discussed below. These reserves are classified as either reductions of accounts receivable or as current liabilities in the consolidated balance sheets. Amounts billed or invoiced are included in accounts receivable, net in the consolidated balance sheets. The Company did not have any contract assets (unbilled receivables) as of December 31, 2021 or 2020, as customer invoicing generally occurs before or at the time of revenue recognition. The Company did not have any contract liabilities as of December 31, 2021 or 2020, as the Company did not receive payments in advance of fulfilling its performance obligations to its customers. The Company calculates its net product revenues based on the wholesale acquisition cost that the Company charges its distributors for Rhopressa® and Rocklatan® less provisions for (i) trade discounts and allowances, such as discounts for prompt payment and distributor fees, (ii) estimated rebates to Third-party Payers, estimated payments for Medicare Part D prescription drug program coverage gap (commonly called the “donut hole”), patient co-pay program coupon utilization, chargebacks and other discount programs and (iii) reserves for expected product returns. Provisions for revenue reserves reduced product revenues by $247.1 million, $202.2 million and $105.9 million in aggregate for the years ended December 31, 2021, 2020 and 2019, respectively, a significant portion of which related to commercial and Medicare Part D rebates.
Trade Discounts and Allowances: The Company generally provides discounts on sales of Rhopressa® and Rocklatan® to its distributors for prompt payment and pays fees for distribution services and for certain data that distributors provide to the Company. The Company expects its distributors to earn these discounts and fees, and accordingly deducts the full amount of these discounts and fees from its gross product revenues at the time such revenues are recognized.
Rebates, Chargebacks and Other Discounts: The Company contracts with Third-party Payers for coverage and reimbursement of Rhopressa® and Rocklatan®. The Company estimates the rebates and chargebacks it expects to be obligated to provide to Third-party Payers and deducts these estimated amounts from its gross product revenue at the time the revenue is recognized. The Company estimates the rebates and chargebacks that it expects to be obligated to provide to Third-party Payers based upon (i) the Company's contracts and negotiations with these Third-party Payers, (ii) estimates regarding the payer mix for Rhopressa® and Rocklatan® based on third-party data and utilization, (iii) inventory held by distributors and (iv) estimates of inventory held at the retail channel. Other discounts include the Company’s co-pay assistance coupon programs for commercially-insured patients meeting certain eligibility requirements. The calculation of the accrual for co-pay assistance is based on an estimate of claims and the cost per claim that the Company expects to pay associated with product that has been recognized as revenue.
Product Returns: The Company estimates the amount of Rhopressa® and Rocklatan® that will be returned and deducts these estimated amounts from its gross revenue at the time the revenue is recognized. The Company currently estimates product returns based on historical information regarding returns of Rhopressa® and Rocklatan® as well as historical industry information regarding rates for comparable pharmaceutical products and product portfolios, the estimated remaining shelf life of Rhopressa® and Rocklatan® shipped to distributors, and contractual agreements with the Company's distributors intended to limit the amount of inventory they maintain. Reporting from the distributors includes distributor sales and inventory held by distributors, which provides the Company with visibility into the distribution channel to determine when product would be eligible to be returned.
Santen Collaboration and License Agreements
First Santen Agreement
In October 2020, Aerie Ireland Limited entered into the First Santen Agreement with Santen, a global ophthalmology company, whereby Aerie Ireland Limited granted to Santen the exclusive right to develop, manufacture, market and commercialize Rhopressa® and Rocklatan® (the “Licensed Products”) in Japan and East Asia (such jurisdictions collectively, the “Territories”). The Company is the sole manufacturer of the Licensed Products for Santen and Santen may manufacture upon mutual agreement of both parties. Under the First Santen Agreement, Aerie Ireland Limited granted Santen a first right of negotiation for the rights to the Licensed Products in any Asian countries other than the Territories.
Under the First Santen Agreement, Santen made an upfront payment of $50.0 million (the “Japan Upfront Payment”) and Aerie Ireland Limited will earn various development milestones of up to $39.0 million and sales milestones of up to $60.0 million
F-18
upon the achievement of certain events. In addition, Santen will pay Aerie Ireland Limited a royalty in excess of 25% of the Licensed Products’ net sales, such consideration consisting of the cost of products supplied to Santen from Aerie Ireland Limited and a royalty for the Company’s intellectual property. Santen will be responsible for sales, marketing and pricing decisions relating to the Licensed Products. Santen is also responsible for all development and commercialization costs and activities related to the Licensed Products in the Territories, except that Aerie Ireland Limited shares 50% of the costs related to conducting the first Rhopressa® Phase 3 clinical trial in Japan, which commenced in the fourth quarter of 2020 and the Company reported positive topline results as described in Note 1.
The term of the First Santen Agreement continues on a country-by-country and product-by-product basis in the Territory until the expiration of the obligation to make payments under the Agreement with respect to each Licensed Product in each country. The First Santen Agreement may be terminated by either Aerie Ireland Limited or Santen upon the other party’s material breach, bankruptcy or insolvency. Aerie Ireland Limited may also terminate the First Santen Agreement upon a patent challenge by Santen, and Santen may terminate the First Santen Agreement in its discretion if Santen reasonably determines that the Licensed Products are not commercially viable in the Territory (effective upon 180 days’ prior written notice). In addition, in the event that patents are issued that may prevent the commercialization of the Licensed Products during the three-year period following marketing authorization of Rhopressa® in Japan, Santen would have the right to terminate the First Santen Agreement and require Aerie Ireland Limited’s repayment of up to approximately 85% of the Upfront Payment, all development milestone payments and 50% of the development expenses incurred by Santen. In the event of termination, the Licensed Products in the applicable Territories will revert to Aerie Ireland Limited.
Second Santen Agreement
In December 2021, Aerie Ireland Limited entered into the Second Santen Agreement with Santen which expands the scope of the First Santen Agreement, discussed above. Pursuant to the Second Santen Agreement, Aerie Ireland Limited granted to Santen the exclusive right to develop and commercialize the Licensed Products in Europe, China, India, the Middle East, CIS, Africa, parts of Latin America and the Oceania countries (such jurisdictions collectively, the “Expanded Territories”). The Company is the sole manufacturer of the Licensed Products for Santen and Santen may manufacture upon mutual agreement of both parties. In addition, Aerie Ireland Limited granted Santen a first right of refusal to commercialize the Licensed Products in Canada.
Under the agreement, Santen made a payment in January 2022 to Aerie Ireland Limited which was comprised of an $88.0 million upfront payment (“Europe Upfront Payment”) and a $2.0 million supplemental upfront payment that was earned based on the achievement of an event that occurred in December 2021. Aerie Ireland Limited will earn various development milestones of up to $15.5 million and sales milestones of up to $60.0 million upon the achievement of certain events. In addition, Santen will pay Aerie Ireland Limited a royalty in excess of 25% of the Licensed Products’ net sales in the Expanded Territories, excluding China and India (in excess of 20% of the Licensed Products’ net sales in China and India), such consideration consisting of the cost of products supplied to Santen from Aerie Ireland Limited and a royalty for the Company’s intellectual property. While the royalty rate decreases when the Licensed Products are manufactured by or on behalf of Santen, there is a guaranteed minimum percentage.
The term of the Second Santen Agreement continues on a country-by-country and product-by-product basis until the expiration of the obligation to make payments under the Second Santen Agreement with respect to each Licensed Product in each country or region. The Second Santen Agreement may be terminated by either Aerie Ireland Limited or Santen upon the other party’s material breach, bankruptcy or insolvency. Aerie Ireland Limited may also terminate the agreement upon a patent challenge by Santen or on a country-by-country basis upon a breach by Santen of its obligation to develop, obtain marketing approval of and commercialize the Licensed Products in certain of the Expanded Territories. Santen may terminate the Second Santen Agreement in its discretion if Santen reasonably determines that the Licensed Products are not commercially viable in the Expanded Territory (effective upon 180 days’ prior written notice). In addition, in the event that patents are issued that may prevent the commercialization of the Licensed Products during the three-year period following marketing authorization of Rhopressa® in China, Santen would have the right to terminate the agreement with respect to China only and require Aerie Ireland Limited to repay $8.0 million of the Europe Upfront Payment. In the event of termination, the Licensed Products in the applicable Expanded Territories will revert to Aerie Ireland Limited.
Assessment under ASC Topic 808 and ASC Topic 606
The Company first assessed each of the Santen Agreements under ASC Topic 808 to determine whether each (in whole or in part) represents a collaborative arrangement based on the risks and rewards and activities of the parties. The Company accounts for collaborative arrangements (or elements within the contract that are deemed part of a collaborative arrangement), which represent a collaborative relationship and not a customer relationship, outside the scope of ASC Topic 606. The Company
F-19
determined that each of the Santen Agreements met the definition of a customer for each unit of account and is within the scope of ASC Topic 606.
The Company identified two distinct performance obligations in the First Santen Agreement: (i) the exclusive license to Rhopressa® and Rocklatan® and (ii) the Phase 3 clinical trials in Japan. In both Santen Agreements, Santen can benefit from the license on its own by developing, manufacturing, marketing and commercializing the Licensed Products using its own resources. In addition, the Company expects to enter into a manufacturing and supply agreement with Santen no later than twenty-four months prior to the first commercial sale of a Licensed Product in the Territory.
The Company identified two distinct performance obligations in the Second Santen Agreement: (i) the exclusive license to Rhopressa® and Rocklatan® and (ii) the supply of Licensed Products to Santen. Santen can benefit from the license on its own by developing, manufacturing, marketing and commercializing the Licensed Products using its own resources and the supply of Licensed Products to Santen does not represent a material right.
The Company recognized deferred revenue, non-current of $56.3 million and $50.8 million, during the years ended December 31, 2021 and 2020, respectively. During each of the years ended December 31, 2021 and 2020, deferred revenue, non-current, included $50.0 million relating to the Japan Upfront Payment as well as Santen’s portion of shared costs related to conducting the first Rhopressa® Phase 3 clinical trial in Japan, which commenced in the fourth quarter of 2020. The Company also recognized as of December 31, 2021, a $6.3 million receivable in prepaid expenses and other current assets in the consolidated balance sheet related to Santen’s portion of shared costs due to the Company conducting the first Rhopressa® Phase 3 clinical trial in Japan, as described above. While the Company determined that the license was a right to use the Company’s intellectual property and as of the effective date of the First Santen Agreement, the Company had provided all necessary information to Santen to benefit from the license and the license term had begun, revenue was not recognized upon satisfaction of the performance obligation due to the uncertainty around potential termination in the event that patents are issued that may prevent the commercialization of the Licensed Products.
The Company will recognize the Japan Upfront Payment, and any other potential future development milestones and sales milestones, when it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. The Company will re-evaluate the transaction price in each reporting period and as uncertain events are resolved or other changes in circumstances occur.
For the year ended December 31, 2021, the Company recognized $82.0 million as licensing revenues, net in the consolidated statement of operations and comprehensive loss, which consisted of (i) $80.0 million of the $88.0 million Europe Upfront Payment and (ii) the $2.0 million supplemental upfront payment earned in connection with the Second Santen Agreement. The licensing revenues were recognized as the license is considered a right to use the Company’s intellectual property and as of the effective date of the Second Santen Agreement, the Company had provided all necessary information to Santen to benefit from the license and the license term had begun, and the performance obligation had been satisfied, with the exception of China as further discussed herein. As of December 31, 2021, the Company recognized $8.0 million of the Europe Upfront Payment as deferred revenue, non-current in its consolidated balance sheet due to the uncertainty around potential termination in China in the event that patents are issued that may prevent the commercialization of the Licensed Products.
F-20
4. Investments
Cash, cash equivalents and investments as of December 31, 2021 included the following:
| GROSS | GROSS | |||||||||||||||||||||||||
| AMORTIZED | UNREALIZED | UNREALIZED | FAIR | |||||||||||||||||||||||
| (in thousands) | COST | GAINS | LOSSES | VALUE | ||||||||||||||||||||||
| Cash and cash equivalents: | ||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 37,187 | $ | — | $ | — | $ | 37,187 | ||||||||||||||||||
| Total cash and cash equivalents | $ | 37,187 | $ | — | $ | — | $ | 37,187 | ||||||||||||||||||
| Investments: | ||||||||||||||||||||||||||
| Certificates of deposit (due within 1 year) | $ | 9,047 | $ | — | $ | (9) | $ | 9,038 | ||||||||||||||||||
| Commercial paper (due within 1 year) | 50,975 | — | (55) | $ | 50,920 | |||||||||||||||||||||
| Corporate bonds (due within 1 year) | 42,718 | — | (62) | 42,656 | ||||||||||||||||||||||
| U.S. Government and government agencies (due within 1 year) | — | — | ||||||||||||||||||||||||
| Total investments | $ | 102,740 | $ | — | $ | (126) | $ | 102,614 | ||||||||||||||||||
| Total cash, cash equivalents and investments | $ | 139,927 | $ | — | $ | (126) | $ | 139,801 | ||||||||||||||||||
Cash, cash equivalents and investments as of December 31, 2020 included the following:
| GROSS | GROSS | |||||||||||||||||||||||||
| AMORTIZED | UNREALIZED | UNREALIZED | FAIR | |||||||||||||||||||||||
| (in thousands) | COST | GAINS | LOSSES | VALUE | ||||||||||||||||||||||
| Cash and cash equivalents: | ||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 151,570 | $ | — | $ | — | $ | 151,570 | ||||||||||||||||||
| Total cash and cash equivalents | $ | 151,570 | $ | — | $ | — | $ | 151,570 | ||||||||||||||||||
| Investments: | ||||||||||||||||||||||||||
| Commercial paper (due within 1 year) | $ | 44,122 | $ | 5 | $ | (23) | $ | 44,104 | ||||||||||||||||||
| Corporate bonds (due within 1 year) | 44,724 | 3 | (37) | 44,690 | ||||||||||||||||||||||
| Total investments | $ | 88,846 | $ | 8 | $ | (60) | $ | 88,794 | ||||||||||||||||||
| Total cash, cash equivalents and investments | $ | 240,416 | $ | 8 | $ | (60) | $ | 240,364 | ||||||||||||||||||
Interest income earned on the Company’s cash, cash equivalents and investments was $0.1 million, $2.0 million and $3.0 million for the years ended December 31, 2021, 2020 and 2019, respectively. Realized gains or losses were immaterial for the years ended December 31, 2021, 2020 and 2019.
As of December 31, 2021, the Company did not hold any equity securities. As of December 31, 2020, the fair value of the equity securities held at the end of the period was $1.3 million. For the year ended December 31, 2021, the Company had $1.0 million of realized losses on equity securities.
F-21
5. Fair Value Measurements
The following tables summarize the fair value of financial assets and liabilities that are measured at fair value and the classification by level of input within the fair value hierarchy:
| FAIR VALUE MEASUREMENTS AS OF | ||||||||||||||||||||||||||
DECEMBER 31, 2021 | ||||||||||||||||||||||||||
| (in thousands) | LEVEL 1 | LEVEL 2 | LEVEL 3 | TOTAL | ||||||||||||||||||||||
| Cash and cash equivalents: | ||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 37,187 | $ | — | $ | — | $ | 37,187 | ||||||||||||||||||
| Total cash and cash equivalents: | $ | 37,187 | $ | — | $ | — | $ | 37,187 | ||||||||||||||||||
| Investments: | ||||||||||||||||||||||||||
| Certificates of deposit | $ | — | $ | 9,038 | $ | — | 9,038 | |||||||||||||||||||
| Commercial paper | — | 50,920 | — | 50,920 | ||||||||||||||||||||||
| Corporate bonds | — | 42,656 | — | 42,656 | ||||||||||||||||||||||
| Total investments | $ | — | $ | 102,614 | $ | — | $ | 102,614 | ||||||||||||||||||
| Total cash, cash equivalents and investments: | $ | 37,187 | $ | 102,614 | $ | — | $ | 139,801 | ||||||||||||||||||
| FAIR VALUE MEASUREMENTS AS OF | ||||||||||||||||||||||||||
DECEMBER 31, 2020 | ||||||||||||||||||||||||||
| (in thousands) | LEVEL 1 | LEVEL 2 | LEVEL 3 | TOTAL | ||||||||||||||||||||||
| Cash and cash equivalents: | ||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 151,570 | $ | — | $ | — | $ | 151,570 | ||||||||||||||||||
| Total cash and cash equivalents: | $ | 151,570 | $ | — | $ | — | $ | 151,570 | ||||||||||||||||||
| Investments: | ||||||||||||||||||||||||||
| Commercial paper | $ | — | $ | 44,104 | $ | — | $ | 44,104 | ||||||||||||||||||
| Corporate bonds | — | 44,690 | — | 44,690 | ||||||||||||||||||||||
| Total investments | $ | — | $ | 88,794 | $ | — | $ | 88,794 | ||||||||||||||||||
| Total cash, cash equivalents and investments: | $ | 151,570 | $ | 88,794 | $ | — | $ | 240,364 | ||||||||||||||||||
The fair value of the Convertible Notes, which differs from their carrying value, is influenced by interest rates, stock price and stock price volatility and is determined by prices observed in market trading. The market for trading of the Convertible Notes is not considered to be an active market and therefore the estimate of fair value is based on Level 2 inputs. The estimated fair value of the Convertible Notes was $270.4 million and $296.7 million at December 31, 2021 and December 31, 2020, respectively.
6. Inventory
Inventory consists of the following:
| DECEMBER 31, | |||||||||||
| (in thousands) | 2021 | 2020 | |||||||||
| Raw materials | $ | 5,368 | $ | 1,875 | |||||||
| Work-in-process | 30,989 | 21,648 | |||||||||
| Finished goods | 4,053 | 3,536 | |||||||||
| Total inventory | $ | 40,410 | $ | 27,059 | |||||||
For the years ended December 31, 2021 and 2020, $17.0 million and $17.0 million, respectively, of production costs associated with underutilized capacity at the Company’s Athlone manufacturing plant were recorded in cost of goods sold in the
F-22
Company’s consolidated statement of operations and comprehensive loss. The underutilization results from the manufacturing plant having commenced operations in early 2020 and has not reached full capacity.
7. Property, Plant and Equipment, Net
Property, plant and equipment, net consists of the following:
| (in thousands) | DECEMBER 31, | |||||||||||||
| 2021 | 2020 | |||||||||||||
| Manufacturing equipment | $ | 22,464 | $ | 21,705 | ||||||||||
| Laboratory equipment | 9,182 | 7,948 | ||||||||||||
| Furniture and fixtures | 1,569 | 1,681 | ||||||||||||
| Software, computer and other equipment | 7,779 | 7,836 | ||||||||||||
| Leasehold improvements | 31,175 | 30,178 | ||||||||||||
| Construction-in-progress | 2,037 | 1,481 | ||||||||||||
| Property, plant and equipment | 74,206 | 70,829 | ||||||||||||
| Less: Accumulated depreciation | (22,734) | (16,569) | ||||||||||||
| Property, plant and equipment, net | $ | 51,472 | $ | 54,260 | ||||||||||
Depreciation expense was $6.4 million, $6.4 million and $5.1 million for the years ended December 31, 2021, 2020 and 2019, respectively.
8. Leases
The Company has operating leases for corporate offices, research and development facilities, and a fleet of vehicles. The properties primarily relate to the Company’s principal executive office and research facility located in Durham, North Carolina, regulatory, commercial support and other administrative activities located in Irvine, California, and clinical, finance and legal operations located in Bedminster, New Jersey. The Durham, North Carolina, facility consists of approximately 61,000 square feet of laboratory and office space under a lease that was renewed in the third quarter of 2021 and expires in June 2029. The Irvine, California, location consists of approximately 27,000 square feet of office space under a lease that was renewed in the third quarter of 2021 and expires in October 2027. The Bedminster, New Jersey, location consists of approximately 34,000 square feet of office space under a lease that expires in October 2029. There are also small offices in Ireland, the United Kingdom and Japan.
The Company is leasing approximately 30,000 square feet of interior floor space for its manufacturing plant in Athlone, Ireland. The Company is reasonably certain it will remain in the lease through the end of its lease term in 2037, however, the Company is permitted to terminate the lease as early as September 2027.
The Company’s operating leases have remaining lease terms of approximately 1 year to 16 years, some of which include options to extend the leases.
The cash paid for amounts included in the measurement of lease liabilities was $5.4 million, $6.0 million and $4.7 million during the years ended December 31, 2021, 2020, and 2019, respectively. The Company’s right-of-use assets obtained in exchange for operating lease obligations were $13.0 million and $1.9 million during the years ended December 31, 2021 and 2020, respectively.
| DECEMBER 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Operating Leases | |||||||||||
| Weighted-average remaining lease terms | 8 years | 8 years | |||||||||
| Weighted-average discount rate | 8 | % | 9 | % | |||||||
F-23
Maturities of lease liabilities as of December 31, 2021 are as follows:
| OPERATING | |||||
| (in thousands) | LEASES | ||||
| Year Ending December 31, | |||||
| 2022 | $ | 4,447 | |||
| 2023 | 4,826 | ||||
| 2024 | 4,297 | ||||
| 2025 | 4,568 | ||||
| Thereafter | 18,333 | ||||
| Total undiscounted lease payments | 36,471 | ||||
| Less: present value adjustment | (10,355) | ||||
| Total lease liabilities | $ | 26,116 | |||
Maturities of lease liabilities as of December 31, 2020 were as follows:
| OPERATING | |||||
| (in thousands) | LEASES | ||||
| Year Ending December 31, | |||||
| 2021 | $ | 5,068 | |||
| 2022 | 2,467 | ||||
| 2023 | 2,139 | ||||
| 2024 | 1,764 | ||||
| Thereafter | 10,424 | ||||
| Total undiscounted lease payments | $ | 21,862 | |||
| Less: present value adjustment | (6,733) | ||||
| Total lease liabilities | $ | 15,129 | |||
Lease expense for the Company’s operating leases was $5.9 million, including variable lease payments of $1.1 million, for the year ended December 31, 2021, respectively. Lease expense for the Company’s operating leases was $5.6 million, including variable lease payments of $0.7 million, for the year ended December 31, 2020, respectively. Lease expense for the Company’s operating leases was $5.3 million, including variable lease payments of $1.3 million, for the year ended December 31, 2019.
9. Accrued Expenses & Other Current Liabilities
Accrued expenses and other current liabilities consist of the following:
(1)Comprised primarily of accruals related to fees for investigative sites, contract research organizations and other service providers that assist in conducting preclinical research studies and clinical trials.
(2)Comprised primarily of accruals related to commercial and government rebates as well as returns. The accrued revenue reserve at December 31, 2021 is higher than prior year primarily due to higher rebates largely driven by government sponsored programs.
F-24
(3)Comprised primarily of accruals related to interest payable as well as other business-related expenses.
10. Debt
Convertible Notes
In September 2019, the Company issued an aggregate principal amount of $316.25 million of Convertible Notes to qualified institutional buyers pursuant to Rule 144A of the Securities Act of 1933, as amended. The Convertible Notes, governed by an indenture between the Company and a trustee, are senior, unsecured obligations and do not include financial and operating covenants nor any restrictions on the payments of dividends, the incurrence of indebtedness or the issuance or repurchase of securities by Aerie or any of its subsidiaries. Interest on the Convertible Notes is payable semi-annually in cash in arrears at a rate of 1.50% per annum on April 1 and October 1 of each year, which began on April 1, 2020. The Convertible Notes will mature on October 1, 2024 unless they are redeemed, repurchased or converted prior to such date. Prior to April 1, 2024, the Convertible Notes will be convertible at the option of holders only during certain periods and upon satisfaction of certain conditions. On and after April 1, 2024, the Convertible Notes will be convertible at the option of the holders any time until the close of business on the second scheduled trading day immediately preceding the maturity date. Upon conversion, the Convertible Notes may be settled in shares of Aerie common stock, cash or a combination, thereof, at the Company's election. The Company intends to pay cash upon conversion of the Convertible Notes, and consequently does not include the conversion value of the Convertible Notes in the diluted earnings per share computation. See Note 2 for additional information.
The Convertible Notes have an initial conversion rate of 40.04 shares of Aerie common stock per $1,000 principal amount of the Convertible Notes, which will be subject to customary anti-dilution adjustments in certain circumstances. This represents an initial effective conversion price of approximately $24.98 per share, which represents a premium of approximately 35% to the $18.50 per share closing price of Aerie common stock on September 4, 2019, the date the Company priced the offering.
The Company may redeem all or any portion of the Convertible Notes, at its option, on or after October 3, 2022, at a cash redemption price equal to 100% of the principal amount of the Convertible Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date, but only if the last reported sale price of Aerie common stock exceeds 130% of the conversion price of $24.98, which amounts to $32.47, then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately before the date the Company provides written notice of redemption; and the trading day immediately before the notice is sent.
Holders of Convertible Notes may require the Company to repurchase their Convertible Notes upon the occurrence of certain events that constitute a fundamental change under the indenture governing the Convertible Notes at a fundamental change repurchase price equal to 100% of the principal amount thereof, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
During the year ended December 31, 2021, the conditions allowing holders of the Convertible Notes to elect to convert had not been met. As of December 31, 2021, the if-converted value of the Convertible Notes did not exceed the principal amount of the Convertible Notes.
The estimated fair value of the liability component of the Convertible Notes at the time of issuance was $187.9 million and was determined based on a discounted cash flow analysis and a binomial lattice model. The valuation required the use of Level 3 unobservable inputs and subjective assumptions, including but not limited to the stock price volatility and bond yield. The effective interest rate on the liability component was 10.5% for the period from the date of issuance through December 31, 2021. The equity component of the Convertible Notes was recognized at issuance and represents the difference between the principal amount of the Convertible Notes and the fair value of the liability component of the Convertible Notes at issuance. The equity component was approximately $128.4 million at the time of issuance and its fair value is not remeasured as long as it continues to meet the conditions for equity classification.
In connection with the issuance of the Convertible Notes, the Company incurred debt issuance costs of $9.2 million for the three months ended December 31, 2019. In accordance with ASC Topic 470, Debt, these costs were allocated to debt and equity components in proportion to the allocation of proceeds. Issuance costs of $5.5 million were recorded as debt issuance costs in the net carrying value of Convertible Notes. The debt issuance costs are amortized on an effective interest basis over the term of the Convertible Notes. The remaining issuance costs of $3.7 million were recorded as additional paid-in capital, net with the equity component and such amounts are not subject to amortization.
F-25
The following table summarizes the carrying value of the Convertible Notes:
| DECEMBER 31, | |||||||||||
| (in thousands) | 2021 | 2020 | |||||||||
| Gross proceeds | $ | 316,250 | $ | 316,250 | |||||||
| Unamortized debt discount | (78,395) | (101,565) | |||||||||
| Unamortized issuance costs | (3,328) | (4,312) | |||||||||
| Carrying value | $ | 234,527 | $ | 210,373 | |||||||
The following table summarizes the interest expense recognized related to the Convertible Notes:
| DECEMBER 31, | |||||||||||||||||
| (in thousands) | 2021 | 2020 | 2019 | ||||||||||||||
| Stated interest | $ | 4,744 | $ | 4,751 | $ | 1,476 | |||||||||||
| Amortized debt discount | 23,170 | 20,837 | 5,989 | ||||||||||||||
| Amortized issuance costs | 983 | 885 | 254 | ||||||||||||||
| Interest Expense | $ | 28,897 | $ | 26,473 | $ | 7,719 | |||||||||||
Separately, the Company entered into privately negotiated capped call options with financial institutions. The capped call options cover, subject to customary anti-dilution adjustments, the number of shares of Aerie common stock that initially underlie the Convertible Notes. The cap price of the capped call options is $37.00 per share of Aerie common stock, representing a premium of 100% above the closing price of $18.50 per share of Aerie common stock on September 4, 2019, and is subject to certain adjustments under the terms of the capped call options. The capped call options are generally intended to reduce or offset potential dilution to Aerie common stock upon conversion of the Convertible Notes with such reduction and/ or offset, as the case may be, subject to a cap based on the cap price. The Company paid a total of $32.9 million in premiums for the capped call options, which was recorded as additional paid-in capital, using a portion of the gross proceeds from the issuance and sale of the Convertible Notes. The capped call options are excluded from diluted earnings per share because the impact would be anti-dilutive.
Credit Facility
In September 2019, the Company terminated its $200 million credit facility with certain entities affiliated with Deerfield Management Company L.P. (“Deerfield”) pursuant to which $100 million of delayed draw term loan commitments were provided by Deerfield in July 2018 (the “July 2018 tranche”) and $100 million of delayed draw term loan commitments were provided by Deerfield in May 2019 (the “May 2019 tranche”). Upon termination, the Company paid aggregate fees of $6.5 million to Deerfield in respect of the fee on undrawn amounts and the exit fee for each of the July 2018 tranche and May 2019 tranche. No funds were drawn under either tranche at the time of termination.
Interest Expense
Interest expense was $28.9 million and $26.5 million for the years ended December 31, 2021 and 2020, and included stated interest and amortization of debt discount and issuance costs related to the Convertible Notes. Interest expense was $15.3 million for the year ended December 31, 2019, and included stated interest and amortization of debt discount and issuance costs related to the Convertible Notes and issuance costs and fees related to the credit facility.
11. Income Taxes
The provision for income taxes is based on net loss before income taxes as follows:
| DECEMBER 31, | |||||||||||||||||
| (in thousands) | 2021 | 2020 | 2019 | ||||||||||||||
| Net loss before income taxes: | |||||||||||||||||
| United States | $ | (138,323) | $ | (143,349) | $ | (153,620) | |||||||||||
| Non-U.S. | 64,106 | (34,507) | (46,051) | ||||||||||||||
| Net loss before income taxes | $ | (74,217) | $ | (177,856) | $ | (199,671) | |||||||||||
F-26
Significant components of the Company’s net deferred income tax assets as of December 31, 2021 and 2020 consist of the following:
A reconciliation of the statutory tax rates and the effective tax rates for the years ended December 31, 2021, 2020 and 2019 is as follows:
In March 2019, the IRS issued new guidance related to sequestration on the alternative minimum tax (“AMT”) tax credits. For taxable years beginning after December 31, 2017, refund payments and refund offset transactions due to refundable minimum tax credits will not be reduced due to federal sequestration. In January 2020 the IRS issued new guidance related to sequestration on the AMT tax credits which would restore the portion of the minimum tax credit refunds previously sequestered with respect to multistate tax commission (“MTC”) refund claims in lieu of bonus depreciation under Section 168(k)(4).
F-27
On March 27, 2020, the President of the United States signed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which is aimed at providing emergency assistance and health care for individuals, families, and businesses affected by the COVID-19 pandemic and generally supporting the U.S. economy. The CARES Act, among other things, includes several business tax provisions which include, but are not limited to modifications of federal net operating loss carrybacks and deductibility, changes to prior year refundable AMT liabilities to allow the accelerated recovery of refund, increase of limitations on business interest deductions from 30 percent to 50 percent of earnings before interest, taxes, depreciation, and amortization, technical corrections of the classification of qualified improvement property making them eligible for bonus depreciation, increase of the limits on charitable contribution deductions from 10 percent to 25 percent of adjusted taxable income, modifications of the treatment of federal loans, loan guarantees, and other investments, suspension of industry specific excise taxes, deferral of the company portion of old age, survivors, and disability insurance program (“OASDI”), and implementation of a refundable employee retention tax credit. During 2020, the Company received the remaining accelerated AMT refund of $0.8 million. The CARES Act did not have a material impact on the Company's consolidated financial statements as of and for the years ended December 31, 2021 and December 31, 2020.
At December 31, 2021, the Company had U.S. federal and state net operating loss (“NOL”) carryforwards of approximately $635.1 million and $616.3 million, respectively. If not utilized, federal NOLs that arose prior to 2018 and state NOLs will begin to expire at various dates beginning in 2031 and 2023, respectively. U.S. federal NOLs that arose on or after January 1, 2018 can be carried forward indefinitely against future income, but can only be used to offset a maximum of 80% of the Company’s federal taxable income in any year. As of December 31, 2021, the Company also had foreign NOL carryforwards of $66.0 million, which are available solely to offset taxable income of its foreign subsidiaries, subject to any applicable limitations under foreign law.
U.S. federal NOLs and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service and may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant stockholders over a three-year period in excess of 50%, as defined under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended. This could limit the amount of tax attributes that can be utilized annually to offset future taxable income or tax liabilities.
Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. Significant pieces of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended December 31, 2021 and lack of profitability for a sustained period. Such objective evidence limits the ability to consider other subjective evidence, such as projections for future growth. On the basis of this evaluation, as of December 31, 2021, the Company maintains a valuation allowance on all of its deferred tax assets as of December 31, 2021. The amount of deferred tax asset considered realizable, however, could be adjusted if objective negative evidence in the form of cumulative losses or lack of profitability for a sustained period is no longer present and additional weight is given to other subjective evidence such as projections for growth. As of December 31, 2021, 2020, 2019 and 2018, the Company had a valuation allowance of $212.8 million, $211.4 million, $170.3 million and $143.3 million, respectively. The increase in valuation allowance in 2021, 2020 and 2019 of $1.4 million, $41.1 million and $27.0 million, respectively, was primarily due to the increase in NOL carryforwards, offset by other temporary differences.
The Company does not have any unrecognized tax benefits as of December 31, 2021. The Company is subject to taxation in the United States, Ireland, Japan and the United Kingdom. As of December 31, 2021, tax years ended December 31, 2017 through December 31, 2020 are open under the statute of limitations and subject to tax examinations. To the extent the Company has tax attribute carryforwards, the tax years in which the attribute was generated may still be adjusted upon examination by the IRS, state, or non-U.S. tax authorities to the extent utilized in a future period.
12. Stock-based Compensation
Stock-based compensation expense for options granted, RSAs, PSAs, RSUs, SARs and stock purchase rights is reflected in the consolidated statements of operations and comprehensive loss as follows:
| YEAR ENDED DECEMBER 31, | |||||||||||||||||
| (in thousands) | 2021 | 2020 | 2019 | ||||||||||||||
| Cost of goods sold | $ | 1,335 | $ | 2,353 | $ | — | |||||||||||
| Selling, general and administrative | 20,616 | 27,176 | 30,463 | ||||||||||||||
| Pre-approval commercial manufacturing | — | 344 | 3,634 | ||||||||||||||
| Research and development | 7,573 | 10,222 | 10,996 | ||||||||||||||
| Total | $ | 29,524 | $ | 40,095 | $ | 45,093 | |||||||||||
F-28
As of December 31, 2021, the Company had $22.4 million of unrecognized compensation expense related to options outstanding under its equity plans. This expense is expected to be recognized over a weighted average period of 2.17 years as of December 31, 2021. As of December 31, 2021, the Company had $12.6 million of unrecognized compensation expense, related to unvested RSAs, including PSAs. This cost is expected to be recognized over a weighted average period of 2.63 years as of December 31, 2021.
Equity Plans
The Company maintains three equity compensation plans, the 2005 Aerie Pharmaceutical Stock Plan (the “2005 Plan”), the 2013 Omnibus Incentive Plan (the “2013 Equity Plan”), which was amended and restated as the Aerie Pharmaceuticals, Inc. Second Amended and Restated Omnibus Incentive Plan (the “Second Amended and Restated Equity Plan”), as described below, and the Aerie Pharmaceuticals, Inc. Inducement Award Plan (the “Inducement Award Plan”), as described below. The 2005 Plan, the Second Amended and Restated Equity Plan and the Inducement Award Plan are referred to collectively as the “Plans.”
On October 30, 2013, the effective date of the 2013 Equity Plan, the 2005 Plan was frozen and no additional awards have been or will be made under the 2005 Plan. Any remaining shares available for future grant under the 2005 Plan were allocated to the 2013 Equity Plan. In 2015, Aerie’s stockholders approved the adoption of the Aerie Pharmaceuticals, Inc. Amended and Restated Omnibus Incentive Plan (“Amended and Restated Equity Plan”) and no additional awards have been or will be made under the 2013 Equity Plan. Any remaining shares available under the 2013 Equity Plan were allocated to the Amended and Restated Equity Plan.
In 2018, Aerie’s stockholders approved the adoption of the Second Amended and Restated Equity Plan to increase the number of shares issuable under the Plan by 4,500,000. The Second Amended and Restated Equity Plan provides for the granting of up to 10,229,068 equity awards in respect of common stock of Aerie, including equity awards that were previously available for issuance under the 2013 Equity Plan.
In 2016, Aerie’s Board of Directors approved the Inducement Award Plan which provides for the granting of up to 418,000 equity awards in respect of common stock of Aerie and was subsequently amended in 2017 to increase the equity awards that may be issued by an additional 874,500 shares. On December 5, 2019, the Inducement Award Plan was further amended by Aerie’s Board of Directors to increase the number of shares issuable under the plan by 100,000 shares. On December 9, 2021, Aerie’s Board of Directors approved an increase to the number of shares issuable under the plan for grants made to the Company’s new Chief Executive Officer in connection with his hiring, including 602,952 shares for grants made in December 2021 and additional shares for grants anticipated to be made in the first quarter of 2022. Awards granted under the Inducement Award Plan are intended to qualify as employment inducement awards under NASDAQ Listing Rule 5635(c)(4).
Options to Purchase Common Stock
Weighted average assumptions utilized in the fair value calculation for options to purchase common stock as of December 31, 2021, 2020 and 2019 are as follows:
| YEAR ENDED DECEMBER 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Expected term (years) | 6.0 | 6.0 | 6.0 | ||||||||||||||
| Expected stock price volatility | 68 | % | 74 | % | 74 | % | |||||||||||
| Risk-free interest rate | 1.0 | % | 0.9 | % | 1.9 | % | |||||||||||
| Dividend yield | — | % | — | % | — | % | |||||||||||
F-29
The following table summarizes the stock option activity under the Plans:
| NUMBER OF SHARES | WEIGHTED AVERAGE EXERCISE PRICE | WEIGHTED AVERAGE REMAINING CONTRACTUAL LIFE (YEARS) | AGGREGATE INTRINSIC VALUE (000’s) | ||||||||||||||||||||
Options outstanding at December 31, 2020 | 8,588,614 | $ | 27.36 | ||||||||||||||||||||
| Granted | 1,614,997 | 13.92 | |||||||||||||||||||||
| Exercised | (1,146,095) | 3.20 | |||||||||||||||||||||
| Canceled | (2,506,906) | 31.02 | |||||||||||||||||||||
Options outstanding at December 31, 2021 | 6,550,610 | $ | 26.87 | 6.4 | $ | 1,116 | |||||||||||||||||
Options exercisable at December 31, 2021 | 4,449,867 | $ | 31.05 | 5.2 | $ | 1,116 | |||||||||||||||||
Options vested and expected to vest at December 31, 2021 | 6,550,610 | $ | 26.87 | 6.4 | $ | 1,116 | |||||||||||||||||
The weighted-average fair values of all stock options granted for the years ended December 31, 2021, 2020 and 2019 was $8.57, $10.82, and $20.70, respectively. The aggregate intrinsic value of options exercised for the years ended December 31, 2021, 2020 and 2019 was $7.5 million, $0.6 million and $4.2 million, respectively. The intrinsic value is calculated as the difference between the fair market value at December 31, 2021 and the exercise price per share of the stock options. The fair market value per share of common stock as of December 31, 2021 was $7.02.
The following table provides additional information about stock options that are outstanding and exercisable at December 31, 2021:
| EXERCISE PRICE | OPTIONS OUTSTANDING | WEIGHTED AVERAGE REMAINING CONTRACTUAL LIFE (YEARS) | OPTIONS EXERCISABLE | |||||||||||||||||
$0.20 - $10.00 | 735,309 | 6.7 | 288,083 | |||||||||||||||||
$10.01 - $20.00 | 2,035,383 | 7.5 | 959,566 | |||||||||||||||||
$20.01 - $30.00 | 1,794,790 | 5.3 | 1,391,071 | |||||||||||||||||
$30.01 - $45.00 | 700,678 | 5.7 | 628,032 | |||||||||||||||||
$45.01 - $55.00 | 753,011 | 6.2 | 682,273 | |||||||||||||||||
$55.01 - $73.10 | 531,439 | 6.2 | 500,842 | |||||||||||||||||
| 6,550,610 | 4,449,867 | |||||||||||||||||||
Restricted Stock Awards
The following table summarizes the RSA, including PSAs, activity under the Plans:
| NUMBER OF SHARES | WEIGHTED AVERAGE FAIR VALUE PER SHARE | ||||||||||
Nonvested RSAs at December 31, 2020 | 809,527 | $ | 29.03 | ||||||||
| Granted | 660,926 | 13.48 | |||||||||
| Vested | (274,488) | 33.70 | |||||||||
| Canceled | (218,721) | 24.03 | |||||||||
Nonvested RSAs at December 31, 2021 | 977,244 | $ | 18.32 | ||||||||
The vesting of the RSAs is time and service based with terms of 1 to 4 years. The total fair value of restricted stock vested during the years ended December 31, 2021, 2020 and 2019 was $9.2 million, $11.5 million and $9.8 million, respectively. During the year ended December 31, 2017, the Company granted 98,817 RSAs with non-market performance conditions that vest upon the satisfaction of certain performance conditions and service conditions. As of the second quarter of 2020, all PSAs were vested.
F-30
Restricted Stock Units
In September 2019, 43,071 nonvested RSAs were cancelled and replaced with a corresponding number of RSUs. The RSUs were issued with the same vesting provisions as the cancelled RSAs. Accordingly, the 43,071 RSUs outstanding at September 30, 2019 were nonvested. As of December 31, 2021, the associated unrecognized compensation expense totaled $3.0 million. This expense is expected to be recognized over the weighted average period of 3 years as of December 31, 2021.
| NUMBER OF SHARES | WEIGHTED AVERAGE FAIR VALUE PER SHARE | ||||||||||
Nonvested RSUs at December 31, 2020 | 107,182 | $ | 14.43 | ||||||||
| Granted | 100,322 | 15.48 | |||||||||
| Vested | (30,958) | 15.27 | |||||||||
| Canceled | (19,673) | 14.89 | |||||||||
Nonvested RSUs at December 31, 2021 | 156,873 | $ | 14.88 | ||||||||
Stock Appreciation Rights
The following table summarizes the SARs activity under the Plans:
| NUMBER OF SHARES | WEIGHTED AVERAGE EXERCISE PRICE | WEIGHTED AVERAGE REMAINING CONTRACTUAL LIFE (YEARS) | AGGREGATE INTRINSIC VALUE (000’s) | ||||||||||||||||||||
SARs outstanding at December 31, 2020 | 212,044 | $ | 32.28 | ||||||||||||||||||||
| Granted | 70,700 | 15.97 | |||||||||||||||||||||
| Exercised | — | — | |||||||||||||||||||||
| Canceled | (44,395) | 31.05 | |||||||||||||||||||||
SARs outstanding at December 31, 2021 | 238,349 | $ | 27.67 | 3.04 | $ | — | |||||||||||||||||
SARs exercisable at December 31, 2021 | 83,873 | $ | 38.63 | 2.11 | $ | — | |||||||||||||||||
Holders of the SARs are entitled under the terms of the Plans to receive cash payments calculated based on the excess of Aerie’s common stock price over the exercise price in their award; consequently, these awards are accounted for as liability-classified awards, and the Company measures compensation cost based on their estimated fair value at each reporting date, net of actual forfeitures, if any.
Employee Stock Purchase Plan
The Company maintains the 2013 Employee Stock Purchase Plan (the “Purchase Plan”) under which substantially all employees may purchase Aerie’s common stock through payroll deductions and lump sum contributions at a price equal to 85% of the lower of the fair market values of the stock as of the beginning or the end of the offering periods. Employees may not purchase more than the fair value equivalent of $25,000 of stock during any calendar year. The Purchase Plan provides for the issuance of up to 645,814 shares of Aerie’s common stock.
13. Commitments and Contingencies
Milestone Payments
In November 2019, the Company entered into a Share Purchase Agreement with Avizorex, (the “Avizorex Agreement”) under which the Company acquired Avizorex, including its lead product candidate AVX-012 (now known as AR-15512), for which Avizorex completed a Phase 2a study in dry eye subjects in 2019. The consideration given for the Avizorex acquisition was $10.2 million. Additionally, contingent milestone payments of up to $69.0 million may be due, subject to achievement of certain product regulatory approvals using the IPR&D assets acquired, plus royalties on net sales of any approved products from Avizorex’s development pipeline. In the first quarter of 2022, the Company gained alignment with the FDA on the results of its Phase 2b clinical trial and confirmed the design of the Phase 3 trials, which the Company currently expects to initiate in the second quarter of 2022. This resulted in the achievement of a regulatory milestone in which the Company will pay Avizorex
F-31
approximately $8.0 million in the first quarter of 2022. This is a non-recognized subsequent event and will be reflected in the first quarter 2022 financial statements.
In October 2017, the Company entered into an Asset Purchase Agreement with Envisia Therapeutics (“Envisia”) (the “Envisia Agreement”) to acquire the rights to use PRINT® technology in ophthalmology, as well as rights relating to a preclinical dexamethasone steroid implant for the potential treatment of RVO and DME that utilizes the PRINT® technology, referred to as AR-1105. Under the terms of the Envisia Agreement, the Company (a) made an upfront cash payment of $10.5 million and issued 263,146 shares of Aerie’s common stock valued at approximately $14.3 million and (b) agreed to make potential milestone payments of up to an aggregate of $45.0 million, subject to achievement of certain product regulatory approvals using the IPR&D assets acquired, if achieved within the 15-year milestone period.
In July 2017, the Company entered into a collaborative research, development and licensing agreement with DSM Biomedical (“DSM”), which included an option to license DSM’s bio-erodible polymer implant technology for sustained delivery of certain Aerie compounds to treat ophthalmic diseases. This technology uses polyesteramide polymers to produce an injectable, thin fiber that is minute in size. On August 1, 2018, the Company entered into an Amended and Restated Collaborative Research, Development, and License Agreement with DSM (the “DSM Agreement”), which provides for (i) a worldwide exclusive license for all ophthalmic indications to DSM’s polyesteramide polymer technology, (ii) continuation of the collaborative research initiatives through the end of 2020, including the transfer of DSM’s formulation technology to Aerie during that time and (iii) access to a preclinical latanoprost implant. Aerie paid $6.0 million to DSM upon execution of the DSM Agreement, with an additional $9.0 million payable to DSM through the end of 2020. The DSM Agreement includes contingent payments of up to $75 million that may be due to DSM upon the achievement of certain development and regulatory milestones. In addition, pursuant to the DSM Agreement, a $3.0 million milestone payment was made during the year ended December 31, 2018 upon the completion of certain manufacturing technology transfer activities. Aerie would also pay royalties to DSM when products are commercialized under this DSM Agreement, if any.
These contingent milestone payments are recognized only when the contingency is resolved (the milestone is achieved) and the consideration is paid or becomes payable. As of December 31, 2021, there were no liabilities recorded relating to potential future milestone payments as the achievement of the related milestones were not met and the timing and likelihood of such milestone payments are not known.
Litigation
The Company may periodically become subject to legal proceedings and claims arising in connection with its business. As of December 31, 2021, the Company is not a party to any material pending legal or administrative proceedings and, to its knowledge, no such proceedings are threatened or contemplated. The Company does not have contingency reserves established for any litigation liabilities as of December 31, 2021.
14. Segment Information
Aerie has one operating segment: the discovery, development and commercialization of pharmaceutical products that address unmet medical needs, focusing on open-angle glaucoma, dry eye, DME and wet AMD. The Company's business is managed by a single management team, which reports to the Chief Executive Officer.
The following table presents total long-lived assets by geographic location:
| DECEMBER 31, | |||||||||||
| (in thousands) | 2021 | 2020 | |||||||||
| United States | $ | 8,067 | $ | 8,391 | |||||||
| Ireland | 43,405 | 45,869 | |||||||||
| Total long-lived assets | $ | 51,472 | $ | 54,260 | |||||||
F-32
