Our
business is subject to a number of risks, some of which are discussed below. You
should consider carefully the following risks in addition to the other
information contained in this report and our other filings with the
SEC, before deciding to buy, sell or hold our common stock. The risks
and uncertainties described below are not the only ones facing our company.
Additional risks and uncertainties not presently known to us or that we
currently believe are not important may also impair our business operations. If
any of the following risks actually occur, our business, financial condition or
results of operations could be materially adversely affected, the value of our
common stock could decline and you may lose all or part of your
investment.
Current
worldwide economic conditions may limit our access to capital, adversely affect
our business and financial condition, as well as further decrease our stock
price.
General worldwide economic
conditions have experienced a downturn due to the effects of the subprime
lending crisis, general credit market crisis, collateral effects on the finance
and banking industries, concerns about inflation, slower economic activity,
decreased consumer confidence, reduced corporate profits and capital spending,
adverse business conditions and liquidity concerns. Although the impact of the
downturn on our business is uncertain at this time, downturn may adversely
affect our business and operations. Like many other stocks, our stock price has
been subject to fluctuations and has decreased substantially in recent months.
Our stock price could further decrease due to concerns that our business,
operating results and financial condition will be negatively impacted by a
worldwide economic downturn.
We
may be unable to raise additional capital on acceptable terms in the future
which may in turn limit our ability to develop and commercialize products and
technologies.
We expect our capital
outlays and operating expenditures to substantially increase over at least the
next several years as we expand our product pipeline and increase research and
development efforts and clinical and regulatory activities. Conducting clinical
trials is very expensive, and we expect that we will need to raise additional
capital, through future private or public equity offerings, strategic alliances
or debt financing, before we achieve commercialization of any of our Aganocide
compounds. In addition, we may require even more significant capital outlays and
operating expenditures if we do not continue to partner with third
parties to develop and commercialize our products.
Our future capital
requirements will depend on many factors, including:
|
•
|
|
the
scope, rate of progress and cost of our pre-clinical studies and clinical
trials and other research and development
activities;
|
|
•
|
|
future
clinical trial results;
|
|
•
|
|
the
terms and timing of any collaborative, licensing and other arrangements
that we may establish;
|
|
•
|
|
the
cost and timing of regulatory
approvals;
|
|
•
|
|
the
cost of establishing clinical and commercial supplies of our product
candidates and any products that we may
develop;
|
|
•
|
|
the
effect of competing technological and market
developments;
|
|
•
|
|
the
cost of filing, prosecuting, defending and enforcing any patent claims and
other intellectual property rights;
and
|
|
•
|
|
the
extent to which we acquire or invest in businesses, products and
technologies, although we currently have no commitments or agreements
relating to any of these types of
transactions.
|
We do not currently have
any commitments for future external funding. Additional financing may not be
available on favorable terms, or at all. Our ability to obtain additional
financing may be negatively affected by the recent volatility in the financial
markets and the credit crisis, as well as the general downturn in the economy
and decreased consumer confidence. Even if we succeed in selling additional
securities to raise funds, our existing shareholders’ ownership percentage would
be diluted and new investors may demand rights, preferences or privileges senior
to those of existing shareholders. If we raise additional capital through
strategic alliance and licensing arrangements, we may have to trade our rights
to our technology, intellectual property or products to others on terms that may
not be favorable to us. If we raise additional capital through debt financing,
the financing may involve covenants that restrict our business
activities.
In addition, it is often
the case that the cost of pharmaceutical development can be significantly
greater than initially anticipated. This may be due to any of a large number of
possible reasons, some of which could have been anticipated, while others may be
caused by unpredictable circumstances. A significant increase in our costs would
cause the amount of financing that would be required to enable us to achieve our
goals to be likewise increased.
If we determine that we
need to raise additional funds and we are not successful in doing so, we may be
unable to complete the clinical development of some or all of our product
candidates or to seek or obtain FDA approval of our product candidates. Such
events could force us to discontinue product development, enter into a
relationship with a strategic partner earlier than currently intended, reduce
sales and marketing efforts or forego attractive business
opportunities.
We
are an early stage company with a history of losses. We expect to incur net
losses for the foreseeable future and we may never achieve or maintain
profitability.
We have incurred net
losses since our inception. For the years ended December 31, 2005, 2006 and
2007 we had net losses of approximately $3.5 million, $5.3 million and $5.4
million, respectively. Through September 30, 2008, we had an accumulated deficit
of approximately $25 million. To date, we have been, and expect to remain for
the foreseeable future, mostly in a research and development stage. Since our
inception, we have not generated revenue, except for modest revenue in 2006 and
2007 relating to two research and development collaboration and license
agreements. We have incurred substantial research and development expenses,
which were approximately $2.0 million, $4.1 million and $7.4 million for the
years ended December 31, 2005, 2006 and 2007, respectively. We expect to
continue to make, for at least the next several years, significant expenditures
for the development of products that incorporate our Aganocide compounds, as
well as continued research into the biological activities of our Aganocide
compounds, which expenditures are accounted for as research and development
expenses. We do not expect any of our current product candidates to be
commercialized within the next several years, if at all, except as may be
commercialized under our agreement with KCI, pursuant to which we granted them
the exclusive rights to develop, manufacture and commercialize NVC-101, as well
as other products containing hypochlorous acid as the principal active
ingredient, worldwide for use in wound care in humans, other than products or
uses intended for the eye, ear or nose. We expect to continue to incur
substantial losses for the foreseeable future, and we may never become
profitable. We anticipate that our expenses will continue to increase
substantially in the foreseeable future as we:
|
•
|
|
conduct
pre-clinical studies and clinical trials for our product candidates in
different indications;
|
|
•
|
|
conduct
pre-clinical studies and clinical trials for our product candidates in
different indications;
|
|
•
|
|
develop,
formulate, manufacture and commercialize our product candidates either
independently or with partners;
|
|
•
|
|
pursue,
acquire or in-license additional compounds, products or technologies, or
expand the use of our technology;
|
|
•
|
|
maintain,
defend and expand the scope of our intellectual property;
and
|
|
•
|
|
hire
additional qualified personnel.
|
We will need to generate
significant revenues to achieve and maintain profitability. If we cannot
successfully develop, obtain regulatory approval for and commercialize our
product candidates, either independently or with partners, we will not be able
to generate such revenues or achieve or maintain profitability in the future.
Our failure to achieve and subsequently maintain profitability could have a
material adverse impact on the market price of our common
stock.
Our
limited operating history may make it difficult for you to evaluate our business
and to assess our future viability.
Our operations to date
have been limited to organizing and staffing our company, developing our
technology, researching and developing our compounds, and conducting preclinical
studies and early-stage clinical trials of our compounds. We have not
demonstrated the ability to succeed in achieving clinical endpoints, obtain
regulatory approvals, formulate and manufacture products on a commercial scale
or conduct sales and marketing activities. Consequently, any predictions you
make about our future success or viability are unlikely to be as accurate as
they could be if we had a longer operating history.
We
have very limited data on the use of our products in humans and will need to
perform costly and time consuming clinical trials in order to bring our products
to market.
Most of the data that we
have on our products is from in-vitro (laboratory) studies or in-vivo animal
studies. We have conducted limited human studies and will need to conduct Phase
I, II and III human clinical trials to confirm the in-vitro and in-vivo results
in order to obtain approval from the FDA of our compounds. Often, positive
in-vitro or in-vivo animal studies are not followed by positive results in human
clinical trials, and we may not be able to demonstrate that our products are
safe and effective for indicated uses in humans. In addition, for each
indication, we estimate that it will take between three and five years to
conduct the necessary clinical trials and will cost between $15 million and $30
million.
We
currently do not have any marketable products, and if we are unable to develop
and obtain regulatory approval for products that we develop, we may never
generate product revenues.
To date, our revenues have
been derived solely from two research and development collaboration and license
agreements. We have never generated revenues from sales of products and we
cannot guarantee that we will ever have marketable drugs or other products.
Satisfaction of all regulatory requirements applicable to our product candidates
typically takes many years, is dependent upon the type, complexity, novelty and
classification of the product candidates, and requires the expenditure of
substantial resources for research and development and testing. Before
proceeding with clinical trials, we will conduct pre-clinical studies, which
may, or may not be, valid predictors of potential outcomes in humans. If
pre-clinical studies are favorable, we will then begin clinical trials. We must
demonstrate that our product candidates satisfy rigorous standards of safety and
efficacy before we can submit for and gain approval from the FDA and other
regulatory authorities in the United States and in other countries. In addition,
to compete effectively, our products will need to be easy to use, cost-effective
and economical to manufacture on a commercial scale. We may not achieve any of
these objectives. We cannot be certain that the clinical development of any of
our current product candidates or any other product that we may develop in the
future will be successful, that they will receive the regulatory approvals
required to commercialize them, or that any of our other in-licensing efforts or
pre-clinical testing will yield a product suitable for entry into clinical
trials. Our commercial revenues from sales of products will be derived from
sales of products that we may not be commercially available for at least the
next several years, if at all.
We
have limited experience in developing drugs and medical devices, and we may be
unable to commercialize any of the products we develop.
Development and
commercialization of drugs and medical devices involves a lengthy and complex
process. We have limited experience in developing products and have never
commercialized, any of our product candidates. In addition, no one has ever
developed or commercialized a product based on our Aganocide compounds, and we
cannot assure you that it is possible to develop, obtain regulatory approval for
or commercialize any products based on these compounds or that we will be
successful in doing so.
Before we can develop and
commercialize any new products, we will need to expend significant resources
to:
|
•
|
|
undertake
and complete clinical trials to demonstrate the efficacy and safety of our
product candidates;
|
|
•
|
|
maintain
and expand our intellectual property
rights;
|
|
•
|
|
obtain
marketing and other approvals from the FDA and other regulatory agencies;
and
|
|
•
|
|
select
collaborative partners with suitable manufacturing and commercial
capabilities.
|
The
process of developing new products takes several years. Our product development
efforts may fail for many reasons, including:
|
•
|
|
the
failure of our product candidates to demonstrate safety and
efficacy;
|
|
•
|
|
the
high cost of clinical trials and our lack of financial and other
resources; and
|
|
•
|
|
our
inability to partner with firms with sufficient resources to assist us in
conducting clinical trials.
|
Success
in early clinical trials often is not replicated in later studies, and few
research and development projects result in commercial products. At any point,
we may abandon development of a product candidate or we may be required to
expend considerable resources repeating clinical trials, which would eliminate
or adversely impact the timing for revenues from those product candidates. If a
clinical study fails to demonstrate the safety and effectiveness of our product
candidates, we may abandon the development of the product or product feature
that was the subject of the clinical trial, which could harm our
business.
Even if we develop
products for commercial use, these products may not be accepted by the medical
and pharmaceutical marketplaces or be capable of being offered at prices that
will enable us to become profitable. We cannot assure you that our products will
be approved by regulatory authorities or ultimately prove to be useful for
commercial markets, meet applicable regulatory standards, or be successfully
marketed
.
The
price of our common stock may fluctuate substantially, which may result in
losses to our shareholders.
The stock prices of many
companies in the pharmaceutical and biotechnology industry have generally
experienced wide fluctuations, which are often unrelated to the operating
performance of those companies. The market price of our common stock is likely
to be volatile and could fluctuate in response to, among other
things:
|
•
|
|
the
results of preclinical or clinical trials relating to our product
candidates;
|
|
•
|
|
the
announcement of new products by us or our
competitors;
|
|
•
|
|
announcement
of partnering arrangements by us or our
competitors;
|
|
•
|
|
quarterly
variations in our or our competitors’ results of
operations;
|
|
•
|
|
announcements
by us related to litigation;
|
|
•
|
|
changes
in our earnings estimates, investors’ perceptions, recommendations by
securities analysts or our failure to achieve analysts’ earning
estimates;
|
|
•
|
|
developments
in our industry; and
|
|
•
|
|
General,
economic and market conditions, including the recent volatility in the
financial markets and decrease in consumer confidence and other
factors unrelated to our operating performance or the operating
performance of our competitors.
|
The
volume of trading of our common stock may be low, leaving our common stock open
to risk of high volatility.
The number of shares of
our common stock being traded may be very low. Any shareholder wishing to sell
his/her stock may cause a significant fluctuation in the price of our stock. In
addition, low trading volume of a stock increases the possibility that, despite
rules against such activity, the price of the stock may be manipulated by
persons acting in their own self-interest. We may not have adequate market
makers and market making activity to prevent manipulation.
Future
sales of shares by our shareholders could cause the market price of our common
stock to drop significantly, even if our business is doing well.
As of the closing of our
initial public offering, we had 21,254,474 shares of common stock outstanding,
of which the 5,000,000 shares we sold in the offering may be resold in the
public market immediately. Of the remaining shares, 13,282,199 shares became
available for sale in the public market in April 2008, subject in some cases to
compliance with the volume and other limitations of Rule 144 and in other cases
subject to compliance with applicable Canadian requirements. Thereafter,
2,972,275 additional shares held by certain of our officers and directors will
become eligible for sale in the public market over the nine to 24 month period
after the closing of the initial public offering, as the shares are released
from lock-up agreements with the underwriters and applicable Canadian escrow
requirements.
In addition, at any time
and without public notice, the underwriters may release, at their discretion,
all or some of the securities subject to lock-up agreements with them, subject
to applicable regulatory requirements. As restrictions on resale end, the market
price of our stock could drop significantly if the holders of those shares sell
them or are perceived by the market as intending to sell them. These declines in
our stock price could occur even if our business is otherwise doing
well.
We
must implement additional and expensive finance and accounting systems,
procedures and controls in order to grow our business and organization and to
satisfy new reporting requirements, which will increase our costs and require
additional management resources.
We completed our initial
public offering, or IPO, in October 2007. As a public reporting company, we are
required to comply with the Sarbanes-Oxley Act of 2002 and the related rules and
regulations of the SEC and Canadian securities regulatory authorities, including
expanded disclosure and accelerated reporting requirements and more complex
accounting rules. We are also required to comply with marketplace rules and the
heightened corporate governance standards of the Toronto Stock Exchange, or TSX,
and the American Stock Exchange, or AMEX. Compliance with Section 404 of
the Sarbanes-Oxley Act of 2002, which will be required by 2009, and other
requirements of the SEC, Canadian securities regulatory authorities, AMEX and
the TSX will increase our costs and require additional management resources. We
recently have begun upgrading our finance and accounting systems, procedures and
controls and will need to continue to implement additional finance and
accounting systems, procedures and controls as we grow our business and
organization and to satisfy reporting requirements. If we are unable to complete
the required Section 404 assessment as to the adequacy of our internal
control over financial reporting, if we fail to maintain or implement adequate
controls, or if our independent registered public accounting firm is unable to
provide us with an unqualified report as to the effectiveness of our internal
control over financial reporting as of the date of the first Annual Report on
Form 10-K for which compliance is required, our ability to obtain additional
financing could be impaired. In addition, investors could lose confidence in the
reliability of our internal control over financial reporting and in the accuracy
of our periodic reports filed with the SEC and with Canadian securities
regulatory authorities. A lack of investor confidence in the reliability and
accuracy of our public reporting could cause our stock price to
decline.
If
we do not maintain our current research collaboration with Alcon and KCI and
enter into additional collaborations, a portion of our funding may decrease and
inhibit our ability to develop new products.
We have entered into a
collaborative arrangement with Alcon, and we rely on Alcon for joint
intellectual property creation and for substantially all of our near-term
revenues. Under the agreement, we licensed to Alcon the exclusive rights (except
for certain retained marketing rights) to develop, manufacture and commercialize
products incorporating the Aganocide compounds for application in connection
with the eye, ear and sinus and for use in contact lens solutions. We have also
entered into a license agreement with KCI pursuant to which we granted to them
the exclusive rights to develop, manufacture and commercialize our NVC-101
compound worldwide for use in wound care in humans (other than products or uses
intended for the eye, ear or nose). We cannot assure you that our collaboration
with Alcon or KCI or any other collaborative arrangement will be successful, or
that we will receive the full amount of research funding, milestone payments or
royalties, or that any commercially valuable intellectual property will be
created, from these arrangements. If Alcon or KCI were to breach or terminate
its agreement with us or otherwise fail to conduct its collaborative activities
successfully and in a timely manner, the research contemplated by our
collaboration with them could be delayed or terminated and our costs of
performing studies may increase. We plan on entering into additional
collaborations and licensing arrangements. We may not be able to negotiate
additional collaborations on acceptable terms, if at all, and these
collaborations may not be successful. Our current and future success depends in
part on our ability to enter into successful collaboration arrangements and
maintain the collaboration arrangement we currently have. If we are unable to
enter into, maintain or extend successful collaborations, our business may be
harmed.
We
do not have our own manufacturing capacity, and we plan to rely on partnering
arrangements or third-party manufacturers for the manufacture of our potential
products.
We do not currently
operate manufacturing facilities for clinical or commercial production of our
product candidates. We have no experience in drug formulation or manufacturing,
and we lack the resources and the capabilities to manufacture any of our product
candidates on a clinical or commercial scale. As a result, we expect to partner
with third parties to manufacture our products or rely on contract manufacturers
to supply, store and distribute product supplies for our clinical trials. Any
performance failure on the part of our commercial partners or future
manufacturers could delay clinical development or regulatory approval of our
product candidates or commercialization of our products, producing additional
losses and reducing the potential for product revenues.
Our products, if developed
and commercialized, will require precise, high quality manufacturing. The
failure to achieve and maintain high manufacturing standards, including the
incidence of manufacturing errors, could result in patient injury or death,
product recalls or withdrawals, delays or failures in product testing or
delivery, cost overruns or other problems that could seriously harm our
business. Contract manufacturers and partners often encounter difficulties
involving production yields, quality control and quality assurance, as well as
shortages of qualified personnel. These manufacturers and partners are subject
to ongoing periodic unannounced inspection by the FDA and corresponding state
agencies to ensure strict compliance with current Good Manufacturing Practice
and other applicable government regulations and corresponding foreign standards;
however, we do not have control over third-party compliance with these
regulations and standards. If any of our manufacturers or partners fails to
maintain compliance, the production of our products could be interrupted,
resulting in delays, additional costs and potentially lost
revenues.
In addition, if the FDA or
other regulatory agencies approve any of our product candidates for commercial
sale, we will need to manufacture them in larger quantities. Significant
scale-up of manufacturing will require validation studies, which the FDA must
review and approve. If we are unable to successfully increase the manufacturing
capacity for a product, the regulatory approval or commercial launch of any
drugs may be delayed or there may be a shortage in supply and our business may
be harmed as a result
.
We
may acquire other businesses or form joint ventures or in-license compounds that
could disrupt our business, harm our operating results, dilute your ownership
interest in us, or cause us to incur debt or significant expense.
As part of our business
strategy, we may pursue acquisitions of complementary businesses and assets, and
enter into technology or pharmaceutical compound licensing arrangements. We also
may pursue strategic alliances that leverage our core technology and industry
experience to enhance our ability to commercialize our product candidates and
expand our product offerings or distribution. We have no experience with respect
to acquiring other companies and limited experience with respect to the
formation of commercial partnering agreements, strategic alliances, joint
ventures or in-licensing of compounds. If we make any acquisitions, we may not
be able to integrate these acquisitions successfully into our existing business,
and we could assume unknown or contingent liabilities. If we in-license any
additional compounds, we may fail to develop the product candidates, and spend
significant resources before determining whether a compound we have in-licensed
will produce revenues. Any future acquisitions or in-licensing by us also could
result in significant write-offs or the incurrence of debt and contingent
liabilities, any of which could harm our operating results. Integration of an
acquired company also may require management resources that otherwise would be
available for ongoing development of our existing business. We may not identify
or complete these transactions in a timely manner, on a cost-effective basis, or
at all, and we may not realize the anticipated benefits of any acquisition,
technology license, strategic alliance or joint venture.
To finance any
acquisitions, we may choose to issue shares of our common stock as
consideration, which would dilute your interest in us. If the price of our
common stock is low or volatile, we may not be able to acquire other companies
for stock. Alternatively, it may be necessary for us to raise additional funds
for acquisitions by incurring indebtedness. Additional funds may not be
available on terms that are favorable to us, or at all.
Our
directors, executive officers and principal shareholders have significant voting
power and may take actions that may not be in the best interests of our other
shareholders.
As of September 30, 2008,
our officers and directors collectively controlled approximately 18.1% of our
outstanding common stock (and approximately 23.3% of our common stock when
including options held by them which were exercisable as of or within 60 days of
September 30, 2008). Furthermore, as of September 30, 2008, our largest
shareholder, a family trust established and controlled by Dr. Ramin Najafi,
our Chairman and Chief Executive Officer, beneficially owned 14.5% of our
outstanding common stock. As a result, Dr. Najafi can significantly
influence the management and affairs of our company and most matters requiring
shareholder approval, including the election of directors and approval of
significant corporate transactions. This concentration of ownership may have the
effect of delaying or preventing a change in control and might adversely affect
the market price of our common stock. This concentration of ownership may not be
in the best interests of our other shareholders.
We
depend on skilled and experienced personnel to operate our business effectively.
If we are unable to recruit, hire and retain these employees, our ability to
manage and expand our business will be harmed, which would impair our future
revenue and profitability.
Our success largely
depends on the skills, experience and efforts of our officers, especially our
Chief Executive Officer, Chief Financial Officer, Vice President of Research and
Development, Vice President of Clinical Research and Development, Senior Vice
President of Corporate and Business Development, and other key employees. The
efforts of each of these persons is critical to us as we continue to develop our
technologies and as we attempt to transition into a company with commercial
products. Any of our officers and other key employees may terminate their
employment at any time. The loss of any of our senior management team members
could weaken our management expertise and harm our ability to compete
effectively, develop our technologies and implement our business
strategies.
Our ability to retain our
skilled labor force and our success in attracting and hiring new skilled
employees will be a critical factor in determining whether we will be successful
in the future. Our research and development programs and collaborations depend
on our ability to attract and retain highly skilled scientists and technicians.
We may not be able to attract or retain qualified scientists and technicians in
the future due to the intense competition for qualified personnel among life
science businesses, particularly in the San Francisco Bay Area. We also face
competition from universities and public and private research institutions in
recruiting and retaining highly qualified scientific personnel. We have also
encountered difficulties in recruiting qualified personnel from outside the San
Francisco Bay Area, due to the high housing costs in the
area.
If
we fail to manage our growth effectively, we may be unable to execute our
business plan.
Our future growth, if any,
may cause a significant strain on our management, and our operational, financial
and other resources. Our ability to manage our growth effectively will require
us to implement and improve our operational, financial and management
information systems and to expand, train, manage and motivate our employees.
These demands may require the hiring of additional management personnel and the
development of additional expertise by management. Any increase in resources
devoted to research and product development without a corresponding increase in
our operational, financial and management information systems could have a
material adverse effect on our business, financial condition, and results of
operations.
It
may be difficult to recruit and retain independent members for our Board of
Directors.
The burdens being placed
on the members of a board of directors by applicable laws and regulations are
making it increasingly difficult to recruit qualified candidates to be members
of a board of directors of a public company. These same burdens may make it
increasingly difficult to retain members of our Board of Directors. If we are
unable to maintain a Board of Directors in which our shareholders have
confidence, this could have an adverse impact on shareholder confidence and on
the price of our stock.
If
our facilities become inoperable, we will be unable to perform our research and
development activities, fulfill the requirements under our collaboration
agreement and continue developing products and, as a result, our business will
be harmed.
We do not have redundant
laboratory facilities. We perform substantially all of our research, development
and testing in our laboratory located in Emeryville, California. Emeryville is
situated on or near active earthquake fault lines. Our facility and the
equipment we use to perform our research, development and testing would be
costly to replace and could require substantial lead time to repair or replace.
The facility may be harmed or rendered inoperable by natural or man-made
disasters, including earthquakes, flooding and power outages, which may render
it difficult or impossible for us to perform our research, development and
testing for some period of time. The inability to perform our research and
development activities may result in the loss of partners or harm our
reputation, and we may be unable to regain those partnerships in the future. Our
insurance coverage for damage to our property and the disruption of our business
may not be sufficient to cover all of our potential losses, including the loss
of time as well as the costs of lost opportunities, and may not continue to be
available to us on acceptable terms, or
at all.
Obtaining
regulatory approval in the United States does not ensure we will obtain
regulatory approval in other countries
.
We will aim to obtain
regulatory approval in the United States as well as in other countries. To
obtain regulatory approval to market our proposed products outside of the United
States, we and any collaborator must comply with numerous and varying regulatory
requirements in other countries regarding safety and efficacy. Approval
procedures vary among countries and can involve additional product testing and
additional administrative review periods. The time required to obtain approval
in other countries might differ significantly from that required to obtain FDA
approval. The regulatory approval process in other countries include all of the
risk associated with FDA approval as well as additional, presently unanticipated
risks. Regulatory approval in one country does not ensure regulatory approval in
another, but a failure or delay in obtaining regulatory approval in one country
may negatively impact the regulatory process in others. Failure to obtain
regulatory approval in other countries or any delay or setback in obtaining such
approval could have the same adverse effects associated with regulatory approval
in the United States, including the risk that our product candidates may not be
approved for all indications requested and that such approval may be subject to
limitations on the indicated uses for which the product may be marketed. In
addition, failure to comply with applicable regulatory requirements in other
countries can result in, among other things, warning letters, fines,
injunctions, civil penalties, recall or seizure of products, total or partial
suspension of production, refusal of the government to renew marketing
applications and criminal prosecution.
If
we are unable to design, conduct and complete clinical trials successfully, we
will not be able to obtain regulatory approval for our products.
In order to obtain FDA
approval for some of our product candidates, we must submit to the FDA a New
Drug Application, or NDA, demonstrating that the product candidate is safe and
effective for its intended use. This demonstration requires significant research
and animal tests, which are referred to as preclinical studies, as well as human
tests, which are referred to as clinical trials.
Any clinical trials we
conduct or that are conducted by our partners may not demonstrate the safety or
efficacy of our product candidates. Success in pre-clinical testing and early
clinical trials does not ensure that later clinical trials will be successful.
Results of later clinical trials may not replicate the results of prior clinical
trials and pre-clinical testing. Even if the results of one or more of our
clinical trials are positive, we may have to commit substantial time and
additional resources to conducting further preclinical studies or clinical
trials before we can submit NDAs or obtain FDA approvals for our product
candidates, and positive results of a clinical trial may not be replicated in
subsequent trials.
Clinical trials are very
expensive and difficult to design and implement. The clinical trial process is
also time-consuming. Furthermore, if participating patients in clinical studies
suffer drug-related adverse reactions during the course of such trials, or if we
or the FDA believe that participating patients are being exposed to unacceptable
health risks, we will have to suspend or terminate our clinical trials. Failure
can occur at any stage of the trials, and we could encounter problems that cause
us to abandon clinical trials or to repeat clinical studies.
In
addition, the completion of clinical trials can be delayed by numerous factors,
including:
|
•
|
|
delays
in identifying and agreeing on acceptable terms with prospective clinical
trial sites;
|
|
•
|
|
slower
than expected rates of patient recruitment and
enrollment;
|
|
•
|
|
increases
in time required to complete monitoring of patients during or after
participation in a trial; and
|
|
•
|
|
unexpected need for
additional patient
-related
data.
|
Any of these delays, if
significant, could impact the timing, approval and commercialization of our
product candidates and could significantly increase our overall costs of drug
development.
Even if our clinical
trials are completed as planned, their results may not support our expectations
or intended marketing claims. The clinical trials process may fail to
demonstrate that our products are safe and effective for indicated uses. Such
failure would cause us to abandon a product candidate for some indications and
could delay development of other product candidates.
Government
agencies may establish usage guidelines that directly apply to our proposed
products or change legislation or regulations to which we are
subject.
Government usage
guidelines typically address matters such as usage and dose, among other
factors. Application of these guidelines could limit the use of products that we
may develop. In addition there can be no assurance that government regulations
applicable to our proposed products or the interpretation thereof will not
change and thereby prevent the marketing of some or all of our products for a
period of time or permanently. The FDA’s policies may change and additional
government regulations may be enacted that could prevent or delay regulatory
approval of our product candidates. We cannot predict the likelihood, nature or
extent of adverse government regulation that may arise from future legislation
or administrative action, either in the United States or in other
countries.
Our
product candidates may be classified as a drug or a medical device, depending on
the indication of use and prior precedent, and a change in the classification
may have an adverse impact on our revenues or our ability to obtain necessary
regulatory approvals.
Several potential
indications for our product candidates may be regulated under the medical device
regulations of the FDA administered by the Center for Devices and Radiological
Health or by the Center for Drug Evaluation and Research and the same physical
product may be regulated by one such agency for one indication and the other
agency for another indication. Our products may be classified by the FDA as a
drug or a medical device depending upon the indications for use or claims. For
example, for NVC-422, if the indication is for bladder lavage, we believe it
would be classified as a medical device, whereas we believe it would be
considered a drug when it is indicated for the prevention of urinary tract
infection. Similarly, the use of NVC-101 as a solution for cleansing and
debriding wounds would be considered as a medical device. In addition, the
determination as to whether a particular indication is considered a drug or a
device is based in part upon prior precedent. A reclassification by the FDA of
an indication from a device to a drug indication during our development for that
indication could have a significant adverse impact due to the more rigorous
approval process required for drugs, as compared to medical devices. Such a
change in classification can significantly increase development costs and
prolong the time for development and approval, thus delaying revenues. A
reclassification of an indication after approval from a drug to a device could
result in a change in classification for reimbursement. In many cases,
reimbursement for devices is significantly lower than for drugs and there could
be a significant negative impact on our revenues.
Conducting
clinical trials of our product candidates may expose us to expensive liability
claims, and we may not be able to maintain liability insurance on reasonable
terms or at all.
The risk of clinical trial
liability is inherent in the testing of pharmaceutical and medical device
products. If we cannot successfully defend ourselves against any clinical trial
claims, we may incur substantial liabilities or be required to limit or
terminate testing of one or more of our product candidates. Our inability to
obtain sufficient clinical trial insurance at an acceptable cost to protect us
against potential clinical trial claims could prevent or inhibit the
commercialization of our product candidates. Our current clinical trial
insurance covers individual and aggregate claims up to $3 million. This
insurance may not cover all claims and we may not be able to obtain additional
insurance coverage at a reasonable cost, if at all, in the future. In addition,
if our agreements with any future corporate collaborators entitle us to
indemnification against product liability losses and clinical trial liability,
such indemnification may not be available or adequate should any claim
arise.
If
product liability lawsuits are brought against us, they could result in costly
litigation and significant liabilities.
The product candidates we
are developing or attempting to develop will, in most cases, undergo extensive
clinical testing and will require regulated approval from the applicable
regulatory authorities prior to sale. However, despite all reasonable efforts to
ensure safety, it is possible that we or our collaborators will sell products
which are defective, to which patients react in an unexpected manner, or which
are alleged to have side effects. The manufacture and sale of such products may
expose us to potential liability, and the industries in which our products are
likely to be sold have been subject to significant product liability litigation.
Any claims, with or without merit, could result in costly litigation, reduced
sales, significant liabilities and diversion of our management’s time and
attention and could have a material adverse effect on our financial condition,
business and results of operations.
If a product liability
claim is brought against us, we may be required to pay legal and other expenses
to defend the claim and, if the claim is successful, damage awards may not be
covered, in whole or in part, by our insurance. We may not have sufficient
capital resources to pay a judgment, in which case our creditors could levy
against our assets. We may also be obligated to indemnify our collaborators and
make payments to other parties with respect to product liability damages and
claims. Defending any product liability claims, or indemnifying others against
those claims, could require us to expend significant financial and managerial
resources.
If
we receive regulatory approval for drug products that we develop, we and our
collaborators will also be subject to ongoing FDA obligations and continued
regulatory review, such as continued safety reporting requirements, and we and
our collaborators may also be subject to additional FDA post-marketing
obligations or new regulations, all of which may result in significant expense
and which may limit our ability to commercialize our potential drug
products.
Any regulatory approvals
that we receive for drug products that we develop may also be subject to
limitations on the indicated uses for which the drug may be marketed or contain
requirements for potentially costly post-marketing follow-up studies. The FDA
may require us to commit to perform lengthy Phase IV post-approval studies (as
further described below), for which we would have to expend additional
resources, which could have an adverse effect on our operating results and
financial condition. In addition, if the FDA approves any of our drug product
candidates, the labeling, packaging, adverse event reporting, storage,
advertising, promotion and record keeping for the drug will be subject to
extensive regulatory requirements. The subsequent discovery of previously
unknown problems with the drugs, including adverse events of unanticipated
severity or frequency, may result in restrictions on the marketing of the drugs
or the withdrawal of the drugs from the market. If we are not able to maintain
regulatory compliance, we may be subject to fines, suspension or withdrawal of
regulatory approvals, product recalls, seizure of products, operating
restrictions and criminal prosecution. Any of these events could prevent us from
marketing any products we may develop and our business could
suffer.
Failure
to obtain sufficient quantities of products and substances necessary for
research and development, pre-clinical trials, human clinical trials and product
commercialization that are of acceptable quality at reasonable prices or at all
could constrain our product development and have a material adverse effect on
our business.
We have relied and will
continue to rely on contract manufacturers for the foreseeable future to produce
quantities of products and substances necessary for research and development,
pre-clinical trials, human clinical trials and product commercialization. It
will be important to us that such products and substances can be manufactured at
a cost and in quantities necessary to make them commercially viable. At this
point in time, we have not attempted to identify, and do not know whether there
will be, any third party manufacturers which will be able to meet our needs with
respect to timing, quantity and quality for commercial production. In addition,
if we are unable to contract for a sufficient supply or required products and
substances on acceptable terms, or if we should encounter delays or difficulties
in our relationships with manufacturers, our research and development,
pre-clinical and clinical testing would be delayed, thereby delaying the
submission of product candidates for regulatory approval or the market
introduction and subsequent sales of products. Any such delay may have a
material adverse effect on our business, financial condition and results of
operations.
If
we use biological and hazardous materials in a manner that causes injury, we
could be liable for damages. Compliance with environmental regulations can be
expensive, and noncompliance with these regulations may result in adverse
publicity and potentially significant monetary damages and fines.
Our activities currently
require the controlled use of potentially harmful biological materials and other
hazardous materials and chemicals and may in the future require the use of
radioactive compounds. We cannot eliminate the risk of accidental contamination
or injury to employees or third parties from the use, storage, handling or
disposal of these materials. In the event of contamination or injury, we could
be held liable for any resulting damages, and any liability could exceed our
resources or any applicable insurance coverage we may have. Additionally, we are
subject, on an ongoing basis, to U.S. federal, state and local laws and
regulations governing the use, storage, handling and disposal of these materials
and specified waste products. The cost of compliance with these laws and
regulations might be significant and could negatively affect our operating
results. In addition, if more stringent laws and regulations are adopted in the
future, the costs of compliance with these new laws and regulations could be
substantial or could impose significant changes in our testing and production
process.
Because
our clinical development activities rely heavily on sensitive and personal
information, an area which is highly regulated by privacy laws, we may not be
able to generate, maintain or access essential patient samples or data to
continue our research and development efforts in the future on reasonable terms
and conditions, which may adversely affect our business.
As a result of our
clinical development, we will have access to very sensitive data regarding the
patients enrolled in our clinical trials. This data will contain information
that is personal in nature. The maintenance of this data is subject to certain
privacy-related laws, which impose upon us administrative and financial burdens,
and litigation risks. For instance, the rules promulgated by the Department of
Health and Human Services under the Health Insurance Portability and
Accountability Act, or HIPAA, creates national standards to protect patients’
medical records and other personal information in the United States. These rules
require that healthcare providers and other covered entities obtain written
authorizations from patients prior to disclosing protected health care
information of the patient to companies like NovaBay. If the patient fails to
execute an authorization or the authorization fails to contain all required
provisions, then we will not be allowed access to the patient’s information and
our research efforts can be substantially delayed. Furthermore, use of protected
health information that is provided to us pursuant to a valid patient
authorization is subject to the limits set forth in the authorization (i.e., for
use in research and in submissions to regulatory authorities for product
approvals). As such, we are required to implement policies, procedures and
reasonable and appropriate security measures to protect individually
identifiable health information we receive from covered entities, and to ensure
such information is used only as authorized by the patient. Any violations of
these rules by us could subject us to civil and criminal penalties and adverse
publicity, and could harm our ability to initiate and complete clinical studies
required to support regulatory applications for our proposed products. In
addition, HIPAA does not replace federal, state, or other laws that may grant
individuals even greater privacy protections. We can provide no assurance that
future legislation will not prevent us from generating or maintaining personal
data or that patients will consent to the use of their personal information,
either of which may prevent us from undertaking or publishing essential
research. These burdens or risks may prove too great for us to reasonably bear,
and may adversely affect our ability to function profitably in the
future.
We
may be subject to fines, penalties, injunctions and other sanctions if we are
deemed to be promoting the use of our products for non-FDA-approved, or
off-label, uses.
Our business and future
growth depend on the development, use and ultimate sale of products that are
subject to FDA regulation, clearance and approval. Under the U.S. Federal Food,
Drug, and Cosmetic Act and other laws, we are prohibited from promoting our
products for off-label uses. This means that we may not make claims about the
safety or effectiveness of our products and may not proactively discuss or
provide information on the use of our products, except as allowed by the
FDA.
There is a risk that the
FDA or other federal or state law enforcement authorities could determine that
the nature and scope of our sales and marketing activities may constitute the
promotion of our products for a non-FDA-approved use in violation of applicable
law. We also face the risk that the FDA or other regulatory authorities might
pursue enforcement based on past activities that we have discontinued or
changed, including sales activities, arrangements with institutions and doctors,
educational and training programs and other activities.
Government investigations
concerning the promotion of off-label uses and related issues are typically
expensive, disruptive and burdensome and generate negative publicity. If our
promotional activities are found to be in violation of applicable law or if we
agree to a settlement in connection with an enforcement action, we would likely
face significant fines and penalties and would likely be required to
substantially change our sales, promotion, grant and educational activities. In
addition, were any enforcement actions against us or our senior officers to
arise, we could be excluded from participation in U.S. government healthcare
programs such as Medicare and Medicaid.
If
we are unable to protect our intellectual property, our competitors could
develop and market products similar to ours that may reduce demand for our
products.
Our success, competitive
position and potential future revenues will depend in significant part on our
ability to protect our intellectual property. We rely on the patent, trademark,
copyright and trade secret laws of the United States and other countries, as
well as confidentiality and nondisclosure agreements, to protect our
intellectual property rights. We apply for patents covering our technologies as
we deem appropriate. We have registered the NovaBay trademark and design in the
United States, and the Aganocide trademark in the United States, the European
Community and Japan. We have allowed trademark applications in the United States
for AgaNase, NeutroPhase, and NovaBay. We have registered the NovaBay trademark
in Australia, the AgaNase trademark in Australia, the European Community, South
Korea and Japan, the NeutroPhase trademark in Australia, Ireland and the United
Kingdom, and have applications for these same trademarks pending in a number of
other foreign countries.
We have two issued
patents, one allowed patent application and six pending applications in the
United States. We also have two pending international applications filed
under the Patent Cooperation Treaty, one issued patent each in China, Hong Kong,
Israel, India, Mexico, and South Korea, and 46 pending foreign national
applications in Europe, Argentina, Australia, Brazil, Canada, China, Hong Kong,
Israel, India, Japan, South Korea, Mexico, Singapore, New Zealand, Taiwan and
South Africa.
The subject matter of our
patents and patent applications cover three key areas: methods relating to the
manufacture and use of NVC-101, composition of matter of the Aganocide compounds
and their compositions, and methods of treatment utilizing the Aganocide
compounds.
Our first issued patent in
the U.S. provides coverage for a method of treating burns or promoting wound
healing, tissue repair or tissue regeneration using a specific range of
formulations of NVC-101. This patent was issued on July 30, 2002 and
will expire in 2020. The second issued patent in the U.S. provides
coverage for a method of disinfecting open wounds and burns, promoting wound
healing and providing ocular disinfection using a specific range of formulations
of NVC-101. This patent was issued on July 1, 2008 and will expire in
2024.
The allowed application
claims the composition of matter for NVC-422 and other Aganocide
compounds. Once issued, it is expected to expire in
2026.
NovaBay aggressively
protects and enforces its patent rights worldwide. However, certain
risks remain. We cannot assure you that patents will issue from any
of our applications or, for those patents that do issue, that the claims will be
sufficiently broad to protect our proprietary rights, or that it will be
economically possible to pursue sufficient numbers of patents to afford
significant protection. In addition, we cannot assure you that any patents
issued to us or licensed or assigned to us by third parties will not be
challenged, invalidated, found unenforceable or circumvented, or that the rights
granted thereunder will provide competitive advantages to us. If we or our
collaborators or licensors fail to file, prosecute or maintain certain patents,
our competitors could market products that contain features and clinical
benefits similar to those of any products we develop, and demand for our
products could decline as a result. Further, although we have taken steps to
protect our intellectual property and proprietary technology, we cannot assure
you that third parties will not be able to design around our patents or, if they
do infringe upon our technology, that we will be successful or have sufficient
resources in pursuing a claim of infringement against those third parties. Any
pursuit of an infringement claim by us may involve substantial expense and
diversion of management attention.
We also rely on trade
secrets and proprietary know-how that we seek to protect by confidentiality
agreements with our employees, consultants and collaborators. We cannot assure
you that these agreements will be enforceable, will not be breached, that we
will have adequate remedies for any breach, or that our trade secrets and
proprietary know-how will not otherwise become known or be independently
discovered by competitors.
We operate in the State of
California. The laws of the State prevent us from imposing a delay
before an employee who may have access to trade secrets and proprietary know-how
can commence employment with a competing company. Although we may be able to
pursue legal action against competitive companies improperly using our
proprietary information, we may not be aware of any use of our trade secrets and
proprietary know-how until after significant damage has been done to our
company.
Furthermore, the laws of
foreign countries may not protect our intellectual property rights to the same
extent as the laws of the United States. If our intellectual property does not
provide significant protection against foreign or domestic competition, our
competitors, including generic manufacturers, could compete more directly with
us, which could result in a decrease in our market share. All of these factors
may harm our competitive position.
If
we are unable to protect the intellectual property and market exclusivity of
Aganocide compounds and products, thereby enabling other parties to
commercialize competing products, our ability to generate revenues from the sale
of our products may be limited or diminished.
We have filed patent
applications with claims directed to the Aganocide compounds and claims directed
to the method of using the Aganocide compounds with the United States Patent and
Trademark Office, or USPTO, and related international patent applications in
Argentina, Australia, Brazil, Canada, China, the European Patent Office, Hong
Kong, Israel, India, Japan, South Korea, Mexico, New Zealand, Singapore and
Taiwan. The first of these patents has issued in the U.S. However, we
cannot assure you that any additional patents will eventually be issued from the
U.S. or international patent applications. Should we be unable to obtain patents
with sufficiently broad scope to protect our proprietary rights, the interest of
potential partners for the development and commercialization of our Aganocide
products could be greatly diminished.
If no such patents are
issued or if they are issued but are later found invalid or unenforceable or are
not of sufficient scope, or after such patents expire in a given jurisdiction,
our competitors may produce generic products and make them available at a cost
that is cheaper than the price at which we, or our commercial partners, would
offer to sell any Aganocide products we develop.
Also, we do not have any
composition of matter patent directed to the NVC-101 composition. If a potential
competitor introduces a similar method of using NVC-101 with a similar
composition that does not fall within the scope of the method of treatment
claims, then we or a potential marketing partner would be unable to rely on the
allowed claims to protect its market position for the method of using the
NVC-101 composition, and any revenues arising from such protection would be
adversely impacted.
We
may be subject to damages resulting from claims that we or our employees have
wrongfully used or disclosed alleged trade secrets of their former
employers.
Some of
our employees may have been previously employed at universities or other
biotechnology or pharmaceutical companies, including our competitors or
potential competitors. Although no claims against us are currently pending, we
may be subject to claims that these employees or we have inadvertently or
otherwise used or disclosed trade secrets or other proprietary information of
their former employers. Litigation may be necessary to defend against these
claims. Even if we are successful in defending against these claims, litigation
could result in substantial costs and be a distraction to management. If we fail
in defending such claims, in addition to paying money damages, we may lose
valuable intellectual property rights or personnel. A loss of key research
personnel or their work product could hamper or prevent our ability to
commercialize product candidates, which could severely harm our
business.
The
pharmaceutical and biopharmaceutical industries are characterized by patent
litigation and any litigation or claim against us may cause us to incur
substantial costs, and could place a significant strain on our financial
resources, divert the attention of management from our business and harm our
reputation.
There has been substantial
litigation in the pharmaceutical and biopharmaceutical industries with respect
to the manufacture, use and sale of new products that are the subject of
conflicting patent rights. For the most part, these lawsuits relate to the
validity, enforceability and infringement of patents. Generic companies are
encouraged to challenge the patents of pharmaceutical products in the United
States because a successful challenger can obtain nine months of exclusivity as
a generic product under the Waxman-Hatch Act. We expect that we will rely upon
patents, trade secrets, know-how, continuing technological innovations and
licensing opportunities to develop and maintain our competitive position and we
may initiate claims to defend our intellectual property rights as a result.
Other parties may have issued patents or be issued patents that may prevent the
sale of our products or know-how or require us to license such patents and pay
significant fees or royalties in order to produce our products. In addition,
future patents may issue to third parties which our technology may infringe.
Because patent applications can take many years to issue, there may be
applications now pending of which we are unaware that may later result in issued
patents that our products may infringe.
Intellectual property
litigation, regardless of outcome, is expensive and time-consuming, could divert
management’s attention from our business and have a material negative effect on
our business, operating results or financial condition. If such a dispute were
to be resolved against us, we may be required to pay substantial damages,
including treble damages and attorneys fees if we were to be found to have
willfully infringed a third party’s patent, to the party claiming infringement,
develop non-infringing technology, stop selling any products we develop, cease
using technology that contains the allegedly infringing intellectual property or
enter into royalty or license agreements that may not be available on acceptable
or commercially practical terms, if at all. Our failure to develop
non-infringing technologies or license the proprietary rights on a timely basis
could harm our business. Modification of any products we develop or development
of new products thereafter could require us to conduct additional clinical
trials and to revise our filings with the FDA and other regulatory bodies, which
would be time-consuming and expensive. In addition, parties making infringement
claims may be able to obtain an injunction that would prevent us from selling
any products we develop, which could harm our business.
If
bacteria develop resistance to Aganocide compounds, our revenues could be
significantly reduced.
Based on our understanding
of the hypothesis of the mechanism of action of our Aganocide compounds, we do
not expect bacteria to be able to develop resistance to Aganocide compounds.
However, we cannot assure you that one or more strains of bacteria will not
develop resistance to our compounds, either because our hypothesis of the
mechanism of action is incorrect or because a strain of bacteria undergoes some
unforeseen genetic mutation that permits it to survive. Since we expect lack of
resistance to be a major factor in the commercialization of our product
candidates, the discovery of such resistance would have a major adverse impact
on the acceptability and sales of our products.
If
physicians and patients do not accept and use our products, we will not achieve
sufficient product revenues and our business will suffer.
Even if the FDA approves
any product candidates that we develop, physicians and patients may not accept
and use them. Acceptance and use of our products may depend on a number of
factors including:
|
•
|
|
perceptions
by members of the healthcare community, including physicians, about the
safety and effectiveness of our
products;
|
|
•
|
|
published
studies demonstrating the cost-effectiveness of our products relative to
competing products;
|
|
•
|
|
availability
of reimbursement for our products from government or healthcare payers;
and
|
|
•
|
|
effectiveness
of marketing and distribution efforts by us and our licensees and
distributors, if any.
|
The failure of any of our
products to find market acceptance would harm our business and could require us
to seek additional financing.
If
we are unable to develop our own sales, marketing and distribution capabilities,
or if we are not successful in contracting with third parties for these services
on favorable terms, or at all, revenues from any products we develop could be
disappointing.
We currently have no
internal sales, marketing or distribution capabilities. In order to
commercialize any product candidates approved by the FDA, we will either have to
develop such capabilities internally or collaborate with third parties who can
perform these services for us. If we decide to commercialize any products we
develop, we may not be able to hire the necessary experienced personnel and
build sales, marketing and distribution operations which are capable of
successfully launching new products and generating sufficient product revenues.
In addition, establishing such operations will take time and involve significant
expense.
If we decide to enter into
co-promotion or other licensing arrangements with third parties, we may be
unable to identify acceptable partners because the number of potential partners
is limited and because of competition from others for similar alliances with
potential partners. Even if we are able to identify one or more acceptable
partners, we may not be able to enter into any partnering arrangements on
favorable terms, or at all. If we enter into any partnering arrangements, our
revenues are likely to be lower than if we marketed and sold our products
ourselves.
In addition, any revenues
we receive would depend upon our partners’ efforts which may not be adequate due
to lack of attention or resource commitments, management turnover, change of
strategic focus, further business combinations or other factors outside of our
control. Depending upon the terms of our agreements, the remedies we have
against an under-performing partner may be limited. If we were to terminate the
relationship, it may be difficult or impossible to find a replacement partner on
acceptable terms, or at all.
If
we cannot compete successfully for market share against other companies, we may
not achieve sufficient product revenues and our business will
suffer.
The market for our product
candidates is characterized by intense competition and rapid technological
advances. If our product candidates receive FDA approval, they will compete with
a number of existing and future drugs, devices and therapies developed,
manufactured and marketed by others. Existing or future competing products may
provide greater therapeutic convenience or clinical or other benefits for a
specific indication than our products, or may offer comparable performance at a
lower cost. If our products are unable to capture and maintain market share, we
may not achieve sufficient product revenues and our business will
suffer.
We will compete for market
share against fully integrated pharmaceutical companies or other companies that
develop products independently or collaborate with larger pharmaceutical
companies, academic institutions, government agencies and other public and
private research organizations. In addition, many of these competitors, either
alone or together with their collaborative partners, have substantially greater
capital resources, larger research and development staffs and facilities, and
greater financial resources than we do, as well as significantly greater
experience in:
|
•
|
|
developing
drugs and devices;
|
|
•
|
|
conducting
preclinical testing and human clinical
trials;
|
|
•
|
|
obtaining
FDA and other regulatory approvals of product
candidates;
|
|
•
|
|
formulating
and manufacturing products; and
|
|
•
|
|
launching,
marketing, distributing and selling
products.
|
Our
competitors may:
|
•
|
|
develop
and patent processes or products earlier than we
will;
|
|
•
|
|
develop
and commercialize products that are less expensive or more efficient than
any products that we may develop;
|
|
•
|
|
obtain
regulatory approvals for competing products more rapidly than we will;
and
|
|
•
|
|
improve
upon existing technological approaches or develop new or different
approaches that render any technology or products we develop obsolete or
uncompetitive.
|
We cannot assure you that
our competitors will not succeed in developing technologies and products that
are more effective than any developed by us or that would render our
technologies and any products we develop obsolete. If we are unable to compete
successfully against current or future competitors, we may be unable to obtain
market acceptance for any product candidates that we create, which could prevent
us from generating revenues or achieving profitability and could cause the
market price of our common stock to decline.
Our
ability to generate revenues from any products we develop will be diminished if
we fail to obtain acceptable prices or an adequate level of reimbursement for
our products from healthcare payers.
Our ability to
commercialize our product candidates will depend, in part, on the extent to
which health insurers, government authorities and other third-party payers will
reimburse the costs of products which may be developed by us or our partners. We
expect that a portion of our economic return from partnering arrangements with
pharmaceutical companies and other collaborators will be derived from royalties,
fees or other revenues linked to final sales of products that we or our partners
develop. Newly-approved pharmaceuticals and other products which are developed
by us or our partners will not necessarily be reimbursed by third-party payers
or may not be reimbursed at levels sufficient to generate significant sales.
Government and other third-party payers are increasingly attempting to contain
health care costs by limiting both coverage and the level of reimbursement for
new drugs or medical devices. Cost control initiatives such as these could
adversely affect our or our collaborators’ ability to commercialize products. In
addition, real or anticipated cost control initiatives for final products may
reduce the willingness of pharmaceutical companies or other potential partners
to collaborate with us on the development of new products.
Significant uncertainty
exists as to the reimbursement status of newly-approved healthcare products.
Healthcare payers, including Medicare, health maintenance organizations and
managed care organizations, are challenging the prices charged for medical
products or are seeking pharmacoeconomic data to justify formulary acceptance
and reimbursement practices. We currently have not generated pharmacoeconomic
data on any of our product candidates. Government and other healthcare payers
increasingly are attempting to contain healthcare costs by limiting both
coverage and the level of reimbursement for drugs and medical devices, and by
refusing, in some cases, to provide coverage for uses of approved products for
disease indications for which the FDA has or has not granted labeling approval.
Adequate third-party insurance coverage may not be available to patients for any
products we discover and develop, alone or with collaborators. If government and
other healthcare payers do not provide adequate coverage and reimbursement
levels for our products, market acceptance of our product candidates could be
limited.
A
significant terrorist attack or threat of such attack may adversely impact our
ability to obtain financing.
A major terrorist attack,
the threat of such attack or other unforeseen events beyond our control, may
occur at a time when we need to raise additional financing. Closure or severe
perturbation of the financial markets as a result of such events may make such
financing impossible or unattractive and our plans may be seriously disrupted.
As a consequence, the progress of the company towards revenues or profits could
be significantly impaired.
Our
amended and restated articles of incorporation and bylaws and California law,
contain provisions that could discourage a third party from making a takeover
offer that is beneficial to our shareholders.
Anti-takeover provisions
of our amended and restated articles of incorporation, amended and restated
bylaws and California law may have the effect of deterring or delaying attempts
by our shareholders to remove or replace management, engage in proxy contests
and effect changes in control. The provisions of our charter documents
include:
|
•
|
|
a
classified board so that only one of the three classes of directors on our
Board of Directors is elected each
year;
|
|
•
|
|
elimination
of cumulative voting in the election of
directors;
|
|
•
|
|
procedures
for advance notification of shareholder nominations and
proposals;
|
|
•
|
|
the
ability of our Board of Directors to amend our bylaws without shareholder
approval; and
|
|
•
|
|
the
ability of our Board of Directors to issue up to 5,000,000 shares of
preferred stock without shareholder approval upon the terms and conditions
and with the rights, privileges and preferences as our Board of Directors
may determine.
|
In addition, as a
California corporation, we are subject to California law, which includes
provisions that may have the effect of deterring hostile takeovers or delaying
or preventing changes in control or management of our company. Provisions of the
California Corporations Code could make it more difficult for a third party to
acquire a majority of our outstanding voting stock by discouraging a hostile
bid, or delaying, preventing or deterring a merger, acquisition or tender offer
in which our shareholders could receive a premium for their shares, or effect a
proxy contest for control of NovaBay or other changes in our
management.
We
have not paid dividends in the past and do not expect to pay dividends in the
future, and any return on investment may be limited to the value of our
stock.
We have never paid cash
dividends on our common stock and do not anticipate paying cash dividends on our
common stock in the foreseeable future. The payment of dividends on our common
stock will depend on our earnings, financial condition and other business and
economic factors affecting us at such time as our Board of Directors may
consider relevant. If we do not pay dividends, you will experience a return on
your investment in our shares only if our stock price appreciates. We cannot
assure you that you will receive a return on your investment when you do sell
your shares or that you will not lose the entire amount of your
investment.
We
may be considered a “foreign investment entity” which may have adverse Canadian
tax consequences for our Canadian investors.
Although we believe that
we are not currently a “foreign investment entity” within the meaning of the FIE
Tax Proposals (as defined in “Material Canadian Federal Income Tax
Considerations—Foreign Investment Entity Status”), no assurances can be given in
this regard or as to our status in the future. If we become a “foreign
investment entity” within the meaning of the FIE Tax Proposals, there may be
certain adverse tax consequences for our Canadian investors.
Because
we are a California corporation and the majority of our directors and officers
are resident in the United States, it may be difficult for investors in Canada
to enforce against us certain civil liabilities and judgments based solely upon
the securities laws of Canada.
We are organized under the
laws of California and our principal executive offices are located in
California. A majority of the directors and officers and the experts named in
this report reside principally in the United States and all or a substantial
portion of their assets and all or a substantial portion of our assets are
located in the United States. Consequently, it may be difficult for shareholders
to effect service of process within Canada upon us or our directors, officers or
experts who are residents of the United States. Furthermore, it may not be
possible to enforce against us or such directors, officers or experts, in the
United States, judgments obtained in Canadian courts, including judgments based
upon the civil liability provisions of applicable Canadian securities
law.