S-1/A 1 d178027ds1a.htm AMENDMENT NO. 4 TO FORM S-1 Amendment No. 4 to Form S-1
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As filed with the Securities and Exchange Commission on July 13, 2012

Registration Statement File No. 333-180694

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 4

to

Form S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

HYPERION THERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   2834   61-1512713

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial Classification

Code Number)

  (I.R.S. Employer Identification Number)

601 Gateway Boulevard, Suite 200

South San Francisco, California 94080

(650) 745-7802

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Donald J. Santel

Chief Executive Officer

Hyperion Therapeutics, Inc.

601 Gateway Boulevard, Suite 200

South San Francisco, California 94080

(650) 745-7802

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Laura A. Berezin

Jon Layman

Hogan Lovells US LLP

525 University Avenue

Palo Alto, CA 94301

(650) 463-4000

 

Jeffrey S. Farrow

Chief Financial Officer

Hyperion Therapeutics, Inc.

601 Gateway Boulevard, Suite 200
South San Francisco, CA 94080

(650) 745-7802

 

Mark B. Weeks

Brett D. White

Cooley LLP

3175 Hanover Street

Palo Alto, CA 94304

(650) 843-5000

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.    ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨            

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨            

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨            

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of
Securities to be Registered
  Amount of Shares to
be Registered(1)
  Proposed Maximum
Offering
Price Per Share(2)
 

Proposed Maximum

Aggregate Offering
Price(2)

 

Amount of

Registration Fee(3)

Common Stock, $0.0001 par value per share

  4,791,667   $13.00   $62,291,671   $7,140

 

 

(1) Includes the shares of common stock that the underwriters have an option to purchase to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457(a) under the Securities Act of 1933, as amended.
(3) The total registration fee includes $6,590 that was previously paid on April 12, 2012.

The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 


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The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is declared effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED JULY 13, 2012

PROSPECTUS 

4,166,667 Shares

 

LOGO

Common Stock

Hyperion Therapeutics, Inc. is offering 4,166,667 shares of common stock. This is our initial public offering, and no public market currently exists for our common stock. We anticipate that the initial public offering price will be between $11.00 and $13.00 per share.

We have applied to list our common stock on The NASDAQ Global Market under the symbol “HPTX.”

Investing in our common stock involves risks. See “Risk Factors” beginning on page 10.

We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 and will be subject to reduced public company reporting requirements.

 

     Per Share     

Total

 

Initial public offering price

   $                    $                

Underwriting discounts and commissions

   $         $     

Proceeds, before expenses, to us

   $         $     

Certain of our existing stockholders, including certain affiliates of our directors, have indicated an interest in purchasing an aggregate of approximately $22.0 million of shares of our common stock in this offering at the initial public offering price. However, because indications of interest are not binding agreements or commitments to purchase, the underwriters may determine to sell more, less or no shares in this offering to any of these stockholders, or any of these stockholders may determine to purchase more, less or no shares in this offering.

We have granted the underwriters an option for 30 days from the date of this prospectus to purchase up to 625,000 additional shares of our common stock at the initial public offering price, less underwriting discounts and commissions, to cover over-allotments.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares of common stock on or about                     , 2012.

 

 

 

Leerink Swann   Cowen and Company

Joint Book-Running Managers

 

Needham & Company

The date of this prospectus is                     , 2012.


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TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1   

Risk Factors

     10   

Special Note Regarding Forward-Looking Statements

     42   

Use of Proceeds

     43   

Dividend Policy

     43   

Capitalization

     44   

Dilution

     47   

Selected Consolidated Financial Data

     50   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     52   

Business

     76   

Management

     110   

Executive Compensation

     119   

Certain Relationships and Related Person Transactions

     134   

Principal Stockholders

     141   

Description of Capital Stock

     146   

Shares Eligible For Future Sale

     151   

Material U.S. Federal Income and Estate Tax Consequences to Non-U.S. Holders

     154   

Underwriting

     158   

Legal Matters

     163   

Experts

     163   

Where You Can Find More Information

     163   

Index to Consolidated Financial Statements

     F-1   

 

 

You should rely only on the information contained in this prospectus and any free writing prospectus prepared by or on behalf of us or to which we have referred you. We have not authorized anyone to provide you with information that is different. We are offering to sell shares of our common stock, and seeking offers to buy shares of our common stock, only in jurisdictions where offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of our common stock.

Until and including                     , 2012, 25 days after the date of this prospectus, all dealers that buy, sell or trade our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions.

For investors outside of the United States: neither we nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus.

In this prospectus, unless otherwise stated or the context otherwise indicates, references to “Hyperion,” “we,” “us,” “our” and similar references refer to Hyperion Therapeutics, Inc. and our wholly-owned subsidiary. The names Hyperion Therapeutics, Inc. TM and RavictiTM are our trademarks. BUPHENYL® and AMMONUL® are registered trademarks of Ucyclyd Pharma, Inc., a wholly owned subsidiary of Medicis Pharmaceutical Corporation. All other trademarks, trade names and service marks appearing in this prospectus are the property of their respective owners.

 

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. Before you decide to invest in our common stock, you should read the entire prospectus carefully, including the “Risk Factors” section and the financial statements and related notes appearing at the end of this prospectus.

Our Company

We are a biopharmaceutical company focused on the development and commercialization of novel therapeutics to treat disorders in the areas of orphan diseases and hepatology. We are developing Ravicti (glycerol phenylbutyrate) to treat the most prevalent urea cycle disorders, or UCD, and hepatic encephalopathy, or HE. UCD and HE are generally characterized by elevated levels of ammonia in the bloodstream. Elevated levels of ammonia are potentially toxic and can lead to severe medical complications which may include death. Ravicti is designed to lower ammonia in the blood. On December 23, 2011, we submitted an NDA for Ravicti for the chronic management of UCD in patients aged 6 years and above based on data from our pivotal Phase III trial in adult patients and the results of two Phase II trials, one in adults and one in pediatric patients aged 6 through 17 years. The U.S. Food and Drug Administration, or FDA, accepted the NDA for review in February 2012. Under the Prescription Drug User Fee Act, or PDUFA, the FDA is currently due to notify us regarding Ravicti’s approval status by October 23, 2012, unless that action date is extended by the FDA. In April 2012, we submitted data from the switchover portion of a clinical trial in UCD patients aged 29 days through 5 years and a revised draft package insert requesting approval of Ravicti to include this patient population. We currently expect to commercially launch Ravicti in the first half of 2013.

UCD are inherited rare genetic diseases caused by a deficiency of one or more enzymes or protein transporters that constitute the urea cycle, which in a healthy individual removes ammonia through the conversion of ammonia to urea. We believe UCD occur in approximately 1 in 10,000 births in the United States. Ravicti was granted orphan drug designation by the FDA for the maintenance treatment of patients with UCD. Orphan drug designation is given to a drug candidate intended to treat a rare disease or condition, which affects fewer than 200,000 individuals in the United States.

Currently, the only branded therapy approved by the FDA for chronic management of the most prevalent UCD is BUPHENYL® (sodium phenylbutyrate) Tablets and Powder, which is currently commercialized by Ucyclyd Pharma, Inc., or Ucyclyd, a wholly owned subsidiary of Medicis Pharmaceutical Corporation. We believe BUPHENYL use is limited due to the combination of high pill burden or large quantity of powder that must be taken, frequency of dosing (3-6 times per day), the unpleasant taste and smell, and tolerability issues. In addition, the sodium content of the maximum daily dose of BUPHENYL exceeds the FDA’s recommended daily allowance, which may lead to high blood pressure. Ravicti uses the same vehicle for ammonia removal as BUPHENYL but requires a much smaller volume of drug. For example, approximately 1 tablespoon of Ravicti liquid is equivalent to the FDA-approved maximum daily dose of 40 tablets of BUPHENYL. Furthermore, Ravicti is nearly tasteless and odorless and does not contain any sodium. Significantly elevated ammonia levels with corresponding neurological symptoms are known as hyperammonemic, or HA, crises. We believe that Ravicti may reduce HA crises as compared to BUPHENYL and, if approved, will offer benefits that enhance tolerability and increase compliance in support of improved disease management.

In March 2012, pursuant to an asset purchase agreement, or purchase agreement, with Ucyclyd we purchased all of the worldwide rights to Ravicti for an upfront payment of $6.0 million, future payments based upon the achievement of regulatory milestones in indications other than UCD, sales milestones, and mid to high single digit royalties on global net sales of Ravicti. Pursuant to an amended and restated collaboration agreement,

 

 

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or restated collaboration agreement, with Ucyclyd, also entered into in March 2012, we have an option to purchase all of Ucyclyd’s worldwide rights in BUPHENYL and AMMONUL® (sodium phenylacetate and sodium benzoate) injection 10%/10%, the only adjunctive therapy currently FDA-approved for the treatment of HA crises in patients with the most prevalent UCD, for an upfront payment of $22.0 million, plus subsequent milestone and royalty payments. To fund this upfront payment, we may choose to draw on a loan commitment from Ucyclyd, which loan would be payable over eight quarters. We will be permitted to exercise this option for a period of 90 days beginning on the earlier of the date of the approval of Ravicti for the treatment of UCD and June 30, 2013, but in no event earlier than January 1, 2013. If we exercise our option, Ucyclyd has a time-limited option to retain AMMONUL for a purchase price of $32.0 million. If Ucyclyd exercises its option under the restated collaboration agreement and retains AMMONUL, the upfront purchase price for BUPHENYL will be $19.0 million resulting in a net payment from Ucyclyd to us of $13.0 million upon close of the transaction.

To expand the commercial potential of Ravicti, we have completed a Phase II trial assessing the safety and efficacy of Ravicti for the treatment of episodic HE. The FDA has also granted orphan drug designation for Ravicti for this indication. HE is a serious but potentially reversible neurological disorder that can occur in patients with liver scarring, known as cirrhosis, or acute liver failure. HE is believed to occur when the brain is exposed to gut-derived toxins that are normally removed from the blood by a healthy liver. Episodic HE can be diagnosed clinically through a set of signs and symptoms. Similar to UCD patients who may experience HA crises, patients with episodic HE often experience periods in which their symptoms worsen, referred to as HE events, that are manifested by symptoms ranging from disorientation to coma, and frequently require hospitalization. Our HE development program is targeting patients with episodic HE and is designed to determine whether treatment with Ravicti will decrease the number of HE events. The Phase II trial met its primary endpoint, which was to demonstrate that the proportion of patients experiencing an HE event was significantly lower on Ravicti versus placebo, both administered in addition to standard of care, including lactulose and/or rifaximin. We believe that ammonia plays a central role in HE and that Ravicti, if approved, could be beneficial in managing this disease. Moreover, given its mechanism of action of removing ammonia from the body, Ravicti could be complementary to currently approved agents, such as rifaximin, that may limit the local production of ammonia.

Ravicti Clinical Development

We have completed two Phase II trials and one pivotal Phase III trial in which we evaluated the non-inferiority of Ravicti as compared to BUPHENYL in controlling blood ammonia levels in adult and pediatric patients with UCD. We successfully demonstrated non-inferiority in each of these trials and a pooled analysis of the data from these trials demonstrated statistically significant lower ammonia levels in patients on Ravicti as compared to BUPHENYL. A non-inferiority trial compares a test drug to an established treatment with the goal of showing that any difference in the performance of the test drug is small enough to support a conclusion that the test drug is not inferior to the established treatment, and that the test drug is, therefore, also effective. In our trial, non-inferiority of Ravicti would be demonstrated if the upper 95% confidence interval of ammonia on Ravicti would not be more than 25% higher than that seen on BUPHENYL. A 95% confidence interval means that if the trial was run multiple times, 95% of the time, ammonia levels on Ravicti were not more than 25% higher than that seen on BUPHENYL. We believe the ammonia control provided by Ravicti is responsible for improved executive function seen in UCD patients aged 6 through 17 years after 12 months of treatment with Ravicti. In the 12-month safety extension to our pivotal Phase III trial, patients on Ravicti have experienced fewer HA crises than they reported having experienced in the prior year while on BUPHENYL. In addition, in our Phase II trials, 34 of 36 patients expressed a preference for Ravicti over BUPHENYL. Forty-one of the forty-four patients in our pivotal Phase III trial who had been treated chronically with BUPHENYL before trial enrollment agreed to continue treatment and monthly monitoring with Ravicti beyond the initial four-week treatment period. Sixty-seven of sixty-nine patients who completed 12 months of treatment with Ravicti elected to enroll in an expanded access protocol to continue receiving Ravicti.

 

 

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We are currently conducting a fourth clinical trial in UCD patients aged 29 days through 5 years designed to demonstrate the safety and efficacy of Ravicti in this patient population. The efficacy portion of this trial is complete, and a complete study report was submitted to the FDA in April 2012 as part of an update to our NDA. We expect the results of the 12-month safety extension portion of the trial to be available by the second quarter of 2013. As part of the April 2012 update, we submitted a revised draft package insert requesting the approval of Ravicti for all UCD patients down to 29 days of age. If the FDA classifies this submission as a major amendment, the PDUFA action date will likely be delayed.

Our HE clinical program comprises two trials which have enrolled patients with cirrhosis. The Phase II clinical trial design was similar to that used to evaluate rifaximin, the only therapy approved by the FDA for episodic HE within the last 30 years. The Phase II trial was a multinational randomized, placebo-controlled, double-blind study of Ravicti versus placebo in 178 patients with episodic HE receiving standard of care including lactulose and/or rifaximin. The Phase II trial met its primary endpoint: the proportion of patients experiencing at least one HE event was significantly lower on Ravicti versus placebo (21.1% vs. 36.4%, p = 0.0214). Patients receiving Ravicti also experienced fewer total HE events in the course of the study versus placebo (35 vs. 57; p = 0.0354). There were trends favoring Ravicti in numbers of patients hospitalized for HE events, total HE-related hospitalizations and total hospital days for HE-related admissions, suggesting a potentially important pharmacoeconomic benefit to the treatment of HE with Ravicti.

Among patients on lactulose only or no therapy at study entry, a population similar to that enrolled in the rifaximin pivotal study, Ravicti significantly reduced the proportion of patients experiencing at least one HE event versus placebo (10.0% vs. 32.2%; p = 0.0031) as well as the proportion of patients who experienced the more severe West Haven grade ³2 events versus placebo (5% vs. 25.4 %; p = 0.001). In this subgroup, there was an 82% reduction in the risk of experiencing a grade ³2 HE event on Ravicti as compared with placebo (p = 0.0073). Based upon the positive results of our Phase II trial in HE we are planning to request an end of Phase II meeting with the FDA for the fourth quarter of 2012, which is critical for evaluating our Phase III clinical options with respect to Ravicti in this indication.

Our Business Strategy

Our strategy is to commercialize a product portfolio, including Ravicti, for the treatment of UCD and to develop Ravicti for the treatment of HE and other indications. The key elements of our strategy are to:

 

   

obtain FDA approval of Ravicti;

 

   

commercialize Ravicti and improve patient care in UCD;

 

   

market BUPHENYL and AMMONUL for patients ineligible for Ravicti;

 

   

develop Ravicti for the treatment of HE; and

 

   

expand Ravicti into additional indications and acquire additional products and product candidates.

Risk Factors Associated with Our Business

Our business is subject to numerous risks, as more fully described in the section entitled “Risk Factors” immediately following this prospectus summary. You should read these risks before you invest in our common stock. In particular, our risks include, but are not limited to, the following:

 

   

we depend substantially on the success of our only product candidate, Ravicti, and we may not obtain regulatory approval of Ravicti for the treatment of UCD or we may be unable to successfully commercialize it;

 

 

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regulatory approval could be substantially delayed if the pediatric data we have submitted and intend to submit does not satisfy the FDA or if the FDA requires additional time or studies to assess the safety and efficacy of Ravicti;

 

   

the patient population suffering from UCD is small and has not been established with precision;

 

   

we currently have no source of revenue and may never become profitable;

 

   

we may need to obtain additional financing to fund our operations;

 

   

if we choose to draw on a loan commitment from Ucyclyd to fund the purchase of Ucyclyd’s worldwide rights to BUPHENYL and AMMONUL, we might be unable to service the loan due to a lack of cash flow, which could result in default;

 

   

termination of the restated collaboration agreement with Ucyclyd prior to our purchase of Ucyclyd’s worldwide rights to BUPHENYL and AMMONUL would result in our losing rights to these products; and

 

   

if we cannot successfully defend our intellectual property, additional competitors could enter the market, including with generic versions of our products, and sales of affected products may decline materially.

Our Corporate Information

We were incorporated under the laws of the State of Delaware in November 2006. Our principal executive offices are located at 601 Gateway Boulevard, Suite 200, South San Francisco, CA 94080, and our telephone number is (650) 745-7802. Our website address is www.hyperiontx.com. The information contained on, or that can be accessed through, our website is not part of this prospectus. We have included our website address in this prospectus solely as an inactive textual reference.

 

 

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THE OFFERING

 

Common stock to be offered by us

4,166,667 shares

 

Common stock to be outstanding after this offering

14,535,502 shares

 

Over-allotment option

We have granted the underwriters an option for 30 days from the date of this prospectus to purchase up to 625,000 additional shares of common stock to cover over-allotments.

 

Use of proceeds

We expect to use the net proceeds from this offering to: fund clinical development, regulatory approval, post-marketing studies and, if approved, the commercial launch of Ravicti for UCD; to fund license payments to Brusilow Enterprises, LLC; and for working capital and general corporate purposes. See “Use of Proceeds” on page 43.

 

Proposed NASDAQ Global Market symbol

HPTX

 

Risk factors

You should read the “Risk Factors” section of this prospectus for a discussion of factors to consider carefully before deciding to invest in shares of our common stock.

 

 

Certain of our existing stockholders, including certain affiliates of our directors, have indicated an interest in purchasing an aggregate of approximately $22.0 million of shares of our common stock in this offering at the initial public offering price. However, because indications of interest are not binding agreements or commitments to purchase, the underwriters may determine to sell more, less or no shares in this offering to any of these stockholders, or any of these stockholders may determine to purchase more, less or no shares in this offering.

The number of shares of common stock outstanding immediately after this offering is based on 481,174 shares of common stock outstanding as of March 31, 2012. This number excludes:

 

   

1,267,385 shares of common stock issuable upon the exercise of stock options outstanding as of March 31, 2012 under our 2006 Equity Incentive Plan, or the 2006 Plan, having a weighted average exercise price of $2.37 per share;

 

   

296 shares of common stock issuable upon the exercise of warrants outstanding as of March 31, 2012 having a weighted average exercise price of $1,795.24 per share, which warrants are expected to remain outstanding upon completion of this offering; and

 

   

1,042,284 shares of common stock (which includes the 103,793 shares reserved for issuance under our 2006 Plan as of March 31, 2012) reserved for future issuance under our 2012 Omnibus Incentive Plan, or the 2012 Plan, which will become effective immediately upon the effectiveness of this registration statement, as well as any future increases in the number of shares of common stock reserved for issuance under this plan.

Unless otherwise indicated, all information in this prospectus assumes or gives effect to:

 

   

a 2-for-359 reverse stock split of our common stock effected June 29, 2009;

 

 

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a 1-for-6.09 reverse stock split of our common stock and convertible preferred stock effected July 12, 2012;

 

   

the conversion of all outstanding shares of our convertible preferred stock into an aggregate of 6,575,637 shares of common stock upon completion of this offering;

 

   

the exercise, on a net issuance basis based on an assumed initial public offering price of $12.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, of warrants outstanding as of March 31, 2012 that we issued in connection with a bridge loan financing in April 2011, or the April 2011 warrants, and in May 2011, or the May 2011 warrants, into 359,654 shares of our common stock, at an exercise price of $4.08 per share, and which will expire upon completion of this offering if not exercised;

 

   

the exercise, on a net issuance basis based on an assumed initial public offering price of $12.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, of warrants that we issued in connection with a bridge loan financing in October 2011, or the October 2011 warrants, in November 2011, or the November 2011 warrants, and in February 2012, or the February 2012 warrants, into 92,776 shares of our common stock upon conversion of Series C-2 convertible preferred stock issuable upon exercise of the October 2011 warrants, the November 2011 warrants and the February 2012 warrants, at an exercise price equal to $9.62 per share, and which will expire upon completion of this offering if not exercised;

 

   

the automatic conversion of the principal and accrued interest outstanding under our $17.5 million in aggregate principal amount of convertible promissory notes, or the April 2011 notes, $8,285 in aggregate principal amount of convertible promissory notes, or the May 2011 notes, $7.5 million in aggregate principal amount of convertible promissory notes, or the October 2011 notes, and $3,551 in aggregate principal amount of convertible promissory notes, or the November 2011 notes, and $7.5 million in aggregate principal amount of convertible promissory notes, or the February 2012 notes, into 2,859,594 shares of common stock immediately prior to the closing of this offering at a conversion price equal to the initial public offering price, based on an assumed initial public offering price of $12.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, and assuming the conversion occurred on July 6, 2012;

 

   

the filing of our amended and restated certificate of incorporation, which will occur immediately prior to the completion of this offering; and

 

   

no exercise of the underwriters’ over-allotment option.

Because the number of shares that will be issued upon exercise of the April 2011 warrants, the May 2011 warrants, the October 2011 warrants, the November 2011 warrants and the February 2012 warrants and upon the conversion of the April 2011 notes, the May 2011 notes, the October 2011 notes, the November 2011 notes and the February 2012 notes depends upon the actual initial public offering price per share in this offering and, in the case of the notes, the closing date of this offering, the actual number of shares issuable upon such exercise may differ and upon such conversion will differ from the respective number of shares set forth above. We collectively refer to the April 2011 warrants, the May 2011 warrants, the October 2011 warrants, the November 2011 warrants and the February 2012 warrants as the “bridge warrants,” and we collectively refer to the April 2011 notes, the May 2011 notes, the October 2011 notes, the November 2011 notes and the February 2012 notes as the “bridge notes.”

A $1.00 increase in the assumed initial public offering price of $12.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, would decrease the number of shares of our common stock

 

 

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issued upon exercise of the bridge warrants and upon conversion of the bridge notes (and therefore the number of shares to be outstanding after this offering) by 176,864 shares, assuming that the closing date of this offering (and therefore the conversion date of the bridge notes) is July 6, 2012. A $1.00 decrease in the assumed initial public offering price of $12.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase the number of shares of our common stock issued upon exercise of the bridge warrants and upon conversion of the bridge notes (and therefore the number of shares to be outstanding after this offering) by 209,032 shares, assuming that the closing date of this offering (and therefore the conversion date of the bridge notes) is July 6, 2012. As the closing date of this offering will occur after July 6, 2012, the bridge notes will continue to accrue interest at a rate of 6% per annum and additional shares of our common stock will be issued upon conversion of this additional accrued interest.

SUMMARY CONSOLIDATED FINANCIAL DATA

The following table summarizes our consolidated financial data. We have derived the following consolidated statements of operations data for the years ended December 31, 2009, 2010 and 2011, and the consolidated balance sheet data as of December 31, 2011 from our audited consolidated financial statements, included elsewhere in this prospectus. The consolidated statements of operations data for the three months ended March 31, 2011 and 2012 and the consolidated balance sheet data as of March 31, 2012 are derived from our unaudited consolidated financial statements included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected in the future. The following summary consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

(in thousands, except share and per share amounts)   Year Ended December 31,     Three Months Ended
March 31,
 
    2009     2010     2011     2011     2012  

Consolidated Statements of Operations Data:

         

Revenue

  $      $      $      $      $   

Cost of revenue

                                  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

                                  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

         

Research and development

    11,030        23,111        17,236        4,300        8,902   

General and administrative

    1,909        2,693        8,162        1,361        2,077   

Selling and marketing

    462        797        761        250        246   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    13,401        26,601        26,159        5,911        11,225   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (13,401     (26,601     (26,159     (5,911     (11,225

Interest income

    39        43        28        4        4   

Interest expense

    (763     (1     (2,554            (1,040

Other income (expense), net

    525        1,106        (731            375   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (13,600   $ (25,453   $ (29,416     (5,907     (11,886

Accretion of Series B preferred stock to redemption value

    (78                            
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

  $ (13,678   $ (25,453   $ (29,416   $ (5,907   $ (11,886
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to common stockholders — basic and diluted(1)

  $ (92.84   $ (61.70   $ (62.68   $ (12.59   $ (25.33
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares of common stock outstanding used in computing net loss per share attributable to common stockholders — basic and diluted(1)

    147,329        412,532        469,319        469,319        469,319   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share attributable to common stockholders — basic and diluted (unaudited)(1)

      $ (3.05     $ (1.12
     

 

 

     

 

 

 

Weighted average shares of common stock outstanding used in computing the pro forma net loss per share attributable to common stockholders — basic and diluted(1)

        8,559,148          10,008,313   
     

 

 

     

 

 

 

 

 

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(1) See Note 15 to our consolidated financial statements for an explanation of the method used to calculate basic and diluted net loss per share of common stock, the unaudited pro forma basic and diluted net loss per share of common stock and the weighted average number of shares used in computation of the per share amounts.

 

(in thousands)    As of March 31, 2012  
   Actual     Pro
Forma
    Pro Forma
as Adjusted
 

Consolidated Balance Sheet Data:

      
Cash and cash equivalents    $ 3,736      $ 3,736      $ 47,987   
Working capital (deficit)      (32,889     (1,090     43,581   
Total assets      5,014        5,014        48,846   
Convertible notes payable      30,736                 
Warrants liability      3,464                 
Convertible preferred stock      58,326                 
Total stockholders’ equity (deficit)      (93,864     (275     43,976   

The unaudited pro forma column in the balance sheet data above gives effect to the following transactions and adjustments as if they had occurred as of March 31, 2012:

 

  (1) the conversion of all outstanding shares of our convertible preferred stock into an aggregate of 6,575,637 shares of common stock upon completion of this offering;

 

  (2) the exercise, on a net issuance basis based on an assumed initial public offering price of $12.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, of the April 2011 warrants and the May 2011 warrants into 359,654 shares of our common stock, at an exercise price of $4.08 per share, and which will expire upon completion of this offering if not exercised;

 

  (3) the exercise, on a net issuance basis based on an assumed initial public offering price of $12.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, of the October 2011 warrants, the November 2011 warrants and the February 2012 warrants into 92,776 shares of our common stock upon conversion of Series C-2 convertible preferred stock issuable upon exercise of the October 2011 warrants, the November 2011 warrants and the February 2012 warrants, at an exercise price of $9.62 per share, and which will expire upon completion of this offering if not exercised;

 

  (4) the automatic conversion of the bridge notes and accrued interest, into 2,816,434 shares of common stock immediately prior to the closing of this offering at a conversion price equal to the initial public offering price, based on an assumed initial public offering price of $12.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, and assuming the conversion occurred on March 31, 2012;

 

  (5) the reclassification of the bridge notes liability to common stock and additional paid-in-capital in connection with the conversion based on an assumed initial public offering price of $12.00 per share, the midpoint of the price range set forth on the cover page of this prospectus; and

 

  (6) the reclassification of the bridge warrants liability to common stock and additional paid-in-capital in connection with the exercise based on an assumed initial public offering price of $12.00 per share, the midpoint of the price range set forth on the cover page of this prospectus.

 

 

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The unaudited pro forma as adjusted column in the balance sheet data above gives further effect to the following transactions and adjustments as if they had occurred on March 31, 2012:

 

  (1) the sale of 4,166,667 shares of common stock in this offering at an assumed initial public offering price of $12.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, as if the sale of the shares in this offering had occurred on March 31, 2012; and

 

  (2) the automatic conversion of the bridge notes into 2,859,594 shares of common stock immediately prior to the closing of this offering at a conversion price equal to the initial public offering price based on an assumed initial public offering price of $12.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, and with interest accruing through July 6, 2012.

Each $1.00 increase (decrease) in the assumed initial public offering price of $12.00 per share, the mid-point of the price range set forth on the cover page of this prospectus, would increase (decrease) each of cash and cash equivalents, working capital, total assets and total stockholders’ equity (deficit) by approximately $3.9 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. Each increase (decrease) of 1.0 million shares in the number of shares offered by us would increase (decrease) each of cash and cash equivalents, working capital, total assets and total stockholders’ equity (deficit) by approximately $11.2 million, assuming that the assumed initial public offering price remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. The pro forma as adjusted information discussed above is illustrative only and will adjust based on the actual initial public offering price and other terms of this offering determined at pricing.

 

 

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RISK FACTORS

An investment in our common stock involves a high degree of risk. We operate in a dynamic and rapidly changing 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, and you may lose all or part of your investment.

Risks Related to Development, Commercialization and Regulatory Approval

We depend substantially on the success of our only product candidate, Ravicti, and we may not obtain regulatory approval of Ravicti for the treatment of UCD or we may be unable to successfully commercialize it.

We have invested a significant portion of our efforts and financial resources in the development of Ravicti, which is currently our only product candidate. As a result, our business is substantially dependent on our ability to complete the development of, obtain regulatory approval for, and successfully commercialize Ravicti in a timely manner. The process to develop, obtain regulatory approval for and commercialize Ravicti is long, complex and costly.

The FDA has substantial discretion in the approval process and may form the opinion, after review of our data, that the NDA is insufficient to allow approval of Ravicti. The FDA may require that we conduct additional clinical, nonclinical, manufacturing validation or drug product quality studies and submit those data before it will consider or reconsider the NDA. Depending on the extent of these or any other studies, approval of any applications that we submit may be delayed by several years, or may require us to expend more resources than we have available. It is also possible that additional studies, if performed and completed, may not be considered sufficient by the FDA to approve the NDA. If any of these outcomes occur, we may not receive approval for Ravicti.

Even if we obtain FDA approval for Ravicti for the treatment of UCD, the approval might contain significant limitations related to use restrictions for certain age groups, warnings, precautions or contraindications, or may be subject to significant post-marketing studies or risk mitigation requirements. If we are unable to successfully commercialize Ravicti, we may not be able to earn sufficient revenues to continue our business.

Regulatory approval in UCD could be substantially delayed if the pediatric data we have submitted and intend to submit does not satisfy the FDA or if the FDA requires additional time or studies to assess the safety and efficacy of Ravicti.

In December 2011, we submitted an NDA for Ravicti for the chronic management of UCD in patients aged 6 years and above. Under PDUFA, the FDA is due to notify us regarding Ravicti’s approval status by October 23, 2012. The FDA is not under a binding obligation to respond to us by the PDUFA action date. The FDA does not always meet the PDUFA action date, and even when the FDA does, approval often requires more than one review cycle. If the FDA determines that additional data are required to support approval of Ravicti, it will issue a complete response letter outlining the deficiencies that must be addressed before the FDA will consider approval of the NDA. If the FDA issues a complete response letter to the NDA for Ravicti, approval of Ravicti to treat UCD will likely be delayed and may be denied completely.

In our pre-NDA meeting, the FDA expressed concern that pediatric patients constitute an important population of UCD patients, and indicated it may require a further evaluation of safety and dosing in certain pediatric UCD patients despite the legal exemption under the Pediatric Research Equity Act that orphan drugs such as Ravicti have from generally applicable pediatric testing requirements. We have submitted data which we believe demonstrate that the maximum concentration of phenylacetic acid, or PAA, in blood plasma in UCD

 

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patients aged 6 years and above treated with Ravicti has been significantly below the toxic range and similar to those observed by BUPHENYL. However, these data may not be sufficient to satisfy the FDA, particularly because the FDA expressed concerns specifically about PAA toxicity in pediatric patients.

We are currently conducting a clinical trial in UCD patients aged 29 days through 5 years designed to demonstrate the safety and efficacy in this patient population. The efficacy portion of this trial is complete and a complete study report was submitted to the FDA in April 2012; however, the data from the 12-month safety extension portion of the study will not be available until the second quarter of 2013. As part of the April update to the FDA, we submitted a revised draft package insert requesting approval of Ravicti for UCD patients down to 29 days of age. If the FDA classifies this submission as a major amendment, the PDUFA action date will likely be delayed.

Although we have entered into a Special Protocol Assessment agreement with the FDA relating to our pivotal Phase III trial of Ravicti, this agreement does not guarantee any particular outcome with respect to regulatory review of the pivotal trial or with respect to regulatory approval of Ravicti.

The protocol for our pivotal Phase III trial of Ravicti to treat UCD in adult patients was reviewed and agreed upon by the FDA under a Special Protocol Assessment agreement, or SPA, which allows for FDA evaluation of whether a clinical trial protocol could form the primary basis of an efficacy claim in support of an NDA. The SPA is an agreement that a Phase III trial’s design, clinical endpoints, patient population and statistical analyses are sufficient to support the efficacy claim. Agreement on an SPA is not a guarantee of approval, and there is no assurance that the design of, or data collected from, the trial will be adequate to obtain the requisite regulatory approval. In addition, the NDA currently requests approval of Ravicti in UCD patients aged 6 years and above; however, the SPA covers UCD in adult patients only. Further, the SPA is not binding on the FDA if public health concerns unrecognized at the time the SPA was entered into become evident or other new scientific concerns regarding product safety or efficacy arise. In addition, upon written agreement of both parties, the SPA may be changed, and the FDA retains significant latitude and discretion in interpreting the terms of an SPA and any resulting trial data. As a result, we do not know how the FDA will interpret the parties’ respective commitments under the SPA, how it will interpret the data and results from the pivotal Phase III trial, whether the FDA will require that we conduct or complete one or more additional clinical trials to support potential approval, including the completion of our ongoing clinical trial of Ravicti in pediatric patients aged 29 days through 5 years, or whether Ravicti will receive any regulatory approvals.

In June 2011, we completed a preclinical carcinogenicity study of Ravicti in rats, the results of which may delay or prevent approval of Ravicti.

In June 2011, we completed a 24-month carcinogenicity study of Ravicti in rats. The data from this study showed an increased rate of six different tumor types in rats. While we do not have evidence that individuals who have taken the active ingredient in Ravicti have an increased rate of cancer, the FDA may view these data as posing concerns with respect to the long term safety of Ravicti. The FDA may request that we conduct additional nonclinical studies. If we are unable to explain these data to the satisfaction of the FDA, the approval of Ravicti may be delayed or denied.

The patient population suffering from UCD is small and has not been established with precision. If the actual number of patients is smaller than we estimate, if we are unable to convert patients from BUPHENYL to Ravicti or if any FDA approval is limited to adults only, our revenue and ability to achieve profitability may be adversely affected.

We estimate that the number of individuals in the United States with UCD is approximately 2,100, of which approximately 1,100 are currently diagnosed and approximately 425 are treated with BUPHENYL, and 90 are treated with Ravicti. Of these, we estimate that approximately 60% are children and 40% are adults. Our estimate

 

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of the size of the patient population is based on published studies as well as internal analyses. If the results of these studies or our analysis of them do not accurately reflect the number of patients with UCD, our assessment of the market may be inaccurate, making it difficult or impossible for us to meet our revenue goals, or to obtain and maintain profitability. In addition, if any FDA approval is limited to adult UCD patients, then the potential market for Ravicti will be smaller than we anticipate, our potential revenues will be limited and it will be more difficult to achieve profitability. Also, if we are unable to successfully convert patients from BUPHENYL to Ravicti, it will be more difficult to achieve profitability.

The number of patients in the United States who might be prescribed Ravicti if it is approved could be significantly less than the 515 currently estimated to be on Ravicti or BUPHENYL. Since Ravicti, BUPHENYL and AMMONUL target diseases with small patient populations, the per-patient drug pricing must be high in order to recover our development and manufacturing costs, fund adequate patient support programs and achieve profitability. We may be unable to maintain or obtain sufficient sales volume at a price high enough to justify our product development efforts and manufacturing expenses.

To obtain regulatory approval to market Ravicti in indications other than UCD, including HE, costly and lengthy nonclinical studies and clinical trials may be required, and the results of the studies and trials are highly uncertain.

As part of the regulatory approval process, we must conduct, at our own expense, nonclinical studies in the laboratory and in animals and clinical trials on humans for each indication that we intend to pursue. We expect the number of nonclinical studies and clinical trials that the regulatory authorities will require will vary depending on the disease or condition the drug is being developed to address and regulations applicable to the particular drug. Generally, the number and size of clinical trials required for approval varies based on the nature of the disease and size of the expected patient population that may be treated with a drug. We may need to perform multiple nonclinical studies using various doses and formulations before we can begin clinical trials, which could result in delays in our ability to market Ravicti for any additional indications, including HE. Furthermore, even if we obtain favorable results in nonclinical studies, the results in humans may be significantly different. After we have conducted nonclinical studies, we must demonstrate that our drug products are safe and efficacious for use in the targeted human patients in order to receive regulatory approval for commercial sale.

Serious adverse events or other safety risks could require us to abandon development and preclude or limit approval of Ravicti to treat UCD or HE.

We may voluntarily suspend or terminate our clinical trials if at any time we believe that they present an unacceptable risk to participants or if preliminary data demonstrate that the product is unlikely to receive regulatory approval or unlikely to be successfully commercialized. In addition, regulatory agencies, institutional review boards 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. If we elect or are forced to suspend or terminate a clinical trial of Ravicti to treat UCD or HE, the commercial prospects for Ravicti will be harmed and our ability to generate product revenues from Ravicti may be delayed or eliminated.

Even though we have received orphan drug designation, we may not receive orphan drug exclusivity for Ravicti.

As part of our business strategy, we have obtained orphan drug designation in the United States for glyceryl tri (4 phenylbutyrate), brand name Ravicti, for the maintenance treatment of patients with UCD and for the intermittent or chronic treatment of patients with cirrhosis and any grade of HE. In the United States, the company that first obtains FDA approval for a designated orphan drug for the specified rare disease or condition

 

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receives orphan drug marketing exclusivity for that drug for a period of seven years. This orphan drug exclusivity prevents the FDA from approving another application, including a full NDA, to market the same drug for the same orphan indication, except in very limited circumstances, including when the FDA concludes that the later drug is safer, more effective or makes a major contribution to patient care. For purposes of small molecule drugs, the FDA defines “same drug” as a drug that contains the same active chemical entity and is intended for the same use as the drug in question. To obtain orphan drug exclusivity for a drug that shares the same active chemical entity as an already orphan designated drug, it must be demonstrated to the FDA that the drug is safer or more effective than the approved orphan designated drug, or that it makes a major contribution to patient care. In addition, a designated orphan drug may not receive orphan drug exclusivity if it is approved for a use that is broader than the indication for which it received orphan designation. In addition, orphan drug exclusive marketing rights in the United States may be lost if the FDA later determines that the request for designation was materially defective or if the manufacturer is unable to assure sufficient quantity of the drug to meet the needs of patients with the rare disease or condition.

In our case, Ravicti contains the same active chemical entity as BUPHENYL, which is approved for the treatment of UCD, the intended use for Ravicti. Ravicti was granted orphan designation for UCD based upon a potential safety benefit over BUPHENYL because of the absence of sodium. We will not receive orphan drug exclusivity in UCD unless the FDA in reviewing the NDA concludes that Ravicti is safer or more effective than BUPHENYL or makes a major contribution to patient care. Even if we obtain orphan drug exclusivity for Ravicti, that exclusivity may not effectively protect the product from competition because different drugs can be approved for the same condition.

Approval of Ravicti may require FDA approval of a companion diagnostic test, which would substantially delay FDA approval of Ravicti for UCD.

Our proposed labeling for Ravicti includes dose adjustment based on levels of urinary phenylacetylglutamine, or PAGN. Our plan is for the urinary PAGN testing to be available only as a Laboratory Developed Test that is commercialized by a laboratory certified under the Clinical Laboratory Improvement Amendments without approval or clearance from the FDA. Approval of all Laboratory Developed Tests is required by the State of New York prior to testing patient samples from that state. A test for urinary PAGN may be considered a companion diagnostic test by the FDA. We have not discussed our PAGN-based dosing adjustment labeling strategy with the FDA and do not know whether the FDA will accept a Laboratory Developed Test or instead will consider the test a companion diagnostic and therefore require a Premarket Approval Application, a filing through the de novo reclassification process, or 510(k) clearance for a urinary PAGN test, prior to approving Ravicti. If FDA approval or clearance of a urinary PAGN test is required, any approval and launch of Ravicti could be delayed and additional costs would be required for us to reach agreement with a clinical laboratory or a third-party in vitro diagnostic test manufacturer to seek and obtain premarket approval, de novo reclassification, or premarket clearance from the FDA. The State of New York approval process, and the FDA premarket review process if required, can be lengthy and would require submission of clinical study data.

Our potential purchase of Ucyclyd’s worldwide rights to BUPHENYL and AMMONUL could be hampered or prevented by regulatory action as well as by government or private litigation.

We are subject to antitrust review if we exercise our option to purchase Ucyclyd’s worldwide rights for BUPHENYL and AMMONUL, including, if the necessary jurisdictional thresholds are met at that time, review under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, or the HSR Act. Even if the planned purchase is approved, the terms and conditions of the approval that is granted, if accepted by the parties, may impose requirements, limitations, and additional costs and place restrictions on the conduct of our business. There is no assurance that we will receive the necessary approvals under the HSR Act or that any other conditions, terms, obligations, or restrictions sought to be imposed, and if accepted, would not have a material

 

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adverse effect on us. If the government challenges the purchase under the HSR Act and the challenge cannot be resolved by consent decree, our restated collaboration agreement with Ucyclyd will automatically terminate and we would not have any rights to BUPHENYL or AMMONUL. In addition, whether or not HSR filings are required to purchase Ucyclyd’s worldwide rights for BUPHENYL and AMMONUL, federal antitrust regulators could, before or after the purchase, take any action under the antitrust laws that they consider necessary or desirable in the public interest, including seeking to enjoin the purchase or to seek the divestiture of assets or the imposition of licensing obligations on us. Private parties as well as State Attorneys General and foreign antitrust regulators may also bring legal actions under the antitrust laws under some circumstances, the outcome of which could have a material adverse effect on us.

Even if the FDA approves Ravicti in the United States, we may never obtain approval for or commercialize Ravicti outside of the United States, which would limit our ability to realize its full market potential.

In order to market Ravicti outside of the United States, we must comply with regulatory requirements of, and obtain required regulatory approvals in, other countries. Clinical trials conducted in one country may not be accepted by regulatory authorities in other countries, and 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 nonclinical studies or clinical trials, which could be costly and time consuming. Regulatory requirements can vary widely from country to country and could delay or prevent the introduction of Ravicti in those countries. We do not have any products approved for sale in any jurisdiction, including international markets, and we do not have experience in obtaining regulatory approval in international markets. If we fail to comply with regulatory requirements in international markets or to obtain and maintain required approvals or if regulatory approvals in international markets are delayed, our target market will be reduced and our ability to realize the full market potential of our products will be harmed.

If we obtain approval to commercialize Ravicti outside of the United States and continue to maintain the existing Ucyclyd distribution agreements for BUPHENYL and AMMONUL outside of the United States, a variety of risks associated with international operations could materially adversely affect our business.

If Ravicti is approved for commercialization outside the United States, we will likely enter into agreements with third parties to market Ravicti outside the United States. In addition, if we purchase Ucyclyd’s worldwide rights to BUPHENYL and AMMONUL, we will assume Ucyclyd’s rights and obligations under its existing agreements for distribution of these drugs outside the United States, including Ucyclyd’s obligation to provide Swedish Orphan AB with a right of first refusal for the distribution of Ravicti and other newly developed products for urea cycle disorders on terms and conditions reasonably satisfactory to us. We expect that we will be subject to additional risks related to entering into or maintaining these international business relationships, including:

 

   

different regulatory requirements for drug approvals in foreign countries;

 

   

differing United States and foreign drug import and export rules;

 

   

reduced protection for intellectual property rights in foreign countries;

 

   

unexpected changes in tariffs, trade barriers and regulatory requirements;

 

   

different reimbursement systems;

 

   

economic weakness, including inflation, or political instability in particular foreign economies and markets;

 

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compliance with tax, employment, immigration and labor laws for employees living or traveling abroad;

 

   

foreign taxes, including withholding of payroll taxes;

 

   

foreign currency fluctuations, which could result in increased operating expenses and reduced revenues, and other obligations incident to doing business in another country;

 

   

workforce uncertainty in countries where labor unrest is more common than in the United States;

 

   

production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad;

 

   

potential liability resulting from development work conducted by these distributors; and

 

   

business interruptions resulting from geopolitical actions, including war and terrorism, or natural disasters.

Even if we obtain regulatory approval of Ravicti and purchase Ucyclyd’s worldwide rights to BUPHENYL and AMMONUL, we will continue to face extensive development and regulatory requirements.

Even if a drug is FDA-approved, regulatory authorities may still impose significant restrictions on a product’s indicated uses or marketing or impose ongoing requirements for potentially costly post-marketing studies. Furthermore, any new legislation addressing drug safety issues could result in delays or increased costs to assure compliance.

BUPHENYL and AMMONUL are, and if Ravicti is approved, Ravicti will be, subject to ongoing regulatory requirements for labeling, packaging, storage, advertising, promotion, sampling, record-keeping and submission of safety and other post-market information, including both federal and state requirements in the United States. In addition, manufacturers and manufacturers’ facilities are required to comply with extensive FDA requirements, including ensuring that quality control and manufacturing procedures conform to current Good Manufacturing Practices, or cGMP. As such, we and our contract manufacturers are subject to continual review and periodic inspections to assess compliance with cGMP. Accordingly, we and others with whom we work must continue to expend time, money, and effort in all areas of regulatory compliance, including manufacturing, production, and quality control. We will also be required to report certain adverse reactions and production problems, if any, to the FDA, and to comply with requirements concerning advertising and promotion for our products. Promotional communications with respect to prescription drugs are subject to a variety of legal and regulatory restrictions and must be consistent with the information in the product’s approved label. As such, we may not promote our products for indications or uses for which they do not have FDA approval.

If a regulatory agency discovers previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured, or disagrees with the promotion, marketing, or labeling of a product, a regulatory agency may impose restrictions on that product or us, including requiring withdrawal of the product from the market. If we fail to comply with applicable regulatory requirements, a regulatory agency or enforcement authority may:

 

   

issue warning letters;

 

   

impose civil or criminal penalties;

 

   

suspend regulatory approval;

 

   

suspend any of our ongoing clinical trials;

 

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refuse to approve pending applications or supplements to approved applications submitted by us;

 

   

impose restrictions on our operations, including closing our contract manufacturers’ facilities; or

 

   

seize or detain products or require a product recall.

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 from Ravicti, and BUPHENYL and AMMONUL if purchased from Ucyclyd. If regulatory sanctions are applied or if regulatory approval is withdrawn, the value of our company and our operating results will be adversely affected. Additionally, if we are unable to generate revenues from the sale of Ravicti, and BUPHENYL and AMMONUL if purchased from Ucyclyd, our potential for achieving profitability will be diminished and the capital necessary to fund our operations will be increased.

If third-party manufacturers fail to comply with manufacturing regulations, our financial results and financial condition will be adversely affected.

Before they can begin commercial manufacture of Ravicti, BUPHENYL or AMMONUL, contract manufacturers must obtain regulatory approval of their manufacturing facilities, processes and quality systems. In addition, pharmaceutical manufacturing facilities are continuously subject to inspection by the FDA and foreign regulatory authorities, before and after product approval. Due to the complexity of the processes used to manufacture pharmaceutical products and product candidates, any potential third-party manufacturer may be unable to continue to pass or initially pass federal, state or international regulatory inspections in a cost effective manner.

If 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, total or partial suspension of production and/or enforcement actions, including injunctions, and criminal or civil prosecution. These possible sanctions would adversely affect our financial results and financial condition.

If our competitors are able to develop and market products that are preferred over Ravicti, BUPHENYL or AMMONUL, our commercial opportunity will be reduced or eliminated.

We face competition from established pharmaceutical and biotechnology companies, as well as from academic institutions, government agencies and private and public research institutions, which may in the future develop products to treat UCD or HE. During the lifetime of the United States patents covering Ravicti, and for any longer period of market exclusivity granted by the FDA for Ravicti, Ucyclyd and its affiliates are contractually prohibited from developing or commercializing new products, anywhere in the world, for the treatment of UCD or HE that are chemically similar to Ravicti, except for products delivered parenterally for the treatment of HE. In countries outside the United States, this contractual restriction will continue, on a country-by-basis, for the lifetime of patents covering Ravicti in each such country and for any longer period of regulatory exclusivity granted for Ravicti in each such country. Since this restriction only applies to specific indications and to products that are chemically similar to Ravicti, it may not prevent Ucyclyd or its affiliates from developing and commercializing products that compete with Ravicti. Moreover, products approved for indications other than UCD and HE may compete with Ravicti if physicians prescribe such products off-label for UCD or HE. Ucyclyd may develop and commercialize such products and, under the purchase agreement, we granted Ucyclyd a time-limited option to acquire the right to use and reference certain Ravicti data for the development and commercialization of products (other than Ravicti) for the treatment of a specific indication that we are not pursuing. Furthermore, unless and until we purchase Ucyclyd’s worldwide rights to BUPHENYL, Ucyclyd is allowed to continue to market and sell BUPHENYL, and its sales of BUPHENYL will continue to compete with our sales of Ravicti for UCD.

 

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In addition to competition from BUPHENYL, in November 2011 Ampolgen Pharmaceuticals, LLC received FDA approval for a generic version of sodium phenylbutrate tablets which may compete with Ravicti and BUPHENYL in treating UCD. We are also aware that Orphan Europe is conducting a clinical trial of carglumic acid to treat some of the UCD enzyme deficiencies for which we expect Ravicti to be approved. Carglumic acid is approved to treat HA crises resulting from a different rare disorder than UCD and is sold under the name Carbaglu. If the results of this trial are successful and Orphan Europe is able to complete development and obtain approval of Carbaglu to treat additional UCD enzyme deficiencies, we would face competition from this compound. In addition, if we complete development, obtain regulatory approval and commercialize Ravicti to treat HE, we will face competition from Salix Pharmaceuticals, Inc., the manufacturer of rifaximin, as well as generic manufacturers of lactulose. In addition to currently marketed treatments for HE, Ocera Therapeutics, Inc. has conducted two Phase II trials of one of their compounds to treat mild HE and is conducting a Phase II trial of a second compound delivered intravenously to patients with cirrhosis in which they are assessing ammonia control versus placebo. In addition, researchers are continually learning more about UCD and HE, and new discoveries may lead to new therapies. As a result, Ravicti, BUPHENYL and AMMONUL may be rendered less competitive, or even obsolete, at any time. Other early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies.

Our commercial opportunity will be reduced or eliminated if our competitors develop and commercialize products that are safer, more effective, have fewer side effects, are more convenient or are less expensive than Ravicti, BUPHENYL and AMMONUL. We expect that our ability to compete effectively will depend upon, among other things, our ability to:

 

   

successfully and rapidly complete clinical trials and obtain all requisite regulatory approvals in a timely and cost-effective manner;

 

   

maintain patent protection for Ravicti and otherwise prevent the introduction of generics of Ravicti, BUPHENYL and AMMONUL;

 

   

attract and retain key personnel;

 

   

build an adequate sales and marketing infrastructure;

 

   

obtain adequate reimbursement from third-party payors; and

 

   

maintain positive relationships with patient advocacy groups.

The commercial success of Ravicti will depend upon the degree of market acceptance among physicians, patients, patient advocacy groups, health care payors and the medical community.

Ravicti may not gain market acceptance among physicians, patients, patient advocacy groups, health care payors and the medical community. The degree of market acceptance of Ravicti will depend on a number of factors, including:

 

   

the effectiveness of Ravicti as compared with BUPHENYL;

 

   

the prevalence and severity of any side effects;

 

   

potential advantages over BUPHENYL or any generic versions of BUPHENYL;

 

   

the market price and patient out-of-pocket costs of Ravicti relative to BUPHENYL and other UCD treatment options, including any generics;

 

   

relative convenience and ease of administration;

 

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willingness by patients to stop using BUPHENYL and adopt Ravicti;

 

   

restriction on healthcare provider prescribing of and patient access to Ravicti due to a Risk Evaluation Mitigation Strategy, or REMS;

 

   

the strength of our marketing and distribution organizations;

 

   

the quality of our relationship with patient advocacy groups; and

 

   

sufficient third-party coverage or reimbursement.

If we fail to achieve market acceptance of Ravicti in the United States, our revenue will be more limited and it will be more difficult to achieve profitability.

If we fail to obtain and sustain an adequate level of reimbursement for our products by third-party payors, sales would be adversely affected.

The course of treatment for UCD patients is and will continue to be expensive. We expect UCD patients to need treatment throughout their lifetimes. We expect that most families of patients will not be capable of paying for this treatment themselves. There will be no commercially viable market for Ravicti without reimbursement from third-party payors. Additionally, even if there is a commercially viable market, if the level of reimbursement is below our expectations, our revenue and gross margins will be adversely affected.

Third-party payors, such as government or private health care insurers, carefully review and increasingly question the coverage of, and challenge the prices charged for, drugs. Reimbursement rates from private health insurance companies vary depending on the company, the insurance plan and other factors. A current trend in the United States health care industry is toward cost containment. Large public and private payors, managed care organizations, group purchasing organizations and similar organizations are exerting increasing influence on decisions regarding the use of, and reimbursement levels for, particular treatments. Such third-party payors, including Medicare, are questioning the coverage of, and challenging the prices charged for medical products and services, and many third-party payors limit coverage of or reimbursement for newly approved health care products. In particular, third-party payors may limit the covered indications. Cost-control initiatives could decrease the price we might establish for products, which could result in product revenues being lower than anticipated. If the prices for our products decrease or if governmental and other third-party payors do not provide adequate coverage and reimbursement levels, our revenue and prospects for profitability will suffer. Reimbursement systems in international markets vary significantly by country and by region, and reimbursement approvals must be obtained on a country-by-country basis.

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. The negotiation process in some countries can exceed 12 months.

If Ravicti is approved to treat HE in the future, the cost of Ravicti to treat UCD may decline significantly, which could materially affect our UCD revenues.

Given the relative differences in the size of the affected patient population, the number of requests third-party payors receive to reimburse drugs for the treatment of HE is significantly greater than the number of requests for UCD. As a result, we will likely experience greater pricing pressure if Ravicti is approved by the FDA to treat HE than if it is only approved to treat UCD. We do not currently have a plan to differentiate the formulation of Ravicti for UCD and HE, nor can we guarantee success if we attempt to differentiate the formulations for UCD and HE. We expect the required dosing volume to be similar for UCD and HE, if Ravicti

 

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is approved for both indications. If Ravicti is approved by the FDA for HE after FDA approval and launch of the drug for UCD, we will need to significantly decrease the price for Ravicti from that established with respect to UCD in order to gain third-party reimbursement for broad use in HE patients. This would result in a significant decrease in revenues generated by the UCD patient population. We believe the Ravicti revenue potential for HE is much larger than for UCD; however, if the market for Ravicti in HE is significantly smaller than we anticipate, or if we are unsuccessful in any commercial launch of Ravicti for the treatment of HE, total Ravicti revenues may decrease significantly and we may be unable to achieve or maintain profitability. If the Ravicti price is decreased with the introduction of the drug for HE, we may need to decrease our UCD specialty pharmacy and patient support service offerings. This may result in lower UCD revenues due to fewer UCD patients electing to begin use of Ravicti and/or remain compliant.

If we are unable to establish a direct sales force in the United States, our business may be harmed.

We currently do not have an established sales organization. If Ravicti is approved by the FDA for commercial sale, we intend to market Ravicti directly to physicians in the United States through our own sales force. We will need to incur significant additional expenses and commit significant additional management resources to establish and train a sales force to market and sell Ravicti, and BUPHENYL and AMMONUL if we purchase Ucyclyd’s worldwide rights to those products. We may not be able to successfully establish these capabilities despite these additional expenditures. We will also have to compete with other pharmaceutical and life sciences companies to recruit, hire, train and retain sales and marketing personnel. In the event we are unable to successfully market and promote Ravicti, and BUPHENYL and AMMONUL if purchased from Ucyclyd, our business may be harmed.

If we fail to establish an effective distribution process utilizing specialty pharmacies our business may be adversely affected.

We do not currently have the infrastructure necessary for distributing pharmaceutical UCD products to patients. We intend to contract with a third-party logistics company to warehouse these products and distribute them to specialty pharmacies. A specialty pharmacy is a pharmacy that specializes in the dispensing of medications for complex or chronic conditions which require a high level of patient education and ongoing management. This distribution network will require significant coordination with our sales and marketing and finance organizations. Failure to secure contracts with a logistics company and specialty pharmacies could negatively impact the distribution of our UCD products, and failure to coordinate financial systems could negatively impact our ability to accurately report product revenue. If we are unable to effectively establish and manage the distribution process, the commercial launch and sales of our UCD products will be delayed or severely compromised and our results of operations may be harmed.

In addition, the use of specialty pharmacies involves certain risks, including, but not limited to, risks that these specialty pharmacies will:

 

   

not provide us with accurate or timely information regarding their inventories, the number of patients who are using our UCD products, or complaints regarding those drugs;

 

   

not effectively sell or support our UCD products;

 

   

reduce their efforts or discontinue to sell or support our UCD products;

 

   

not devote the resources necessary to sell our UCD products in the volumes and within the time frames that we expect;

 

   

not comply with any requirements imposed on pharmacies through a REMS;

 

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be unable to satisfy financial obligations to us or others; or

 

   

cease operations.

Any such failure may result in decreased product sales and lower product revenue, which would harm our business.

If we are found in violation of federal or state “fraud and abuse” laws, we may be required to pay a penalty and/or be suspended from participation in federal or state health care programs, which may adversely affect our business, financial condition and results of operation.

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

Many states have adopted laws similar to the federal anti-kickback statute, some of which apply to the referral of patients for health care services reimbursed by any source, not just governmental payors. In addition, California and a few other 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, or PhRMA, Code on Interactions with Healthcare Professionals. In addition, several states impose other marketing restrictions or require pharmaceutical companies to make marketing or price 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.

Neither the government nor the courts have provided definitive guidance on the application of fraud and abuse laws to our business. 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. While we believe we have structured our business arrangements to comply with these laws, it is possible that the government could allege violations

 

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of, or convict us of violating, these laws. If we are found in violation of one of these laws, we could be required to pay a penalty and could be suspended or excluded from participation in federal or state health care programs, and our business, financial condition and results of operations may be adversely affected.

Recently enacted and future legislation may increase the difficulty and cost for us to obtain marketing approval of and commercialize our product candidates 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 marketing approval of our product candidates, restrict or regulate post-marketing activities and affect our ability to profitably sell our products for which we obtain marketing approval.

In the United States, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, or Medicare Modernization Act, 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 new 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 will be covered in any therapeutic class under the new 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 Medicare Modernization Act only applies to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy and payment limitations in setting their own reimbursement rates. Therefore, any reduction in reimbursement that results from the Medicare Modernization Act may result in a similar reduction in payments from private payors.

In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, collectively PPACA, a sweeping law intended to broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against healthcare 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. PPACA increased manufacturers’ rebate liability under the Medicaid Drug Rebate Program by increasing the minimum rebate amount for both branded and generic drugs and revised the definition of “average manufacturer price,” or AMP, which may also increase the amount of Medicaid drug rebates manufacturers are required to pay to states. The legislation also expanded Medicaid drug rebates, which previously had been payable only on fee-for-service utilization, to Medicaid managed care utilization, and created an alternative rebate formula for certain new formulations of certain existing products that is intended to increase the rebates due on those drugs. The Centers for Medicare and Medicaid Services, which administers the Medicaid Drug Rebate Program, also has proposed to expand Medicaid rebates to the utilization that occurs in the territories of the United States, such as Puerto Rico and the Virgin Islands. Also effective in 2010, the new law expanded the types of entities eligible to receive discounted 340B pricing, although, with the exception of children’s hospitals, these newly eligible entities will not be eligible to receive discounted 340B pricing on orphan drugs. In addition, as 340B drug pricing is determined based on AMP and Medicaid rebate data, the revisions to the Medicaid rebate formula and AMP definition described above could cause the required 340B discount to increase. Further, beginning in 2011, PPACA imposed a significant annual fee on companies that manufacture or import branded prescription drug products and requires manufacturers to provide a 50% discount off the negotiated price of prescriptions filled by beneficiaries in the Medicare Part D coverage gap, referred to as the “donut hole”. Substantial new provisions affecting compliance have also been enacted, which may require us to modify our business practices with healthcare practitioners. For example, beginning in 2013 pharmaceutical companies will be required to track and report to the federal government certain payments made to physicians and teaching hospitals in the preceding year. We will not know the full effects of PPACA until applicable federal and state agencies issue regulations or guidance under the new law. Although it is too early to determine the effect of PPACA, the new law appears likely to continue the downward pressure on pharmaceutical pricing, especially under the Medicare program, and may also increase our regulatory burdens and operating costs.

 

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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 the FDA regulations, guidance or interpretations will be changed, or what the impact of such changes on the marketing approvals of our product candidates, if any, may be. In addition, increased scrutiny by the United States 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 testing and other requirements. Furthermore, the concerns raised by patients, patient advocacy groups and congressional representatives about the recent pricing of orphan drugs, could result in changes to the Orphan Drug Act or limitations in the approval pathway or pricing and reimbursement of orphan drugs.

Risks Related to Our Financial Position and Need for Additional Capital

We currently have no source of revenue and may never become profitable.

We are a development stage biopharmaceutical company with a limited operating history. Our ability to generate revenue and become profitable depends upon our ability to successfully complete the development of Ravicti for the chronic management of UCD and obtain the necessary regulatory approvals for Ravicti. We have generated no revenue in the last three years. Even if we receive regulatory approval for Ravicti and purchase Ucyclyd’s worldwide rights to BUPHENYL and AMMONUL, we do not know when our UCD products will generate revenue for us, if at all. Our ability to generate product revenue depends on a number of factors, including our ability to:

 

   

successfully complete clinical and nonclinical development, and receive FDA approval, for Ravicti for the chronic management of UCD;

 

   

purchase of Ucyclyd’s worldwide rights to BUPHENYL and AMMONUL;

 

   

set an acceptable price for our products;

 

   

obtain commercial quantities of our UCD products at acceptable cost levels;

 

   

obtain adequate reimbursement from third-party payors;

 

   

successfully market and sell our UCD products in the United States;

 

   

delay the introduction of generic versions of our UCD products;

 

   

maintain our licenses or sublicenses to intellectual property rights to Ravicti; and

 

   

maintain existing distribution agreements for BUPHENYL and AMMONUL outside the United States.

In addition, because of the numerous risks and uncertainties associated with product development, we are unable to predict the timing or amount of increased expenses, or when, or if, we will be able to achieve or maintain profitability. For example, if the FDA requires us to complete the 12-month safety portion of the study in pediatric patients aged 29 days through 5 years and present the data before the FDA will consider approving the NDA for Ravicti in any patients, our ability to generate revenue may be substantially delayed. In addition, our expenses could increase beyond expectations if we are required by the FDA to perform studies in addition to those that we currently anticipate. Even if Ravicti is approved for commercial sale and we purchase Ucyclyd’s worldwide rights to BUPHENYL and AMMONUL, we anticipate incurring significant costs associated with the commercial launch of these products.

 

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Even if we are able to generate revenues from the sale of our products, 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.

We have incurred net losses since inception and anticipate that we will continue to incur net losses for the foreseeable future.

We have incurred losses in each year since our inception on November 1, 2006. Our losses were $13.6 million in 2009, $25.5 million in 2010, $29.4 million in 2011 and $11.9 million for the three months ended March 31, 2012. As of March 31, 2012, we had a deficit accumulated during the development stage of $118.6 million. We have devoted most of our financial resources to research and development, including our nonclinical development activities and clinical trials. To date, we have financed our operations primarily through the sale of equity securities and debt. Ravicti will require the completion of regulatory review, significant marketing efforts and substantial investment before it 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 clinical trials for Ravicti and any other clinical trials or nonclinical testing that we may initiate. In addition, we expect to incur increased sales and marketing expenses. As a result, we expect to continue to incur significant and increasing operating losses and negative cash flows for the foreseeable future. These losses have had and will continue to have an adverse effect on our stockholders’ deficit and working capital.

We may need to obtain additional financing to fund our operations.

We may need to obtain additional financing to fund our future operations, including the development and commercialization of Ravicti, the purchase of Ucyclyd’s worldwide rights to BUPHENYL and AMMONUL pursuant to the restated collaboration agreement, and supporting sales and marketing activities related to Ravicti, and BUPHENYL and AMMONUL if purchased from Ucyclyd. We would likely need to obtain additional financing to conduct a Phase III trial in HE, for additional studies for the approval of Ravicti in UCD if requested by the FDA, and for development of any additional product candidates we might acquire. Moreover, our fixed expenses such as rent, license payments, interest expense and other contractual commitments are substantial and are expected to increase in the future.

Our future funding requirements will depend on many factors, including, but not limited to:

 

   

our ability to successfully commercialize Ravicti for the treatment of UCD, and BUPHENYL and AMMONUL if purchased from Ucyclyd;

 

   

the amount of sales and other revenues from products that we may commercialize, if any, including the selling prices for such products and the availability of adequate third-party reimbursement;

 

   

selling and marketing costs associated with our UCD products, including the cost and timing of expanding our marketing and sales capabilities and establishing a network of specialty pharmacies;

 

   

the progress, timing, scope and costs of our nonclinical studies and 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 and the costs of post-marketing studies that may be required by regulatory authorities;

 

   

the costs of obtaining clinical and commercial supplies of Ravicti, and BUPHENYL and AMMONUL if purchased from Ucyclyd;

 

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payments of milestones and royalties to third parties, including Ucyclyd;

 

   

cash requirements of any future acquisitions of product candidates;

 

   

the time and cost necessary to respond to technological and market developments;

 

   

the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; and

 

   

any changes made to, or new developments in, our restated collaboration agreement with Ucyclyd or any new collaborative, licensing and other commercial relationships that we may establish.

Until we can generate a sufficient amount of revenue, we expect to finance future cash needs through public or private equity offerings or debt financings. 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 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.

We believe that our current cash and cash equivalents, the net proceeds from this offering, as well as potential payments from Ucyclyd beginning January 1, 2013 if Ravicti is not approved by the FDA prior to that, will be sufficient to fund our operations through the commercial launch of Ravicti in UCD, assuming commercialization occurs in the first half of 2013. We have based this estimate on a number of assumptions that may prove to be wrong, and changing circumstances beyond our control may cause us to consume capital more rapidly than we currently anticipate. For example, if the FDA requires us to complete the 12-month safety portion of the study in pediatric patients aged 29 days through 5 years and present the data before the FDA will consider approving the NDA for Ravicti in any patients, our ability to generate revenue may be substantially delayed. Pursuant to the restated collaboration agreement, if the Ravicti NDA for UCD is not approved by January 1, 2013, then Ucyclyd is obligated to make monthly payments of $0.5 million to us until the earliest of (1) FDA approval of the Ravicti NDA for UCD, (2) June 30, 2013, and (3) our written notification of our decision not to purchase BUPHENYL and AMMONUL. Our inability to obtain additional funding when we need it could seriously harm our business.

We might be unable to service our potential loan from Ucyclyd due to a lack of cash flow and might be subject to default.

Under the terms of our restated collaboration agreement, we have an option to purchase Ucyclyd’s worldwide rights to BUPHENYL and AMMONUL at a fixed upfront purchase price, with additional payments for regulatory milestones, net sales milestones and royalties. If we exercise this option, Ucyclyd has a time-limited right to retain ownership of AMMONUL by paying us a predefined price. If Ucyclyd exercises its right to retain AMMONUL, then the upfront purchase price for Ucyclyd’s worldwide rights to BUPHENYL will be offset against the amount due to us from Ucyclyd, resulting in a net payment to us of $13.0 million upon closing of our purchase of BUPHENYL. If Ucyclyd does not exercise its right to retain AMMONUL, we will owe Ucyclyd a payment of $22.0 million upon closing of our purchase of BUPHENYL and AMMONUL. To fund this upfront purchase price, we may draw on a loan commitment from Ucyclyd. The loan, which would be repayable in eight quarterly payments, would be secured by the BUPHENYL and AMMONUL assets and carry a 9% annual interest rate. Any default under the loan security agreement and resulting foreclosure would have a material adverse effect on our financial condition and our ability to continue our operations. For example, if we do not make the required payments when due, if we breach the note or the security agreement related to the note or if we become bankrupt, Ucyclyd could elect to declare all amounts outstanding to be immediately due and payable. Even if we were able to repay the full amount due in cash, any such repayment could leave us with little

 

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or no working capital for our business. If we are unable to repay the full amount due, Ucyclyd would have a first claim on our assets pledged under the loan security agreement and we could lose our rights to BUPHENYL and AMMONUL. If Ucyclyd should attempt to foreclose on the collateral, it is possible that there would be no assets remaining after repayment in full of such secured indebtedness.

We may sell additional equity or debt securities to fund our operations, which may result in dilution to our stockholders and impose restrictions on our business.

In order to raise additional funds to support our operations, we may sell additional equity or debt securities, which would result in dilution to all of our stockholders or impose restrictive covenants that adversely impact our business. 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 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.

Our recurring operating losses have raised substantial doubt regarding our ability to continue as a going concern.

Our recurring operating losses raise substantial doubt about our ability to continue as a going concern. As a result, our independent registered public accounting firm included an explanatory paragraph in its report on our consolidated financial statements as of and for the year ended December 31, 2011. We have no current source of revenue to sustain our present activities, and we do not expect to generate revenue until, and unless, we receive regulatory approval of and successfully commercialize Ravicti, or purchase Ucyclyd’s worldwide rights to BUPHENYL and AMMONUL. Accordingly, our ability to continue as a going concern will require us to obtain additional financing to fund our operations. The perception of our ability to continue as a going concern may make it more difficult for us to obtain financing for the continuation of our operations and could result in the loss of confidence by investors, suppliers and employees.

Risks Related to Our Reliance on Third Parties

We have no manufacturing capacity and anticipate continued reliance on third-party manufacturers for the development and commercialization of our products.

We do not currently operate manufacturing facilities for clinical or commercial production of Ravicti, BUPHENYL or AMMONUL. We have no experience in drug formulation, and we lack the resources and the capabilities to manufacture Ravicti, BUPHENYL or AMMONUL on a clinical or commercial scale. We do not intend to develop facilities for the manufacture of products for clinical trials or commercial purposes in the foreseeable future. We rely on third-party manufacturers to produce bulk drug substance and drug products required for our clinical trials. We plan to continue to rely upon contract manufacturers and, potentially, collaboration partners to manufacture commercial quantities of our drug product candidates if and when approved for marketing by the applicable regulatory authorities. We have clinical supplies of Ravicti manufactured for us by two drug substance suppliers, Helsinn Chemicals SA, or Helsinn, and DSM Fine Chemicals Austria Nfg GmbH, or DSM, on a purchase order basis. We have included both Helsinn and DSM as suppliers of drug substance in the Ravicti NDA. However, neither of our contract manufacturers has completed process validation for the drug substance manufacturing process. If neither contract manufacturers are approved by the FDA, our commercial supply of drug substance will be significant delayed and may result in significant additional costs. We purchase finished Ravicti drug product from Lyne Laboratories, Inc., or Lyne, on a purchase order basis in accordance with a clinical supply agreement. We do not have an agreement in place for, and we have not identified, a secondary fill/finish supplier. If we need to identify an additional fill/finish manufacturer,

 

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we would not be able to do so without significant delay and likely significant additional cost. We have not secured commercial supply agreements with any contract manufacturers and can give no assurance that we will enter commercial supply agreements with any contract manufacturers on favorable terms or at all.

Our contract manufacturers’ 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 or death, 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. Contract manufacturers often encounter difficulties involving production yields, quality control and quality assurance, as well as shortages of qualified personnel. For example, we recently discovered a contaminated lot of Ravicti, which we believe was caused by a failure in a filtration step by one of our third-party drug substance manufacturers. As a result, we have a limited commercial supply of Ravicti, and we will need to manufacture another lot, which could cause a delay in the commercial launch of Ravicti.

Our existing manufacturers and any future contract 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 our UCD products would be interrupted, resulting in delays and additional costs.

In addition, because our contract manufacturers of the bulk drug substance are located outside of the United States, we may face difficulties in importing our UCD products into the United States as a result of, among other things, FDA import inspections, incomplete or inaccurate import documentation or defective packaging.

Some of the intellectual property necessary for the commercialization of our UCD products is or will be licensed from third parties, which will require us to pay milestones and royalties.

Ucyclyd has granted us a license to use some of the technology developed by Ucyclyd in connection with the manufacturing of Ravicti. The purchase agreement under which we purchased the worldwide rights to Ravicti further obligates us to pay Ucyclyd regulatory and sales milestone payments relating to Ravicti, as well as royalties on the net sales of Ravicti. If we purchase BUPHENYL and AMMONUL under the restated collaboration agreement with Ucyclyd, we will also receive a license to use some of the manufacturing technology developed by Ucyclyd in connection with the manufacturing of these products. The restated collaboration agreement will obligate us to pay Ucyclyd regulatory and sales milestone payments, as well as royalties on net sales of these products.

We may become obligated to make a milestone or royalty payments when we do not have the cash on hand to make these payments, or have budgeted cash for our development efforts. This could cause us to delay our development efforts, curtail our operations, scale back our commercialization and marketing efforts or seek additional capital to meet these obligations, which could be on terms unfavorable to us. Additionally, if we fail to make a required payment to Ucyclyd and do not cure the failure with the required time period, Ucyclyd may be able to terminate our license to use its manufacturing technology for our UCD products.

We also license intellectual property necessary for commercialization of Ravicti from Brusilow Enterprises, LLC, or Brusilow. Brusilow may be entitled to terminate our license if we breach that agreement or do not meet specified diligence obligations in our development and commercialization of Ravicti and do not cure the failure within the required time period. If our license from Brusilow is terminated, it may be difficult or impossible for us to commercialize Ravicti.

 

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Termination of the restated collaboration agreement prior to our purchase of Ucyclyd’s worldwide rights to BUPHENYL and AMMONUL would result in our losing rights to these products.

If the restated collaboration agreement terminates before closing of our purchase of Ucyclyd’s worldwide rights to BUPHENYL and AMMONUL, we would lose our rights to these products and would be unable to generate any revenue from these products. The restated collaboration agreement will automatically terminate if any of the following events occur:

 

   

we fail to exercise the option to purchase Ucyclyd’s worldwide rights to BUPHENYL and AMMONUL during the required time period;

 

   

after we exercise our option to purchase Ucyclyd’s worldwide rights to BUPHENYL and AMMONUL, we are unable to resolve a challenge to our purchase of Ucyclyd’s worldwide rights to BUPHENYL and AMMONUL from the Federal Trade Commission or Antitrust Division of the Department of Justice; or

 

   

after we exercise the option to purchase Ucyclyd’s worldwide rights to BUPHENYL and AMMONUL, we do not consummate the purchase within the required time period.

Although we anticipate exercising our option to purchase Ucyclyd’s worldwide rights to BUPHENYL and AMMONUL in the future, we have no control over Ucyclyd’s conduct of the BUPHENYL and AMMONUL business in the intervening time period.

Under the restated collaboration agreement, we will be permitted to exercise our option to purchase Ucyclyd’s worldwide rights to BUPHENYL and AMMONUL for a period of 90 days beginning on the earlier of the date of the approval of Ravicti for the treatment of UCD and June 30, 2013, but in no event earlier than January 1, 2013. Between now and the time that we can exercise our option, Ucyclyd has full control over the commercialization of BUPHENYL and AMMONUL, and we are entirely dependent on Ucyclyd to preserve the value of the businesses related to these products. If the value of the BUPHENYL and AMMONUL businesses decreases significantly, we may decide not to exercise our option to purchase Ucyclyd’s worldwide rights to BUPHENYL and AMMONUL, in which case we would be unable to generate any revenue from these products.

Any collaboration arrangements that we may enter into in the future may not be successful, which could adversely affect our ability to develop and commercialize our current and potential future product candidates.

We may seek collaboration arrangements with pharmaceutical or biotechnology companies for the development or commercialization of our current and potential future product candidates. We may enter into these arrangements on a selective basis depending on the merits of retaining commercialization rights for ourselves as compared to entering into selective collaboration arrangements with leading pharmaceutical or biotechnology companies for each product candidate, both in the United States and internationally. We will face, to the extent that we decide to enter into collaboration agreements, significant competition in seeking appropriate collaborators. Moreover, collaboration arrangements are complex and time consuming to negotiate, document and implement. We may not be successful in our efforts to establish and implement collaborations or other alternative arrangements should we so chose to enter into such arrangements. The terms of any collaborations or other arrangements that we may establish may not be favorable to us.

Any future collaborations that we enter into may not be successful. 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.

Disagreements between parties to a collaboration arrangement regarding clinical development and commercialization matters, can lead to delays in the development process or commercializing the applicable product candidate 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.

 

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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 would adversely affect us financially and could harm our business reputation.

We currently depend on third parties to conduct some of the operations of our clinical trials, and depend on Ucyclyd to supply BUPHENYL for our clinical uses in connection with the development of, and application for regulatory approval of, Ravicti.

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

Ucyclyd currently supplies us with BUPHENYL under a clinical supply agreement effective as of January 31, 2008 and amended on March 22, 2012, for our clinical activities in connection with the development of and regulatory approval for Ravicti. This contractual obligation for Ucyclyd to supply us with BUPHENYL will continue in effect through the period of our option to purchase Ucyclyd’s worldwide rights to BUPHENYL under the restated collaboration agreement and through closing of the purchase, or if we elect not to exercise the option then the clinical supply ends upon expiration of the 90-day option period. If Ucyclyd does not successfully carry out its contractual obligations and meet our requirements for clinical supply of BUPHENYL, then our development and clinical activities with respect to Ravicti may be compromised.

Risks Related to Our Intellectual Property

We may not be able to protect our proprietary technology in the marketplace.

Where appropriate, we seek patent protection for certain aspects of our technology. Patent protection may not be available for some of the products or technology we are developing. If we must spend significant time and money protecting or enforcing our patents, designing around patents held by others or licensing, potentially for large fees, patents or other proprietary rights held by others, our business and financial prospects may be harmed. We may not develop additional proprietary products which are patentable.

The patent positions of pharmaceutical products are complex and uncertain. The scope and extent of patent protection for Ravicti and our future products and product candidates are particularly uncertain. Publication of information related to Ravicti and our future products and product candidates may prevent us from obtaining or enforcing patents relating to these products and product candidates, including without limitation composition-of-matter patents, which are generally believed to offer the strongest patent protection.

We have licensed patents in the United States and in certain foreign jurisdictions related to Ravicti, including U.S. Patent 5,968,979, which covers the composition of matter of Ravicti, which we license from Brusilow. Our Brusilow license may be terminated if we do not comply with the terms of the applicable license. Patents that we own or license do not 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 including identical or similar products;

 

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U.S. Patent 5,968,979 covering Ravicti composition of matter expires February 7, 2015, unless its term is successfully extended;

 

   

upon expiration of U.S. Patent 5,968,979, we do not at this time own or control a granted U.S. Patent that prevents generic entry into the United States market for Ravicti;

 

   

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 existing in the patent landscape for Ravicti that will affect our freedom to operate;

 

   

if our patents are challenged, a court could determine that they are not valid or enforceable;

 

   

a court 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.

As a result of our purchase of the worldwide rights to Ravicti, we also own several pending patent applications in the United States and in foreign jurisdictions relating to methods of using, administering, and adjusting the dosage of Ravicti. These applications do not ensure the protection of our intellectual property. Additionally, these pending applications may not issue or may issue with claims significantly narrower than we currently seek. Unless and until our pending applications issue, their protective scope is impossible to determine, and even after issuance their protective scope may be limited. For example, we may not have developed a method for determining dosing for Ravicti before others developed identical, similar methods or distinct methods, in which case we may not receive a granted patent or any granted patent may not cover potential competition.

If we encounter delays in our development or clinical trials, the period of time during which we could market our products under patent protection would be reduced.

Additional competitors could enter the market, including with generic versions of our products, and sales of affected products may decline materially.

The Ravicti composition of matter patent expires in the United States in 2015. Based on current projections, we expect to receive an extension of this patent under the Drug Price Competition and Patent Term Restoration Act, or Hatch-Waxman Amendments, which we expect to extend this patent coverage for approximately an additional three years.

We own a first set of pending patent applications in the United States, Europe, Japan, and Canada, and a second set of pending patent applications in the United States and internationally pursuant to the Patent Cooperation Treaty, or PCT. These applications are directed to methods of using, administering, and adjusting the effective dosage of Ravicti. If granted, these applications could extend market protection until 2029 to 2032; however, there is a significant risk that these applications will not issue timely, or that they may not issue at all. In particular, claims directed to dosing and dose adjustment may be substantially less likely to issue in light of

 

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the recent Supreme Court decision in Mayo Collaborative Services v. Prometheus Laboratories, Inc. In Mayo, the Court held that claims directed to methods of determining whether to adjust drug dosing levels based on drug metabolite levels in the blood were not patent eligible because they were directed to a law of nature. This decision may have wide-ranging implications on the validity and scope of pharmaceutical method claims, although its full impact will not be known for many years.

Ravicti holds orphan drug designation for UCD; however, we cannot guarantee that orphan drug exclusivity, and the associated seven years of market exclusivity, will be granted.

Under the Hatch-Waxman Act, a pharmaceutical manufacturer may file an abbreviated new drug application, or ANDA, seeking approval of a generic copy of an approved innovator product. Under the Hatch-Waxman Act, a manufacturer may also submit an NDA under section 505(b)(2) that references the FDA’s prior approval of the innovator product. A 505(b)(2) NDA product may be for a new or improved version of the original innovator product.

Hatch-Waxman also provides for certain periods of regulatory exclusivity, which preclude FDA approval (or in some circumstances, FDA filing and reviewing) of an ANDA or 505(b)(2) NDA. These include, subject to certain exceptions, the period during which an FDA-approved drug is subject to orphan drug exclusivity. In addition to the benefits of regulatory exclusivity, an innovator NDA holder may have patents claiming the active ingredient, product formulation or an approved use of the drug, which would be listed with the product in the FDA publication, “Approved Drug Products with Therapeutic Equivalence Evaluations,” known as the “Orange Book.” If there are patents listed in the Orange Book, a generic or 505(b)(2) applicant that seeks to market its product before expiration of the patents must include in the ANDA what is known as a “Paragraph IV certification,” challenging the validity or enforceability of, or claiming non-infringement of, the listed patent or patents. Notice of the certification must be given to the innovator, too, and if within 45 days of receiving notice the innovator sues to protect its patents, approval of the ANDA is stayed for 30 months, or as lengthened or shortened by the court.

We anticipate that, if approved, Ravicti will qualify for a three-year period of exclusivity, based on the fact that data from clinical trials with the product will be necessary to obtain approval. That exclusivity would mean that, even in the absence of any patent protection, FDA could not grant final approval to an ANDA for a generic version of Ravicti until three years after approval of Ravicti. It would not delay a generic competitor submitting an ANDA, or the FDA reviewing it, or granting it “tentative approval.” The exclusivity would also prohibit FDA from approving a 505(b)(2) NDA that references FDA’s approval of Ravicti or includes the same active ingredient and uses as Ravicti.

Accordingly, competitors could file ANDAs for generic versions of Ravicti, or 505(b)(2) NDAs that reference Ravicti, immediately after approval of an NDA for Ravicti, and if there are patents listed for Ravicti in the Orange Book, those ANDAs and 505(b)(2) NDAs would be required to include a certification as to each listed patent indicating whether the ANDA applicant does or does not intend to challenge the patent. We cannot predict whether Ravicti will be approved or, if approved, whether it will be granted any regulatory exclusivity, or the scope of that exclusivity. We also cannot predict whether any patents issuing from our pending patent applications will be eligible for listing in the Orange Book, how any generic competitor would address such patents, whether we would sue on any such patents, or the outcome of any such suit.

The composition of matter patent and orphan drug exclusivity for BUPHENYL have expired. Because BUPHENYL has no regulatory exclusivity or listed patents, a competitor could at any time submit an ANDA for a generic version of BUPHENYL and request immediate approval. We are aware of one ANDA for BUPHENYL tablets which was approved in the fourth quarter of 2011. The ANDA process is a confidential one, so there may be other BUPHENYL ANDAs pending.

We own a first set of patent applications in the United States, Europe, Japan, and Canada and a second set of patent applications in the United States and internationally pursuant to the PCT. The applications directed to

 

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methods of using, administering, and adjusting the dosage of BUPHENYL. If granted, these applications could extend market protection until 2029 to 2032; however, there is a significant risk that these applications will not issue timely, or that they may not issue at all. In particular, claims directed to dosing and dose adjustment may be substantially less likely to issue in light of the recent Supreme Court decision in Mayo. This decision may have wide-ranging implications on the validity and scope of pharmaceutical method claims, although its full impact will not be known for many years. Moreover, even if granted these applications may not provide protection sufficient to protect against the use of generic forms of BUPHENYL.

In the absence of any additional patent protection or even if U.S. Patents issued from our pending patent applications, a competitor may seek and obtain FDA approval for, and subsequently sell, a generic version of BUPHENYL. For example, in November 2011, FDA approved a generic version of BUPHENYL tablets. Such a generic product may be priced at a discount to our branded BUPHENYL and Ravicti, and physicians, patients, or payors may decide that this less expensive alternative is preferable to either of our drugs. If this occurs, our UCD product sales could be materially reduced, but we would nevertheless be required to make royalty payments to Ucyclyd and Brusilow at the same royalty rates.

Although AMMONUL also has no patents listed in the Orange Book, it was the subject of orphan drug exclusivity that expired in February 2012, which means that the FDA can approve a generic version of AMMONUL at any time.

We may not be successful in securing or maintaining proprietary patent protection for products we currently market or for products and technologies we develop or license. Moreover, if any patents that are granted and listed in the Orange Book are successfully challenged by way of a Paragraph IV certification and subsequent litigation, the affected product could more immediately face generic competition and its sales would likely decline materially. Should sales decline, we may have to write off a portion or all of the intangible assets associated with the affected product and our results of operations and cash flows could be materially and adversely affected.

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. This could make it difficult for us to stop the infringement of our in-licensed patents or the misappropriation of our other intellectual property rights. For example, many 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 stop us from commercializing or increase the costs of commercializing our products.

Our commercial success depends significantly on our ability to operate without infringing the patents and other intellectual property rights of third parties. For example, there could be issued patents of which we are not aware that our products infringe. There also could be patents that we believe we do not infringe, but that we may

 

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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 our products infringe. For example, pending applications may exist that provide support or can be amended to provide support for a claim that results in an issued patent that our product infringes.

Third parties may assert that we are employing their proprietary technology without authorization. If a court held 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 our products unless we obtained 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.

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. These agreements may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, others may independently discover our trade secrets and proprietary information. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights. 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.

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

Our ability to defend our intellectual property may require us to initiate litigation to enforce our rights or defend our activities in response to alleged infringement of a third party. In addition, we may be sued by others who hold intellectual property rights who claim that their issued patents are infringed by Ravicti or any future products, including BUPHENYL or AMMONUL, or product candidates. 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 biotechnology and pharmaceutical industries generally.

In addition, our patents and patent applications, or those of our licensors, could face other challenges, such as interference proceedings, opposition proceedings, and re-examination proceedings. 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’s time and attention.

Risks Related to Our Business Operations and Industry

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. The loss of the services of any member of our senior management or the inability to hire or retain experienced

 

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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 one or more of our senior executive officers 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 senior management. The competition for qualified personnel in the pharmaceutical field is intense. Due to this intense competition, we may be unable to continue to attract and retain qualified personnel necessary for the development of our business or to recruit suitable replacement personnel.

Failure to build our finance infrastructure and improve our accounting systems and controls could impair our ability to comply with the financial reporting and internal controls requirements for publicly traded companies.

As a public company, we will operate in an increasingly challenging regulatory environment which requires us to comply with the Sarbanes-Oxley Act of 2002, as amended, or the Sarbanes-Oxley Act, and the related rules and regulations of the Securities and Exchange Commission, or SEC, expanded disclosures, accelerated reporting requirements and more complex accounting rules. Company responsibilities required by the Sarbanes-Oxley Act include establishing corporate oversight and adequate internal control over financial reporting and disclosure controls and procedures. Effective internal controls are necessary for us to produce reliable financial reports and are important to help prevent financial fraud. We will be required to disclose material changes made in our internal controls and procedures on a quarterly basis. However, our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act until the later of the year following our first annual report required to be filed with the SEC or the date we are no longer an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, because we are taking advantage of the exemptions contained in the JOBS Act.

To build this infrastructure, we will need to hire additional accounting personnel and improve our accounting systems, disclosure policies, procedures and controls. We are currently in the process of:

 

   

initiating our plans to upgrade our computer systems, including hardware and software;

 

   

establishing written policies and procedures; and

 

   

enhancing internal controls and our financial statement review process.

If we are unsuccessful in building an appropriate accounting infrastructure, we may not be able to prepare and disclose, in a timely manner, our financial statements and other required disclosures, or comply with existing or new reporting requirements. If we cannot provide reliable financial reports or prevent fraud, our business and results of operations could be harmed and investors could lose confidence in our reported financial information.

We will need to significantly increase the size of our organization, and we may experience difficulties in managing growth.

We are a small company with 14 employees as of March 31, 2012. In order to commercialize our products, we will need to substantially increase our operations, including expanding our employee base of managerial, operational and financial personnel. Future growth will impose significant added responsibilities on members of management, including the need to identify, recruit, maintain and integrate additional employees. Our future

 

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financial performance and our ability to commercialize our products and to compete effectively will depend, in part, on our ability to manage any future growth effectively. To that end, we must be able to:

 

   

manage our clinical trials and the regulatory process effectively;

 

   

manage the manufacturing of products for commercial and clinical use;

 

   

integrate current and additional management, administrative, financial and sales and marketing personnel;

 

   

hire new personnel necessary to effectively commercialize product candidates we license;

 

   

develop our administrative, accounting and management information systems and controls; and

 

   

hire and train additional qualified personnel.

Product candidates that we may acquire in the future may be intended for patient populations that are significantly larger than those for UCD and HE. In order to continue development and marketing of these products, if approved, we would need to significantly expand our operations. Our staff, financial resources, systems, procedures or controls may be inadequate to support our operations and our management may be unable to manage successfully future market opportunities or our relationships with customers and other third parties.

If we engage in acquisitions, we will incur a variety of costs and we may never realize the anticipated benefits of such acquisitions.

We may attempt to acquire businesses, technologies, services, products or product candidates that we believe are a strategic fit with our business. We have no present agreement regarding any material acquisitions other than the restated collaboration agreement, under which we have an option to purchase Ucyclyd’s worldwide rights to BUPHENYL and AMMONUL. However, if we do undertake any acquisitions, the process of integrating an acquired business, technology, service, products or product candidates 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 could result in additional issuances of equity securities that would dilute the ownership of existing stockholders. Future acquisitions could also result in the incurrence of debt, contingent liabilities or the amortization of expenses related to other intangible assets, any of which could adversely affect our operating results. In addition, we may fail to realize the anticipated benefits of any acquisition.

Our business is affected 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 and distributors to purchase, pay for and effectively distribute our products. Similarly, these macroeconomic factors could affect the ability of our contract manufacturers, sole-source or single-source suppliers to remain in business or otherwise manufacture or supply product. Failure by any of them to remain a going concern could affect our ability to manufacture products.

 

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If product liability lawsuits are successfully brought against us, we will incur substantial liabilities and may be required to limit the commercialization of Ravicti or other products.

We face potential product liability exposure related to the testing of our product candidates in human clinical trials, and we may face exposure to claims by an even greater number of persons if we begin marketing and distributing our products commercially. In the future, an individual may bring a liability claim against us alleging that one of our products or product candidates caused an injury. If we cannot successfully defend ourselves against product liability claims, we will incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:

 

   

decreased demand for our products;

 

   

injury to our reputation;

 

   

withdrawal of clinical trial participants;

 

   

costs of related litigation;

 

   

substantial monetary awards to patients and others;

 

   

loss of revenues; and

 

   

the inability to commercialize our products.

In addition, while we continue to take what we believe are appropriate precautions, we may be unable to avoid significant liability if any product liability lawsuit is brought against us.

If product liability lawsuits are successfully brought against us, our insurance may be inadequate.

We are exposed to the potential product liability risks inherent in the testing, manufacturing and marketing of human pharmaceuticals. We plan to maintain insurance against product liability lawsuits for commercial sale of Ravicti, if Ravicti is approved for sale, and for BUPHENYL and AMMONUL if we purchase Ucyclyd’s worldwide rights to those products. We currently maintain insurance for the clinical trials of Ravicti. Biopharmaceutical companies must balance the cost of insurance with the level of coverage based on estimates of potential liability. 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 and commercial use of Ravicti, BUPHENYL and AMMONUL, for which our insurance coverage may not be adequate.

The product liability insurance we will need to obtain in connection with the commercial sales of our product candidates if and when they receive regulatory approval may be unavailable in meaningful amounts or at a reasonable cost. If we are the subject of a successful product liability claim that exceeds the limits of any insurance coverage we obtain, we may incur substantial charges that would adversely affect our earnings and require the commitment of capital resources that might otherwise be available for the development and commercial launch of our product programs.

Business interruptions could delay us in the process of developing our products and could disrupt our sales.

Our headquarters is located in the San Francisco Bay Area, near known earthquake fault zones and is vulnerable to significant damage from earthquakes. We are also vulnerable to other types of natural disasters and

 

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other events that could disrupt our operations. We do not carry insurance for earthquakes or other natural disasters 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.

Risks Related to this Offering and Ownership of Our Common Stock

The market price of our common stock may be highly volatile, and you may not be able to resell your shares at or above the initial public offering price.

Prior to this offering, there has not been a public market for our common stock. If an active trading market for our common stock does not develop following this offering, you may not be able to sell your shares quickly or at the market price. The initial public offering price for the shares will be determined by negotiations between us and representatives of the underwriters and may not be indicative of prices that will prevail in the trading market.

The trading price of our common stock is likely to be volatile. The following factors, in addition to other risk factors described in this section, may have a significant impact on the market price of our common stock:

 

   

announcements of regulatory approval or a complete response letter to Ravicti, or specific label indications or patient populations for its use, or changes or delays in the regulatory review process;

 

   

whether we exercise our option to purchase Ucyclyd’s worldwide rights to BUPHENYL and AMMONUL, and any associated delays or difficulties in completing the purchase or otherwise acquiring such rights, including as a result of antitrust review of the transaction;

 

   

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;

 

   

changes or developments in laws or regulations applicable to Ravicti and the products that we may acquire under our restated collaboration agreement with Ucyclyd;

 

   

any adverse changes to our relationship with Ucyclyd or other licensors, manufacturers or suppliers;

 

   

the success of our testing and clinical trials;

 

   

the success of our efforts to acquire or license additional product candidates;

 

   

any intellectual property infringement actions in which we may become involved;

 

   

announcements concerning our competitors or the pharmaceutical industry in general;

 

   

achievement of expected product sales and profitability;

 

   

manufacture, supply or distribution shortages;

 

   

actual or anticipated fluctuations in our operating results;

 

   

changes in financial estimates or recommendations by securities analysts;

 

   

trading volume of our common stock;

 

   

sales of our common stock by us, our executive officers and directors or our stockholders in the future;

 

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general economic and market conditions and overall fluctuations in the United States equity 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 The NASDAQ Stock Market in particular, have experienced extreme 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, the current decline in the financial markets and related factors beyond our control, including the credit and mortgage crisis in the United States and worldwide, may cause our stock price to decline rapidly and unexpectedly.

We may be subject to securities litigation, which is expensive and could divert management attention.

Our share price may be volatile, and in the past companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Litigation of this type could result in substantial costs and diversion of management’s attention and resources, which could seriously hurt our business. Any adverse determination in litigation could also subject us to significant liabilities.

Our principal stockholders, executive officers and directors own a significant percentage of our common stock and will be able to exert a significant control over matters submitted to our stockholders for approval.

After this offering, our officers and directors, and stockholders who own more than 5% of our outstanding common stock before this offering will, in the aggregate, beneficially own approximately 72.8% of our common stock (after giving effect to the conversion of all outstanding shares of our convertible preferred stock, the conversion of the principal and accrued interest outstanding under our convertible promissory notes and the net exercise of the warrants issued in connection with our bridge loan financings but assuming no exercise of the underwriters’ over-allotment option, no exercise of outstanding options and no exercise of outstanding warrants other than those issued in connection with our bridge loan financings). However, certain of our current stockholders have indicated an interest in purchasing an aggregate of $22.0 million of shares of common stock in this offering, or 1,833,333 shares at the assumed initial public offering price of $12.00 per share, the midpoint of the price range set forth on the cover page of this prospectus. If these current stockholders purchase all such shares of common stock in this offering, our executive officers, directors, greater than 5% stockholders, and entities that are affiliated with them would beneficially own shares representing approximately 75.5% of our common stock after this offering. This significant concentration of share ownership may adversely affect the trading price for our common stock because investors often perceive disadvantages in owning stock in companies with controlling stockholders. As a result, these stockholders, if they acted together, could significantly influence all matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other business combination transactions. The interests of these stockholders may not always coincide with our interests or the interests of other stockholders.

If you purchase our common stock in this offering, you will incur immediate and substantial dilution in the book value of your shares.

The assumed initial public offering price is substantially higher than the net tangible book value per share of our common stock. Investors purchasing common stock in this offering will pay a price per share that substantially exceeds the net tangible book value of our common stock. As a result, investors purchasing common stock in this offering will incur immediate dilution of $8.97 per share, based on the assumed initial public offering price of $12.00 per share, and our pro forma net tangible book value as of March 31, 2012. In

 

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addition, as of March 31, 2012, options to purchase 1,267,385 shares of our common stock at a weighted average exercise price of $2.37 per share were outstanding. The exercise of these options would result in additional dilution. As a result of this dilution, investors purchasing stock in this offering may receive significantly less than the purchase price paid in this offering in the event of liquidation. For more information, please refer to the section of this prospectus entitled “Dilution.”

Sales of a substantial number of shares of our common stock in the public market by our existing stockholders 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. Substantially all of our existing stockholders are subject to lock-up agreements with the underwriters of this offering that restrict the stockholders’ ability to transfer shares of our common stock for at least 180 days from the date of this prospectus. The lock-up agreements limit the number of shares of common stock that may be sold immediately following the public offering. Subject to limitations, approximately 10,368,835 shares will become eligible for sale upon expiration of the lockup period, as calculated and described in more detail in the section entitled “Shares Eligible for Future Sale.” In addition, shares issued or issuable upon exercise of options and warrants vested as of the expiration of the lock-up period will be eligible for sale at that time. Sales of stock by these stockholders could have a material adverse effect on the trading price of our common stock.

Some of the holders of our securities are entitled to rights with respect to the registration of their shares under the Securities Act of 1933, as amended, or the Securities Act, subject to the 180-day lock-up arrangement described above. Registration of these shares under the Securities Act would result in the shares becoming freely tradable without restriction under the Securities Act, except for shares held by our affiliates as defined in Rule 144 under the Securities Act. Any sales of securities by these stockholders could have a material adverse effect on the trading price of our common stock.

Our management will have broad discretion in the use of the net proceeds from this offering and may allocate the net proceeds from this offering in ways that you and other stockholders may not approve.

Our management will have broad discretion in the use of the net proceeds, including for any of the purposes described in the section entitled “Use of Proceeds,” and you will not have the opportunity as part of your investment decision to assess whether the net proceeds are being used appropriately. Because of the number and variability of factors that will determine our use of the net proceeds from this offering, their ultimate use may vary substantially from their currently intended use. The failure of our management to use these funds effectively could harm our business. Pending their use, we may invest the net proceeds from this offering in short-term, investment-grade, interest-bearing securities. These investments may not yield a favorable return to our stockholders.

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 will 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 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 would likely 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.

 

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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 have never declared or paid cash dividends on our common stock. 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. As a result, only appreciation of the price of our common stock, if any, will provide a return to investors in this offering.

Our ability to use our net operating loss carryforwards may be limited.

As of December 31, 2011, we had net operating losses of approximately $75.0 million and $95.0 million for both U.S. federal and California income tax purposes, respectively, which begin to expire in 2026 for U.S. federal income tax purposes and 2016 for California income tax purposes. If we experience an “ownership change” for purposes Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, 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. We are not currently subject to any annual limits on our ability to utilize net operating loss carryforwards. Our deferred tax assets have been fully offset by a valuation allowance as of December 31, 2011.

The requirements associated with being a public company will require significant company resources and management attention.

Following this offering, we will become subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or Exchange Act, the Sarbanes-Oxley Act, the listing requirements of the securities exchange on which our common stock is traded, 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 Securities and Exchange Commission, or SEC, and The NASDAQ Stock Market may also impose various additional requirements on public companies. As a result, we will incur additional legal, accounting and other expenses that we did not incur as a nonpublic company, particularly after we are no longer an “emerging growth company” as defined in the JOBS Act. Further, the need to establish the corporate infrastructure demanded of a public company may divert management’s attention from implementing our growth strategy. We have made, and will continue to make, changes to our corporate governance standards, disclosure controls and financial reporting and accounting systems 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.

The recently enacted JOBS Act will allow us to postpone the date by which we must comply with some of the laws and regulations intended to protect investors and to reduce the amount of information we provide in our reports filed with the SEC, which could undermine investor confidence in our company and adversely affect the market price of our common stock.

For so long as we remain an “emerging growth company” as defined in the JOBS Act, we may take advantage of certain exemptions from various requirements that are applicable to public companies that are not “emerging growth companies” including:

 

   

the provisions of Section 404(b) of the Sarbanes-Oxley Act requiring that our independent registered public accounting firm provide an attestation report on the effectiveness of our internal control over financial reporting;

 

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the “say on pay” provisions (requiring a non-binding shareholder vote to approve compensation of certain executive officers) and the “say on golden parachute” provisions (requiring a non-binding shareholder vote to approve golden parachute arrangements for certain executive officers in connection with mergers and certain other business combinations) of the Dodd-Frank Act and some of the disclosure requirements of the Dodd-Frank Act relating to compensation of its chief executive officer;

 

   

the requirement to provide detailed compensation discussion and analysis in proxy statements and reports filed under the Securities Exchange Act of 1934, and instead provide a reduced level of disclosure concerning executive compensation; and

 

   

any rules that may be adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotation or a supplement to the auditor’s report on the financial statements.

We may take advantage of these exemptions until we are no longer an “emerging growth company.” We would cease to be an “emerging growth company” upon the earliest of: (i) the first fiscal year following the fifth anniversary of this offering; (ii) the first fiscal year after our annual gross revenues are $1 billion or more; (iii) the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt securities; or (iv) as of the end of any fiscal year in which the market value of our common stock held by non-affiliates exceeded $700 million as of the end of the second quarter of that fiscal year.

Although we are still evaluating the JOBS Act, we currently intend to take advantage of some, but not all, of the reduced regulatory and reporting requirements that will be available to us so long as we qualify as an “emerging growth company.” For example, we have irrevocably elected not to take advantage of the extension of time to comply with new or revised financial accounting standards available under Section 102(b) of the JOBS Act. Our independent registered public accounting firm will not be required to provide an attestation report on the effectiveness of our internal control over financial reporting so long as we qualify as an “emerging growth company,” which may increase the risk that weaknesses or deficiencies in our internal control over financial reporting go undetected. Likewise, so long as we qualify as an “emerging growth company,” we may elect not to provide you with certain information, including certain financial information and certain information regarding compensation of our executive officers, that we would otherwise have been required to provide in filings we make with the SEC, which may make it more difficult for investors and securities analysts to evaluate our company. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock, and our stock price may be more volatile and may decline.

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 restated certificate of incorporation and our bylaws that will become effective following the closing of this offering, as well as provisions of the Delaware General Corporation Law, or 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:

 

   

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;

 

   

limiting the removal of directors by the stockholders;

 

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eliminating the ability of stockholders to call a special meeting of stockholders; and

 

   

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.

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 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.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some of the statements made under “Prospectus Summary,” “Risk Factors,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and elsewhere in this prospectus constitute forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” “intends” or “continue,” or the negative of these terms or other comparable terminology.

Forward-looking statements include, but are not limited to, statements about:

 

   

FDA approval of, or other action with respect to, Ravicti;

 

   

the commercial launch and future sales of Ravicti or any other future products or product candidates;

 

   

our ability to achieve premium pricing for Ravicti;

 

   

our plans with respect to the purchase of Ucyclyd’s worldwide rights to BUPHENYL and AMMONUL;

 

   

our expectations regarding the commercial supply of our UCD products;

 

   

third-party payor reimbursement for Ravicti, BUPHENYL and AMMONUL;

 

   

our estimates regarding anticipated capital requirements and our needs for additional financing;

 

   

the UCD or HE patient market size and market adoption of Ravicti by physicians and patients;

 

   

the timing, cost or other aspects of the commercial launch of Ravicti;

 

   

the timing or cost of a Phase III trial in HE;

 

   

the development and approval of the use of Ravicti for additional indications or in combination therapy; and

 

   

our expectations regarding licensing, acquisitions and strategic operations.

These statements are only current predictions and are subject to known and unknown risks, uncertainties, and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from those anticipated by the forward-looking statements. We discuss many of these risks in this prospectus in greater detail under the heading “Risk Factors” and elsewhere in this prospectus. You should not rely upon forward-looking statements as predictions of future events.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Except as required by law, we are under no duty to update or revise any of the forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this prospectus.

 

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USE OF PROCEEDS

We expect to receive approximately $44.3 million in net proceeds from the sale of 4,166,667 shares of common stock offered by us in this offering (approximately $51.2 million if the underwriters exercise their over-allotment option in full), based on an assumed initial public offering price of $12.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

We currently expect to use the net proceeds from this offering for:

 

   

completing the clinical development of Ravicti for UCD, including the long-term safety portion of our trial in UCD patients under 6 years of age, regulatory approval and post-marketing studies, currently estimated to be $8.0 million;

 

   

commercial launch of Ravicti for UCD, including payroll and related costs, marketing and promotional costs, and manufacturing of commercial supplies, currently estimated at $29.0 million;

 

   

license payments under our license agreement with Brusilow of up to $0.5 million over the next 12 months; and

 

   

the remainder for working capital and general corporate purposes.

The amounts set forth above are estimates, and we cannot be certain that actual costs will not vary from these estimates. Our management has significant flexibility and broad discretion in applying the net proceeds received in this offering. We may also use a portion of the net proceeds for the licensing or acquisition of, or development of, additional product candidates other than BUPHENYL and AMMONUL. However, we have no present agreement regarding any material acquisitions. Pending use of the net proceeds, we intend to invest in interest-bearing, investment-grade securities.

Each $1.00 increase (decrease) in the assumed initial public offering price of $12.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the net proceeds to us from this offering by approximately $3.9 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after the deducting underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. Each increase (decrease) of 1.0 million shares in the number of shares offered by us would increase (decrease) the net proceeds to us from this offering by approximately $11.2 million, assuming that the assumed initial public offering price remains the same, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. We do not expect that a change in the offering price or the number of shares by these amounts would have a material effect on our uses of the proceeds from this offering, although it may accelerate the time at which we will need to seek additional capital.

DIVIDEND POLICY

We have never declared or paid any cash dividends on our capital stock and do not anticipate paying any cash dividends in the foreseeable future. Payment of cash dividends, if any, in the future will be at the discretion of our board of directors and will depend on then-existing conditions, including our financial condition, operating results, contractual restrictions, capital requirements, business prospects and other factors our board of directors may deem relevant.

 

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and our capitalization as of March 31, 2012:

 

   

on an actual basis;

 

   

on a pro forma basis to give effect to the following transactions and adjustments as if they had occurred on March 31, 2012:

 

  (1) the conversion of all outstanding shares of our convertible preferred stock into an aggregate of 6,575,637 shares of common stock upon completion of this offering;

 

  (2) the exercise, on a net issuance basis based on an assumed initial public offering price of $12.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, of the April 2011 warrants and the May 2011 warrants into 359,654 shares of our common stock, at an exercise price of $4.08 per share, which will expire upon completion of this offering if not exercised;

 

  (3) the exercise, on a net issuance basis based on an assumed initial public offering price of $12.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, of the October 2011 warrants, the November 2011 warrants and the February 2012 warrants, into 92,776 shares of our common stock upon conversion of Series C-2 convertible preferred stock issuable upon exercise of the October 2011 warrants, the November 2011 warrants and the February 2012 warrants, at an exercise price equal to $9.62 per share, and which will expire upon completion of this offering if not exercised;

 

  (4) the automatic conversion of the bridge notes into 2,816,434 shares of common stock immediately prior to the closing of this offering at a conversion price equal to the initial public offering price based on an assumed initial public offering price of $12.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, and assuming the conversion occurs on March 31, 2012;

 

  (5) the reclassification of the bridge notes liability to common stock and additional paid-in-capital in connection with the conversion based on an assumed initial public offering price of $12.00 per share, the midpoint of the price range set forth on the cover page of this prospectus; and

 

  (6) the reclassification of the bridge warrants liability to common stock and additional paid-in-capital in connection with the exercise based on an assumed initial public offering price of $12.00 per share, the midpoint of the price range set forth on the cover page of this prospectus.

 

   

on a pro forma as adjusted basis to give effect to the following transactions and adjustments as if they had occurred on March 31, 2012:

 

  (1) the sale of 4,166,667 shares of common stock in this offering at an assumed initial public offering price of $12.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, as if the sale of the shares in this offering had occurred on March 31, 2012; and

 

  (2) the automatic conversion of the bridge notes into 2,859,594 shares of common stock immediately prior to the closing of this offering at a conversion price equal to the initial public offering price based on an assumed initial public offering price of $12.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, and with interest accruing through July 6, 2012.

 

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Because the number of shares that will be issued upon net exercise of the bridge warrants and conversion of the bridge notes depends upon the actual initial public offering price per share in this offering and, in the case of the bridge notes, the closing date of this offering, the actual number of shares issuable upon such exercise may differ and upon such conversion will differ from the respective number of shares set forth above. You should read this table in conjunction with the sections titled “Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes included elsewhere in this prospectus.

 

(in thousands, except share and per share data)    March 31, 2012  
     Actual     Pro Forma     Pro Forma
as Adjusted
 
     (unaudited)     (unaudited)     (unaudited)  

Cash and cash equivalents

   $ 3,736      $ 3,736      $ 47,987   
  

 

 

   

 

 

   

 

 

 

Convertible notes payable

     30,736                 

Warrants liability

     3,464                 
  

 

 

   

 

 

   

 

 

 

Convertible preferred stock, par value $0.0001: 66,000,000 shares authorized, 6,575,637 shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

     58,326                 
  

 

 

   

 

 

   

 

 

 

Stockholders’ equity (deficit):

      

Common stock, par value $0.0001: 80,000,000 shares authorized, 481,174 shares issued and outstanding, actual; 100,000,000 shares authorized, 10,325,675 shares issued and outstanding, pro forma; 100,000,000 shares authorized, 14,535,502 shares issued and outstanding, pro forma as adjusted

            1        1   

Preferred stock, $0.0001 par value; no shares authorized, issued and outstanding, actual; 10,000,000 shares authorized, no shares issued and outstanding, pro forma and pro forma as adjusted

                     

Additional paid-in capital

     24,756        118,344        163,113   

Deficit accumulated during the development stage

     (118,620     (118,620     (119,138
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity (deficit)

     (93,864     (275     43,976   
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ (1,338   $ (275   $ 43,976   
  

 

 

   

 

 

   

 

 

 

Each $1.00 increase (decrease) in the assumed initial public offering price of $12.00 per share, the mid-point of the price range set forth on the cover page of this prospectus, would increase (decrease) each of cash and cash equivalents, additional paid-in capital, total stockholders’ equity (deficit) and total capitalization by approximately $3.9 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. Each increase (decrease) of 1.0 million shares in the number of shares offered by us would increase (decrease) each of cash and cash equivalents, additional paid-in capital, total stockholders’ equity (deficit) and total capitalization by approximately $11.2 million, assuming that the assumed initial public offering price, the midpoint of the price range set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. The pro forma as adjusted information discussed above is illustrative only and will adjust based on the actual initial public offering price and other terms of this offering determined at pricing.

 

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The outstanding share information above excludes:

 

   

1,267,385 shares of common stock issuable upon the exercise of stock options outstanding as of March 31, 2012 under our 2006 Plan having a weighted average exercise price of $2.37 per share;

 

   

296 shares of common stock issuable upon the exercise of warrants outstanding as of March 31, 2012 having a weighted average exercise price of $1,795.24 per share, which warrants are expected to remain outstanding upon completion of this offering; and

 

   

1,042,284 shares of common stock (which includes 103,793 shares reserved for issuance under our 2006 Plan as of March 31, 2012) reserved for future issuance under our 2012 Plan, which will become effective immediately upon the execution and delivery of the underwriting agreement for this offering, as well as any future increases in the number of shares of common stock reserved for issuance under this plan.

 

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DILUTION

If you invest in our common stock, you will experience immediate and substantial dilution to the extent of the difference between the assumed initial public offering price of our common stock and the pro forma as adjusted net tangible book value (deficit) per share of our common stock immediately after the offering.

Our historical net tangible book value (deficit) per share is determined by dividing our total tangible assets, less total liabilities and convertible preferred stock, by the actual number of outstanding shares of our common stock. The historical net tangible book value (deficit) of our common stock as of March 31, 2012 was $(93.9) million, or $(195.14) per share. The pro forma net tangible book value (deficit) of our common stock as of March 31, 2012 was $(0.3) million, or $(0.03) per share. The pro forma net tangible book value (deficit) per share gives effect to:

 

  (1) the conversion of all outstanding shares of our convertible preferred stock into an aggregate of 6,575,637 shares of common stock upon completion of this offering;

 

  (2) the exercise, on a net issuance basis based on an assumed initial public offering price of $12.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, of the April 2011 warrants and the May 2011 warrants into 359,654 shares of our common stock, at an exercise price equal to $4.08 per share, and which will expire upon completion of this offering if not exercised;

 

  (3) the exercise, on a net issuance basis based on an assumed initial public offering price of $12.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, of the October 2011 warrants, the November 2011 warrants and the February 2012 warrants, into 92,776 shares of our common stock upon conversion of Series C-2 convertible preferred stock issuable upon exercise of the warrants, at an exercise price equal to $9.62 per share, and which will expire upon completion of this offering if not exercised;

 

  (4) the automatic conversion of the bridge notes into 2,816,434 shares of common stock immediately prior to the closing of this offering at a conversion price equal to the initial public offering price, based on the assumed initial public offering price of $12.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, and assuming the conversion occurred on March 31, 2012;

 

  (5) the reclassification of the bridge notes liability to common stock and additional paid-in-capital in connection with the conversion based on the assumed initial public offering price of $12.00 per share, the midpoint of the price range set forth on the cover page of this prospectus; and

 

  (6) the reclassification of the bridge warrants liability to common stock and additional paid-in-capital in connection with the exercise based on an assumed initial public offering price of $12.00 per share, the midpoint of the price range set forth on the cover page of this prospectus.

Because the number of shares that will be issued upon exercise of the bridge warrants and conversion of the bridge notes depends upon the actual initial public offering price per share in this offering and, in the case of the bridge notes, the closing date of this offering, the actual number of shares issuable upon such exercise may differ and upon such conversion will differ from the respective number of shares set forth above. See “Prospectus Summary — The Offering.”

The pro forma as adjusted net tangible book value (deficit) of our common stock as of March 31, 2012 was $44.0 million, or $3.03 per share. The pro forma as adjusted net tangible book value (deficit) gives effect to (1) the sale of 4,166,667 shares of common stock in this offering at an assumed initial public offering price of

 

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$12.00 per share, the mid-point of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, and (2) the pro forma transactions and other adjustments described above, except that the automatic conversion of bridge notes is calculated with interest accruing through July 6, 2012. The difference between the initial public offering price and the pro forma as adjusted net tangible book value (deficit) per share represents an immediate dilution of $8.97 per share to new investors purchasing common stock in this offering.

The following table illustrates this dilution on a per share basis to new investors:

 

Assumed initial public offering price per share

     $ 12.00   
    

 

 

 

Historical net tangible book value (deficit) per share as of March 31, 2012

   $ (195.14  

Pro forma increase in net tangible book value (deficit) per share attributable to the pro forma transactions and other adjustments described above

     195.11     
  

 

 

   

Pro forma net tangible book value (deficit) before this offering

     (0.03  

Pro forma increase in net tangible book value (deficit) per share attributable to new investors

     3.06     
  

 

 

   

Pro forma as adjusted net tangible book value (deficit) per share after this offering

       3.03   
    

 

 

 

Dilution per share to new investors purchasing common stock in this offering

     $ 8.97   
    

 

 

 

Each $1.00 increase (decrease) in the assumed initial public offering price of $12.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) our pro forma as adjusted net tangible book value (deficit) by approximately $3.9 million, or by approximately $0.30 per share, and the dilution per share to new investors purchasing common stock in this offering by approximately $0.70 per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

We may also increase or decrease the number of shares we are offering. An increase of 1.0 million shares in the number of shares offered by us would increase our pro forma as adjusted net tangible book value (deficit) by approximately $11.2 million, or by approximately $0.52 per share, and the dilution per share to new investors purchasing common stock in this offering would be approximately $8.45 per share, assuming that the assumed initial public offering price remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, a decrease of 1.0 million shares in the number of shares offered by us would decrease our pro forma as adjusted net tangible book value (deficit) by approximately $11.2 million, or by approximately $0.61 per share, and the dilution per share to new investors purchasing common stock in this offering would be approximately $9.58 per share, assuming that the assumed initial public offering price remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. The pro forma as adjusted information discussed above is illustrative only and will adjust based on the actual initial public offering price and other terms of this offering determined at pricing.

If the underwriters’ over-allotment option to purchase additional shares from us is exercised in full, and based on the assumed initial public offering price of $12.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, the pro forma as adjusted net tangible book value (deficit) per share after this offering would be approximately $3.36 per share, the increase in the pro forma net tangible book value (deficit) per share attributable to new investors would be approximately $3.39 per share and the dilution to new investors purchasing shares in this offering would be approximately $8.64 per share.

 

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The table below summarizes as of March 31, 2012, on the pro forma as adjusted basis described above, the number of shares of common stock we issued and sold, the total consideration we received and the average price per share (1) paid by our existing stockholders and (2) to be paid by new investors purchasing our common stock in this offering at the assumed initial public offering price of $12.00 per share, before deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

     Shares Purchased     Total Consideration     Average Price
Per Share
 
(in thousands)    Number      Percent     Amount      Percent    

Existing stockholders

     10,368,835         71   $ 116,851         70   $ 11.27   

New investors

     4,166,667         29        50,000         30        12.00   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

     14,535,502         100   $ 166,851         100   $ 11.48   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

The number of common stock outstanding immediately after this offering is based on 481,174 shares of common stock outstanding as of March 31, 2012 and giving effect to the pro forma transactions described above. This number excludes:

 

   

1,267,385 shares of common stock issuable upon the exercise of stock options outstanding as of March 31, 2012 under our 2006 Plan having a weighted average exercise price of $2.37 per share;

 

   

296 shares of common stock issuable upon the exercise of warrants outstanding as of December 31, 2011 having a weighted average exercise price of $1,795.24 per share, which warrants are expected to remain outstanding upon completion of this offering; and

 

   

1,042,284 shares of common stock (which includes the 103,793 shares reserved for issuance under our 2006 Plan as of March 31, 2012) reserved for future issuance under our 2012 Plan, which will become effective immediately upon the execution and delivery of the underwriting agreement for this offering, as well as any future increases in the number of shares of common stock reserved for issuance under this plan.

Effective upon the closing of this offering, an aggregate of 1,042,284 shares of our common stock will be reserved for future issuance under our equity benefit plans, and the number of reserved shares will also be subject to automatic annual increases in accordance with the terms of the plans. To the extent that new options are granted under our equity benefit plans, there will be further dilution to investors purchasing common stock in this offering.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

You should read the following selected consolidated financial data together with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of this prospectus and our consolidated financial statements and the accompanying notes appearing at the end of this prospectus. We have derived the consolidated statements of operations data for the years ended December 31, 2009, 2010 and 2011 and the consolidated balance sheet data as of December 31, 2010 and 2011 from our audited consolidated financial statements appearing in this prospectus. We have derived the consolidated statements of operations data for the years ended December 31, 2007 and 2008 and the consolidated balance sheet data as of December 31, 2007, 2008 and 2009 from our audited consolidated financial statements not included in this prospectus. The selected consolidated statements of operations data for the three months ended March 31, 2011 and 2012 and the selected consolidated balance sheet data as of March 31, 2012 are derived from our unaudited financial statements appearing elsewhere in this prospectus. The unaudited financial statements have been prepared on a basis consistent with our audited financial statements included in this prospectus and include, in our opinion, all adjustments, consisting only of normal recurring adjustments, necessary for the fair statement of the financial information in those statements. Our historical results for any prior period are not necessarily indicative of results to be expected in any future period.

 

(in thousands, except share and per share amounts)   Year Ended December 31,     Three Months Ended
March 31,
 
    2007     2008     2009     2010     2011           2011                 2012        

Consolidated Statements of Operations Data:

             

Revenue

  $ 242      $ 44      $      $      $      $      $   

Cost of revenue

    10                                             
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    232        44                                      
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

             

Research and development

    4,407        14,452        11,030        23,111        17,236        4,300        8,902   

General and administrative

    2,764        3,469        1,909        2,693        8,162        1,361        2,077   

Selling and marketing

    2,058        2,997        462        797        761        250        246   

Impairment of development and promotion rights acquisition cost

           7,059                                      
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    9,229        27,977        13,401        26,601        26,159        5,911        11,225   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (8,997     (27,933     (13,401     (26,601     (26,159     (5,911     (11,225

Interest income

    220        111        39        43        28        4        4   

Interest expense

    (249     (1,677     (763     (1     (2,554            (1,040

Other income (expense), net

    (12     400        525        1,106        (731       375   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (9,038   $ (29,099   $ (13,600   $ (25,453   $ (29,416   $ (5,907   $ (11,886

Accretion of Series B preferred stock to redemption value

    (7     (29     (78                            
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

  $ (9,045   $ (29,128   $ (13,678   $ (25,453   $ (29,416   $ (5,907   $ (11,886
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to common stockholders — basic and diluted(1)

  $ (17,163.80   $ (49,962.46   $ (92.84   $ (61.70   $ (62.68   $ (12.59   $ (25.33
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares of common stock outstanding used in computing net loss per share attributable to common stockholders — basic and diluted(1)

    527        583        147,329        412,532        469,319        469,319        469,319   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share attributable to common stockholders — basic and diluted (unaudited)(1)

          $ (3.05     $ (1.12
         

 

 

     

 

 

 

Weighted average shares of common stock outstanding used in computing the pro forma net loss per share attributable to common stockholders — basic and diluted(1)

            8,559,148          10,008,313   
         

 

 

     

 

 

 

 

(1) See Note 15 to our consolidated financial statements for an explanation of the method used to calculate basic and diluted net loss per share of common stock, the unaudited pro forma basic and diluted net loss per share of common stock and the weighted average number of shares used in computation of the per share amounts.

 

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(in thousands)    As of December 31,     As of March  31,
2012
 
     2007     2008     2009     2010     2011    

Consolidated Balance Sheet Data:

            

Cash and cash equivalents

   $ 14,566      $ 1,089      $ 10,073      $ 6,579      $ 7,018      $  3,736   

Working capital (deficit)

     14,857        (12,848     6,713        3,650        (21,282     (32,889

Total assets

     25,340        1,756        11,171        7,387        8,142        5,014   

Long-term debt

     9,444        3,889                               

Warrants liability

     400                             2,574        3,464   

Convertible preferred stock

     21,827        21,856        36,265        58,326        58,326        58,326   

Total stockholders’ deficit

     (9,148     (38,125     (29,162     (54,176     (82,104     (93,864

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus. This discussion and other parts of the prospectus contain forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set forth under “Risk Factors” and elsewhere in this prospectus.

Overview

We are a biopharmaceutical company focused on the development and commercialization of novel therapeutics to treat disorders in the areas of orphan diseases and hepatology. We are developing our product candidate, Ravicti, to treat two different diseases in which blood ammonia is elevated: the most prevalent urea cycle disorders, or UCD, and hepatic encephalopathy, or HE. UCD are inherited rare genetic diseases caused by a deficiency of one or more enzymes or protein transporters that constitute the urea cycle, which in a healthy individual removes ammonia through the conversion of ammonia to urea. HE may develop in some patients with liver scarring, known as cirrhosis, or acute liver failure and is a chronic disease which fluctuates in severity and may lead to serious neurological damage. On December 23, 2011, we submitted a New Drug Application, or NDA, to the U.S. Food and Drug Administration, or FDA, for Ravicti for the chronic management of UCD in patients aged 6 years and above. The FDA accepted the NDA for review in February 2012. Under the Prescription Drug User Fee Act, or PDUFA, the FDA is due to notify us regarding Ravicti’s approval status by October 23, 2012, unless that action date is extended by the FDA. In April 2012, we submitted data from the switchover portion of a clinical trial in UCD patients aged 29 days through 5 years and a revised draft package insert requesting approval of Ravicti to include this patient population. We currently expect to commercially launch Ravicti in the first half of 2013. In May 2012, our Phase II HE trial data was unblinded and the trial met its primary endpoint, which was to demonstrate that the proportion of patients experiencing an HE event was significantly lower on Ravicti versus placebo, both administered in addition to a standard of care, including lactulose and/or rifaximin.

Pursuant to an asset purchase agreement, or purchase agreement, with Ucyclyd Pharma, Inc., or Ucyclyd, a wholly owned subsidiary of Medicis Pharmaceutical Corporation, we purchased the worldwide rights to Ravicti in March 2012 for an upfront payment of $6.0 million, future payments based upon the achievement of regulatory milestones in indications other than UCD, sales milestones, and mid to high single digit royalties on global net sales of Ravicti. Pursuant to an amended and restated collaboration agreement, or restated collaboration agreement, with Ucyclyd entered into on March 2012, we have an option to purchase all of Ucyclyd’s worldwide rights in BUPHENYL and AMMONUL® (sodium phenylacetate and sodium benzoate) injection 10%/10%, the only adjunctive therapy currently FDA-approved for the treatment of HA crises in UCD patients, for an upfront payment of $22.0 million, plus subsequent milestone and royalty payments. We will be permitted to exercise this option for a period of 90 days beginning on the earlier of the date of the approval of Ravicti for the treatment of UCD and June 30, 2013, but in no event earlier than January 1, 2013. To fund this upfront payment, we may draw on a loan commitment from Ucyclyd, which loan would be payable over eight quarters. If we exercise our option, Ucyclyd has a time-limited option to retain AMMONUL at a purchase price of $32.0 million. If Ucyclyd exercises its option and retains AMMONUL, the upfront purchase price for Ucyclyd’s worldwide rights to BUPHENYL will be $19.0 million resulting in a net payment from Ucyclyd to us of $13.0 million upon close of the transaction.

We are a development stage company and have incurred net losses since our inception. As of March 31, 2012, we had a deficit accumulated during the development stage of $118.6 million. We recorded net losses of $13.6 million, $25.5 million, $29.4 million and $11.9 million in the years ended December 31, 2009, 2010 and 2011, and the three months ended March 31, 2012, respectively. We anticipate that a substantial portion of our

 

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capital resources and efforts in the foreseeable future will be focused on completing the development and obtaining regulatory approval of Ravicti, and preparing for potential commercialization of Ravicti, and BUPHENYL and AMMONUL if purchased from Ucyclyd. We expect to incur significant and increasing operating losses and negative cash flows in the near future as we continue to conduct clinical trials, seek regulatory approval of Ravicti in UCD and HE, expand our organization, prepare for the potential commercial launch of Ravicti if approved by the FDA, and purchase Ucyclyd’s worldwide rights to BUPHENYL and AMMONUL, subject to Ucyclyd’s option to retain AMMONUL. In addition, any future acquisitions of products or product candidates may require additional capital and personnel.

To date, substantially all of our operations have been funded through the private placement of equity securities and convertible debt. Through March 31, 2012, we have raised net cash proceeds of approximately $66.1 million from the sales of convertible preferred stock, and $15.3 million from the issuance of convertible notes which subsequently converted into shares of convertible preferred stock. Additionally, during 2011 and during the first quarter of 2012 we issued approximately $25.0 million and $7.5 million, respectively, in convertible notes.

In May 2012, we completed a Phase II trial of Ravicti in HE which met its primary endpoint. We expect our research and development expenses to increase if we initiate a Phase III trial of Ravicti in HE or if the FDA requires us to do additional studies for the approval of Ravicti in UCD. If we obtain marketing approval for Ravicti in UCD, we will likely incur significant commercial, sales, marketing and outsourced manufacturing expenses. Additionally, upon completion of this offering, we expect to incur additional expenses associated with operating as a public company. As a result, we expect to continue to incur significant and increasing operating losses for the foreseeable future.

Financial Overview

Revenue

We have generated no revenue from the sale of any products in the last three years, and we do not expect to generate any revenue unless or until we obtain marketing approval of and commercialize Ravicti, or exercise the option to purchase Ucyclyd’s worldwide rights to and commercialize BUPHENYL and AMMONUL, subject to Ucyclyd’s option to retain AMMONUL.

For the period from inception to March 31, 2012, we have only generated limited revenue from the promotion of BUPHENYL and AMMONUL during 2007 and 2008, and earned no revenue during 2006 and 2009 through March 31, 2012.

Research and Development Expenses

Since our inception, we have focused on our clinical development programs. We recognize research and development expenses as they are incurred. Our research and development expenses consist primarily of:

 

   

salaries and related expenses for personnel, including expenses related to stock options or other stock-based compensation granted to personnel in development functions;

 

   

fees paid to clinical consultants, clinical trial sites and vendors, including clinical research organizations, or CROs, in conjunction with implementing and monitoring our clinical trials and acquiring and evaluating clinical trial data, including all related fees, such as for investigator grants, patient screening fees, laboratory work and statistical compilation and analysis;

 

   

other consulting fees paid to third parties;

 

   

expenses related to production of clinical supplies, including fees paid to contract manufacturers;

 

   

expenses related to license fees and milestone payments under in-licensing agreements;

 

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expenses related to compliance with drug development regulatory requirements in the United States, the European Union and other foreign jurisdictions; and

 

   

depreciation and other allocated expenses.

We expense both internal and external research and development expenses as they are incurred. We did not begin tracking our research and development expenses on a program-by-program basis until January 1, 2010. We have been developing Ravicti in both UCD and HE in parallel, and we typically use our employees, consultants and infrastructure resources across our two programs. Thus, some of our research and development expenses are not attributable to an individual program, but rather are allocated across our two clinical stage programs and these costs are included in unallocated costs as detailed below. Allocated expenses include salaries, stock-based compensation and related benefit expenses for our employees, consulting fees and fees paid to clinical suppliers. The following table shows our research and development expenses for the years ended December 31, 2010 and 2011 and the three months ended March 31, 2011 and 2012:

 

     Years Ended
December 31,
     Three Months Ended
March 31,
 
(in thousands)    2010      2011      2011      2012  
                   (unaudited)  

UCD Program

   $ 12,859       $ 7,900       $ 1,592       $ 1,104   

HE Program

     4,892         5,162         1,456         873   

Unallocated

     5,360         4,174         1,252         6,925   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 23,111       $ 17,236       $ 4,300       $ 8,902   
  

 

 

    

 

 

    

 

 

    

 

 

 

We expect our research and development expenses to increase if we initiate our Phase III trial of Ravicti for the treatment of patients with episodic HE or if the FDA requires us to do additional studies for the approval of Ravicti for UCD. Due to the inherently unpredictable nature of product development, we are currently unable to estimate the expenses we will incur in the continued development of Ravicti.

Our research and development expenditures are subject to numerous uncertainties in timing and cost to completion. Development timelines, the probability of success and development expenses can differ materially from expectations. Clinical trials in orphan diseases, such as UCD and HE, may be difficult to enroll given the small number of patients with these diseases. Completion of clinical trials may take several years or more, but the length of time generally varies according to the type, complexity, novelty and intended use of a product candidate. The cost of clinical trials may vary significantly over the life of a project as a result of differences arising during clinical development, including, among others:

 

   

the number of trials required for approval;

 

   

the number of sites included in the trials;

 

   

the length of time required to enroll suitable patients;

 

   

the number of patients that participate in the trials;

 

   

the drop-out or discontinuation rates of patients;

 

   

the duration of patient follow-up;

 

   

the number and complexity of analyses and tests performed during the trial;

 

   

the phase of development of the product candidate; and

 

   

the efficacy and safety profile of the product candidate.

 

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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 multiple research institutions and contract research organizations that conduct and manage clinical trials on our behalf. We generally accrue expenses related to clinical trials based on contracted amounts applied to the level of patient enrollment and activity according to the protocol. If 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.

As a result of the uncertainties discussed above, we are unable to determine with certainty the duration and completion costs of our Ravicti development programs or when and to what extent we will receive revenue from the commercialization and sale of Ravicti.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries, benefits and stock based compensation for employees in administration, finance and business development. Other significant expenses include allocated facilities expenses and professional fees for accounting and legal services, including legal services associated with obtaining and maintaining patents.

We expect that our general and administrative expenses will increase with the continued development of, and if approved, the commercialization of Ravicti and as we begin to operate as a public company after the completion of this offering. We expect these increases will likely include increased expenses for insurance, expenses related to the hiring of additional personnel and payments to outside consultants, lawyers and accountants.

Sales and Marketing Expenses

Sales and marketing expenses consist primarily of salaries and benefits for employees in the marketing, commercial and sales functions. Other significant expenses include professional and consulting fees related to these functions. We expect to incur increased sales and marketing expenses in connection with the commercialization of Ravicti, and BUPHENYL and AMMONUL if purchased from Ucyclyd.

Interest Income

Interest income consists of interest earned on our cash and cash equivalents.

Interest Expense

Interest expense consists primarily of non-cash interest costs related to our borrowings.

Other Income (Expense), net

Other income (expense), net in 2009 and 2010 consists primarily of the change in the fair value of the freestanding financial instrument associated with the Series C-2 convertible preferred stock. In June 2009, we entered into a tranched Series C-2 convertible preferred stock transaction. In connection with the initial closing in June 2009, we agreed to issue to the purchasers and the purchasers agreed to purchase additional shares of the Series C-2 convertible preferred stock at a future date. We determined that the liability to issue additional Series C-2 convertible preferred stock at a future date was a freestanding financial instrument that should be accounted for as a liability based upon the guidance of Accounting Standard Codification, or ASC, Topic 480-10, Distinguishing Liabilities from Equity. Accordingly, we recorded a liability related to this instrument at the time of the initial close in 2009 and remeasured the liability at each reporting period with the corresponding gain or loss from the adjustment recorded as other income (expense), net. The liability expired when the second tranche of Series C-2 convertible preferred stock was issued in April 2010.

 

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In 2011 and the three months ended March 31, 2012, other income (expense), net consists primarily of the changes in the fair value of the common and preferred stock warrants liability and call option liability associated with the issuance of approximately $32.5 million of convertible notes. Under ASC 815, Derivatives and Hedging and ASC 480, we account for the common stock warrants and preferred stock warrants issued in 2011 and 2012, or the common stock warrants and preferred stock warrants, respectively, at fair value and recorded as liabilities on the date of each issuance. The fair value was determined and subsequently remeasured using the Black-Scholes option-pricing model on each reporting date.

Income Taxes

Since inception, we have only generated revenues in the U.S. and have not generated revenues outside the U.S. The only revenues generated in the U.S. have been from commissions for promotion services in 2007 and 2008 through the Ucyclyd collaboration agreement related to the sales of BUPHENYL and AMMONUL for UCD. We have incurred net losses and have not recorded any U.S. federal or state income tax benefits for the losses as they have been offset by valuation allowances.

Critical Accounting Policies and Estimates

Our management’s discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the revenues and expenses during the reporting periods. We evaluate our estimates and judgments on an ongoing basis. Significant estimates include assumptions used in the determination of the fair value measurement of certain financial assets and liabilities at the fair value, including convertible notes payable, common stock warrants, preferred stock warrants and call option liability, and research and development expenses 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 prospectus. The following accounting policies are important in fully understanding and evaluating our reported financial results.

Preclinical and Clinical Trial Accruals

As part of the process of preparing consolidated financial statements, we are required to estimate accrued expenses. We base our expenses related to clinical trials 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 multiple research institutions and CROs that conduct and manage clinical trials on our behalf. We generally accrue expenses related to clinical trials based on contracted amounts applied to the level of patient enrollment and activity according to the protocol. If 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. If we do not identify costs that we have begun to incur or if we underestimate or overestimate the level of services performed or the costs of these services, our actual expenses could differ from our estimates. We do not anticipate the future settlement of existing accruals to differ materially from our estimates.

 

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Warrants and Other Derivative Liabilities

We account for our warrants and other derivative financial instruments as either equity or liabilities based upon the characteristics and provisions of each instrument. We record warrants classified as equity as additional paid-in capital on the consolidated balance sheet and make no further adjustments to their valuation. We record warrants classified as derivative liabilities and other derivative financial instruments, such as call option liability recorded in connection with convertible notes and preferred stock liability recorded in connection with Series C-2 convertible preferred stock, that require separate accounting as liabilities on our consolidated balance sheets at their fair value on the date of issuance and remeasure them on each subsequent balance sheet, with fair value changes recognized as increases or reductions to other income (expense), net in the consolidated statements of operations. We estimate the fair value of these liabilities using option pricing models and assumptions that are based on the individual characteristics of the warrants or instruments on the valuation date, as well as assumptions for future financings, expected volatility, expected life, yield, and risk-free interest rate.

We account for our warrants for shares of convertible preferred stock that are contingently redeemable as liabilities. We will continue to adjust the liability for changes in fair value of these warrants until the earlier of: (i) exercise of warrants; (ii) expiration of warrants; (iii) a change of control of the company; or (iv) the closing of our initial public offering.

We account for our warrants for shares of common stock as liabilities in accordance with accounting guidance for derivatives. The accounting guidance provides a two-step model to be applied in determining whether a financial instrument is indexed to an entity’s own stock that would qualify the financial instruments for a scope exception. This scope exception specifies that a contract that would otherwise meet the definition of a derivative financial instrument would not be considered as such if the contract is both (i) indexed to the entity’s own stock and (ii) classified in the stockholders’ deficit section of the balance sheet. We determined that our common stock warrants issued with convertible notes in 2011 are ineligible for equity classification and we will continue to adjust the liability for changes in fair value until the earlier of: (i) exercise of warrants; (ii) expiration of warrants; (iii) a change of control of the company; (iv) occurrence of a qualified or non-qualified financing as defined in the applicable agreements; (v) the maturity of convertible notes; or (vi) the closing of our initial public offering.

Stock-Based Compensation

We recognize as compensation expense the fair value of stock options and other stock-based compensation issued to employees over the requisite service periods, which are typically the vesting periods. We record equity instruments issued to non-employees at their fair value, periodically revalue them as the equity instruments vest and recognize expense over the related service period.

Stock-based compensation has not been a significant expense to date. In future periods, we expect our stock-based compensation expense to increase as we issue additional stock-based awards in order to attract and retain employees and non-employee consultants.

Stock-based compensation expense includes stock options granted to employees and non-employees and has been reported in our consolidated statements of operations as follows:

 

     Years Ended
December 31,
     Three Months Ended
March 31,
 
(in thousands)    2009      2010      2011      2011      2012  
                         

(unaudited)

 

Research and development

   $ 84       $ 61       $ 137       $ 16       $ 37   

General and administrative

     211         110         182         28         34   

Sales and marketing

     18         14         26         3         7   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 313       $ 185       $ 345       $ 47       $ 78   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Significant Factors, Assumptions and Methodologies Used in Determining Fair Value

We calculate the fair value of stock-based compensation awards using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model requires the input of subjective assumptions, including stock price volatility and the expected term of stock options. As a private company, we do not have sufficient history to estimate the volatility of our common stock price or the expected term of our options. We calculate expected volatility based on reported data for a selected group of similar publicly traded companies, or guideline peer group, for which the historical information is available. We will continue to use the guideline peer group volatility information until the historical volatility of our common stock is relevant to measure expected volatility for future option grants. The assumed dividend yield is based on our expectation of not paying dividends in the foreseeable future. We determine the average expected term of stock options according to the “simplified method” as described in Staff Accounting Bulletin 110, which is the mid-point between the vesting date and the end of the contractual term. We determine the risk-free interest rate by reference to implied yields available from five-year and seven-year U.S. Treasury securities with a remaining term equal to the expected life assumed at the date of grant. We estimate forfeitures based on our historical analysis of actual stock option forfeitures. The assumptions used in the Black-Scholes option-pricing model for the years ended December 31, 2009, 2010 and 2011 are set forth in Note 11 of our consolidated financial statements included elsewhere in this prospectus.

There is a high degree of subjectivity involved when using option-pricing models to estimate stock-based compensation. Currently, there is not a market-based mechanism or other practical application to verify the reliability and accuracy of the estimates stemming from these valuation models, nor is there a means to compare and adjust the estimates to actual values. Although the fair value of employee stock-based awards is determined using an option-pricing model, this value may not be indicative of the fair value observed in a market transaction between a willing buyer and willing seller. If factors change and we employ different assumptions when valuing our options, the compensation expense that we record in the future may differ significantly from what we have historically reported.

Information regarding equity instruments issued since January 1, 2011 is summarized as follows:

 

Date of Transaction

   Equity Type    Number of
Shares
Underlying
Options or
Warrants
Granted
    Exercise
Price
Per
Share
     Management's
Estimate of
Per Share Fair
Value of
the Underlying
Common Stock
 

April 1, 2011

   Common Stock Warrants      544,939 (1)(2)    $ 4.08       $ 3.17   

April 15, 2011

   Common Stock Options      407,946      $ 4.08       $ 3.17 (3) 

October 26, 2011

   Preferred Stock Warrants      233,935 (1)(2)    $ 9.62         N/A   

February 8, 2012

   Preferred Stock Warrants      233,935 (1)(2)    $ 9.62         N/A   

April 16, 2012

   Common Stock Options      453,348      $ 7.31       $ 11.00 (3) 

April 19, 2012

   Common Stock Warrants      75,974      $ 4.08       $ 11.00 (3) 

 

(1) The number of shares to be issued is calculated based upon 30% of the principal amount of the related notes issued in the financing divided by either:

 

  (i) the price per share paid by a new investor in a preferred stock qualified financing;

 

  (ii) in the event the notes have been converted into shares of Series C-2 preferred stock, the series C-2 preferred original issue price of $9.62 per share;

 

  (iii) the price per share paid by a new investor for equity securities in a non-qualified financing; or

 

  (iv) a price per share of $9.62 in the event of an initial public offering.

The column reflecting the number of shares underlying warrants granted assumes the event of an initial public offering and is calculated based upon 30% of the principal amount of the notes divided by a price of $9.62 per share.

 

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(2) The fair value of warrants in the aggregate was determined by using an income approach by first estimating the equity value of our company, then allocating the value to our various securities using the option pricing method. The option pricing method was applied in various scenarios based on the potential liquidity alternatives available to us. See Note 7 to our consolidated financial statements included elsewhere in this prospectus.

 

(3) We reassessed the fair value of our common stock subsequent to the grant date of these awards.

The intrinsic value of all outstanding options as December 31, 2011 was $3.7 million based on the estimated fair value for our common stock of $5.05 per share at December 31, 2011.

There were no stock option grants to our employees during the three months ended March 31, 2012. The intrinsic value of all outstanding options as of March 31, 2012 was $6.6 million based on estimated fair value for our common stock of $7.31 per share at March 31, 2012. The intrinsic value of the vested and unvested options outstanding at March 31, 2012 was $9.5 million and $3.0 million, respectively, based on an assumed initial public offering price of $12.00 per share, the midpoint of the range set forth on the cover of the prospectus.

All options granted by our board of directors on the date noted above were intended to be exercisable at the fair value of our stock based on information known at that time. For the purposes of recording stock-based compensation expense, we reviewed the historical pattern of our common stock values, and subsequently reassessed the fair value of our stock for financial reporting purposes during the year ended December 31, 2011.

The fair values of the common stock underlying our stock-based awards were estimated on each grant date by our board of directors, with input from management. The majority of our directors are not employees and have significant experience in the pharmaceutical and biotechnology industries. We believe that our board of directors has the relevant experience and expertise to determine a fair value of our common stock on each respective grant date. Given the absence of a public trading market of our common stock, and in accordance with the American Institute of Certified Public Accountants Practice Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, our board of directors exercised reasonable judgment and considered numerous objective and subjective factors to determine the best estimate of the fair value of our common stock including:

 

   

valuations performed by unrelated third party specialists;

 

   

prices for our convertible preferred stock sold to outside investors in arm’s-length transactions;

 

   

rights, preferences and privileges of our convertible preferred stock relative to those of our common stock;

 

   

actual operating and financial performance;

 

   

status of our collaboration with Ucyclyd;

 

   

hiring of key personnel and the experience of our management;

 

   

status of research and development efforts, including the clinical trial results for Ravicti in UCD and HE;

 

   

risks inherent in the development of our products and services;

 

   

likelihood of achieving a liquidity event, such as an initial public offering or a sale of our company given prevailing market conditions and the nature and history of our business;

 

   

market values of transactions of similar pharmaceutical and biotechnology companies;

 

 

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illiquidity of stock-based awards involving securities in a private company;

 

   

industry information such as market size and growth; and

 

   

macroeconomic conditions.

Our board of directors considered common stock valuations performed as of February 28, 2011, April 1, 2011, October 31, 2011, December 31, 2011 and March 1, 2012 in determining or confirming the grant date fair value of common stock. Using these valuations, and the other factors described above, we made the following estimates of fair value of our common stock.

 

Valuation Date

   Fair Value
Per Share
 

February 28, 2011

   $ 4.08   

April 1, 2011

   $ 3.17   

October 31, 2011

   $ 4.02   

December 31, 2011

   $ 5.05   

March 1, 2012

   $ 7.31   

In valuing our common stock, the board of directors determined the equity value of our company by utilizing the income approach. The income approach is based on the premise that the value of a business is the present value of a company’s future earning capacity. The application of this approach involves estimating the free cash flows for the business, calculating a terminal value, and then discounting the cash flows and terminal value back to a present value at an appropriate discount rate. We utilized a market approach for calculating the terminal value within the income approach, by applying market multiples of comparable publicly traded companies in our industry or similar lines of business.

We prepared a financial forecast for each valuation that includes consideration of future expectations and significant assumptions on sales and expenses. We believe we have a reasonable basis to estimate sales as we developed our U.S. sales estimates for the UCD indication based upon the existing number of patients on the Ravicti continued access study as well as estimates of patients on BUPHENYL. Additionally, we assumed a modest increase in patients taking Ravicti over time due to newly diagnosed patients requiring therapy as well as a portion of patients currently not taking BUPHENYL due to compliance and other issues converting to Ravicti. In developing our patient estimates we considered annual patient mortality and other factors that may offset growth. We also estimated a selling price in the U.S. for Ravicti and BUPHENYL, which we have the option to acquire, based upon orphan drug pricing. The sales estimates for the HE indication were based upon an estimated market launch date in the late years of our forecast, the estimated prevalence of the disease in the U.S. with an expected penetration rate for Ravicti, and an estimate selling price based upon the selling price of an already FDA-approved drug in this indication.

We estimated our expenses utilizing a bottoms up approach. We estimated cost of sales based upon manufacturing activities and expected costs to manufacture products. We estimated expenses for research and development for expected development and regulatory activities based upon the stage of the clinical development program. We estimated sales and marketing expenses based upon the expected expenses to be incurred for the anticipated launch dates, sales and commercial needs. We estimated general and administrative costs based upon the general corporate and infrastructure needs for the expected size of our organization.

Additionally, our financial forecast incorporated the terms of the option to acquire all of Ucyclyd’s worldwide rights to BUPHENYL and AMMONUL. We anticipate exercising our option to acquire these products and have incorporated the related estimated costs and revenues into the financial forecasts used in the valuations. Our forecast assumes that Ucyclyd does not exercise its option to retain AMMONUL primarily based upon the retention price that will be required to be paid by Ucyclyd to us in order to exercise their option.

 

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The financial forecast for each valuation was used to estimate the free cash flows of the business. These cash flows were discounted at a rate which was calculated using inputs from comparable publicly traded companies also in the business of developing and commercializing treatments which require regulatory approval. In selecting the comparable publicly traded companies in our industry or similar lines of business, we considered a variety of factors including: line of business (specifically, companies operating in the business of developing and commercializing therapies for regulatory approval); therapy type (specifically, companies which develop therapies to treat gastrointestinal, digestive, and liver conditions); size; addressable markets; and geographic location.

We captured the risk relating to the regulatory approval of Ravicti in the discount rate utilized within the income approach. Specifically, we applied an additional risk premium to the discount rate to capture risk related to our company’s size, the fact that we are in the clinical stage of development, and the risks related to raising the required capital needed to bring Ravicti to market.

After determining an equity value utilizing the income approach, we then allocated the fair value of our company to each of our classes of stock using either the Option Pricing Method, or OPM, or the Probability Weighted Expected Return Method, or PWERM. The OPM treats common stock and convertible preferred stock as call options on an enterprise value, with exercise prices based on the value thresholds at which the allocation among the various holders of a company’s securities changes. Under this method, the common stock has value only if the funds available for distribution to the stockholders exceed the value of the liquidation preferences of our preferred stock at the time of a liquidity event such as a merger, sale or initial public offering, assuming the enterprise has funds available to make a liquidation preference meaningful and collectible by the stockholders. The common stock is modeled to be a call option with a claim on the enterprise at an exercise price equal to the remaining value immediately after the convertible preferred stock is liquidated. The OPM uses the Black-Scholes option-pricing model to price the call option. This model defines the securities’ fair values as functions of the current fair value of a company and uses assumptions such as the anticipated timing of a liquidity event and the estimated volatility of the equity securities. A discount for lack of marketability was applied to reflect the increased risk arising from the inability to readily sell the shares.

The PWERM involves a forward-looking analysis of the possible future outcomes of the enterprise. The future outcomes considered under the PWERM included non-IPO market based outcomes as well as IPO scenarios. In the non-IPO scenarios, a large portion of the equity value is allocated to the convertible preferred stock to incorporate the aggregate liquidation preferences. In the IPO scenarios, the equity value is allocated pro rata among the shares of common stock and each series of convertible preferred stock, which causes the common stock to have a higher relative value per share than under the non-IPO scenario. The fair value of the enterprise determined using the IPO and non-IPO scenarios would be weighted according to the board of directors’ estimate of the probability of each scenario.

Discussion of Specific Valuation Inputs

Over time, a combination of factors caused changes in the fair value of our common stock. The following summarizes the changes in value from January 2011 to March 2012 and the major factors that caused each change.

January 2011 through April 2011: As of January 2011, we continued to make progress with Ravicti for patients for the treatment of UCD. During the period from January to February 2011, we held discussions with investment banks regarding our prospects for an IPO. In these discussions, we gained additional understanding of the financial markets. We utilized this information when applying a PWERM allocation method using multiple sale scenarios, as well as an IPO scenario. Each of these scenarios is based on a combination of the expected timing of future financing or liquidity events and the progress achieved in our clinical studies. As a result of the developments in our business and applying the common stock valuation methodology described above, we estimated the fair value of our common stock to be $4.08 per share as of February 28, 2011. However, for purposes of computing the related

 

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stock-based compensation expense for option grants in April 2011, we reassessed the fair value of our common stock at $3.17 per share utilizing a retrospective valuation as described below.

During the period between February 2011 and April 2011 we continued to make progress with Ravicti and we raised $17.5 million in convertible notes from our existing investors, which addressed our short-term liquidity needs. Also during the period, our collaboration partner Ucyclyd disagreed with our filing approach of the NDA. Based on these factors, specifically relating to the additional funding and reassessed IPO timeline, our common stock valuation methodology was simplified into two scenarios — a remaining private company scenario and an IPO scenario. As discussed above, we utilized an income approach to value our equity for each of the scenarios.

The significant assumptions used in the income approach include our estimate of sales and expenses. Our sales estimates assume the commercial launch of Ravicti in UCD in the first half of 2013 with the majority of estimated sales expected to come from the U.S. We also assumed that we would acquire BUPHENYL and AMMONUL in the last quarter of 2012. We estimated sales for the HE indication in the U.S. to start in 2017. We utilized a discount rate of 44.1%, a terminal year revenue multiple of 3.0x, a discount for lack of marketability of 30%, a volatility rate of 70%, a two year time to liquidity, and an equal weighting for the IPO and remain private scenarios of 50%. In addition, we utilized a specific company risk rate, which is a component of the discount rate, of 27.5% applied in our calculation of our discount rate. We considered several qualitative factors in our determination of this rate, including:

 

   

Ravicti may not achieve FDA approval for the treatment of UCD and HE;

 

   

Ravicti may not prove to be efficacious for treatment of HE;

 

   

we have a history of operating losses;

 

   

we face competition from companies that have far more capital and resources and which may discover, develop, and possibly commercialize competitive products and technologies;

 

   

we might lose key personnel or be unable to hire key personnel to accomplish our goals; and

 

   

we may need to raise a substantial amount of additional funding in order to finish testing Ravicti for one or both applications and this may be difficult because of capital market conditions.

Utilizing these assumptions in conjunction with our long term financial forecast yielded an equity value of approximately $70.2 million and a fair value for the common stock of $3.17 per share.

May 2011 through October 2011: In June 2011, we filed a demand for arbitration before the American Arbitration Association for a determination of our rights and obligations and those of Ucyclyd under a collaboration agreement between the parties. In our demand for arbitration, we requested a judgment regarding the rights of the parties in connection with the development activities relating to Ravicti, including our rights relating to the submission of an NDA to the FDA for Ravicti for the treatment of UCD. In September 2011, an arbitration date was established for January 2012 to adjudicate the matter. In August 2011, the last patient completed the 12 months of follow-up in the long-term safety extension portion of our Phase II, fixed-sequence, open-label study of the safety and tolerability of Ravicti when compared to BUPHENYL in children aged 6 through 17 years with UCD. In September 2011, the last patient completed the 12 months of follow-up in the long-term safety extension portion of our pivotal Phase III, open-label study in adults of Ravicti for the long-term treatment of UCD. In October 2011, we completed the enrollment for a Phase II, randomized, double-blind, placebo-controlled study of the safety and efficacy of Ravicti for maintaining remission in subjects with HE. Also in October 2011, we raised an additional $7.5 million of convertible notes from our existing investors. We utilized an income approach to value our equity and continued to use two scenarios in our common stock valuation methodology — a remaining private company scenario at 50% probability and an IPO scenario at 50%

 

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probability. As a result of these factors, we estimated the fair value of our common stock to be $4.02 per share as of October 31, 2011. No options were granted between May 2011 and October 2011.

November 2011 through December 2011: In December 2011, the last patient completed the switch-over, open-label study of the safety, pharmacokinetics, and efficacy of Ravicti, which is followed by a long-term safety extension portion in pediatric patients with UCD under 6 years of age. In December 2011, we also submitted an NDA to the FDA for UCD. During this period, we made significant progress in negotiating a revised agreement with Ucyclyd related to Ravicti, BUPHENYL and AMMONUL. We utilized an income approach to value our equity and continued to use two scenarios in our common stock valuation methodology — a remaining private company scenario at 50% probability and an IPO scenario at 50% probability. As a result of business developments and applying our common stock valuation methodology, we estimated the fair value of our common stock to be $5.05 per share as of December 31, 2011. No options were granted during the period from November to December 2011.

January 2012 through March 2012: In January 2012, we agreed on key terms with Ucyclyd related to our interpretation of the collaboration agreement with them. In February 2012, we received notice of our NDA acceptance by the FDA for UCD. In March 2012, the last patient enrolled completed the study for a Phase II, randomized, double-blind, placebo-controlled study of the safety and efficacy of Ravicti for subjects with overt HE. Additionally, during this period, we started and completed the enrollment of the long-term treatment portion of the open-label study of the safety, pharmacokinetics, and efficacy of Ravicti in patients aged 29 days through 5 years. In March 2012, we entered into a revised collaboration agreement with Ucyclyd. During the period, we re-engaged in discussions with investment banks regarding a potential IPO. We utilized an income approach to value our equity and continued to use two scenarios in our common stock valuation methodology — a remaining private company scenario at 30% probability and an IPO scenario at 70% probability.

The significant assumptions used in the income approach include our estimate of sales and expenses. Our sales estimates assume the commercial launch of Ravicti in UCD and the exercise of our option to acquire BUPHENYL and AMMONUL in the first half of 2013 with the majority of estimated sales expected to come from the U.S. We estimated sales for the HE indication in the U.S. to start in 2018. We utilized a discount rate of 43.4%, a terminal year revenue multiple of 3.0x, a discount for lack of marketability of 15% for the IPO scenario and 30% for the remaining private scenario, a volatility rate of 70%, a 0.42 year time to liquidity for the IPO scenario and a two year time to liquidity for the remaining private scenario. Consistent with our April 1, 2011, valuation we utilized a specific company risk rate of 27.5%. These assumptions in conjunction with our long term forecast yielded an equity value of approximately $124 million and a fair value for the common stock of $7.31 per share as of March 1, 2012.

April 2012 - July 2012: In April 2012, we filed our initial Registration Statement on Form S-1 with the Securities and Exchange Commission.

In May 2012, we unblinded our HE Phase II results which demonstrated that we met the primary endpoint: the proportion of patients experiencing at least one HE event was significantly lower on Ravicti versus placebo. This Phase II data represents an important milestone because it establishes the proof of concept that Ravicti may work in this patient population. In addition, while significant challenges remain to successful development, regulatory approval and commercialization of Ravicti in HE, and we cannot be certain we will successfully develop and commercialize Ravicti in HE, this could represent a second indication in a significant patient population. We anticipate having an end of Phase II meeting with the FDA in the fourth quarter of 2012, which will assist us in the planning for a potential Phase III trial in HE.

In July 2012, our board of directors determined the price range as set forth on the cover page of the prospectus. As is typical in IPOs, the estimated price range for this offering was not derived using a formal determination of fair value of our common stock, but was determined based in part on negotiations between us and our underwriters. Among the factors that were considered in setting the price range were: the general conditions of the securities markets; our assessment of our progress in developing our products, including clinical

 

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results from our recent HE Phase II clinical trial; a receptive public trading market for pre-commercial biotechnology companies such as Hyperion; anticipated sufficient demand for our common stock to support a $50 million offering; commercial stage orphan company revenue trading multiples; and consideration of pre-commercial biotechnology IPO valuations since 2009. Compared to our most recent valuation conducted in March 2012, the anticipated IPO price range assumed that the IPO has occurred and a public market for our common stock has been created, and therefore the price range excludes any marketability or illiquidity discount, and attributes no weighting to any other outcome of our business. Assuming an IPO only scenario and no marketability discount in our March 2012 valuation, the fair value of our common stock in March 2012, which occurred before we filed our initial Registration Statement on Form S-1 with the Securities and Exchange Commission and the unblinding of our HE Phase II results, would have been approximately $10.54 per share.

As a result of the establishment of our preliminary price range, we revised the estimate of the fair value of our common stock as of April 16, 2012, and used the low end of the price range, $11.00, as our deemed fair value for the options granted at an exercise price of $7.31 per share. As a result of the stock options granted on April 16, 2012, we will be recording stock-based compensation expense for these options of approximately $170,000 for the second quarter of 2012, which is not expected to materially effect the results of operations for the quarter.

Results of Operations

Comparison of the Three Months Ended March 31, 2011 and 2012

 

     Three Months
Ended March 31,
    Increase/
(Decrease)
    % Increase/
(Decrease)
 
(in thousands, except for percentages)    2011      2012      
     (unaudited)              

Research and development

   $ 4,300       $ 8,902      $ 4,602        107

General and administrative

     1,361         2,077        716        53   

Selling and marketing

     250         246        (4     (0

Interest income

     4         4                 

Interest expense

             (1,040     (1,040     100   

Other income (expense), net

             375        375        100   

Research and Development Expenses

Research and development expenses increased by $4.6 million, or 107%, to $8.9 million for the three months ended March 31, 2012 from $4.3 million for the three months ended March 31, 2011. The increase in research and development expenses in the first quarter of 2012 as compared to the first quarter of 2011 was primarily due to $5.7 million incurred in connection with the purchase agreement with Ucyclyd as discussed in Note 3 to our consolidated financial statements. The increase was offset in part by lower clinical development costs of $1.0 million and lower professional and consulting fees of $0.2 million due to lower costs in our HE Phase II trial as patient enrollment was largely completed in the fourth quarter of 2011 and as a result of completing the long term safety extension trial in adults with UCD in 2011.

For the period from inception to March 31, 2012, research and development expenses amounted to $79.1 million. Research and development expenses comprise primarily clinical and pre-clinical development costs of $42.6 million, payroll related costs of $12.5 million, professional consulting costs of $7.1 million, the expenses incurred for the purchase of Ravicti of $5.7 million, and regulatory related costs of $3.3 million.

 

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General and Administrative Expenses

General and administrative expenses increased by $0.7 million, or 53%, to $2.1 million for the three months ended March 31, 2012 from $1.4 million for the three months ended March 31, 2011. The increase in the first quarter of 2012 was primarily due to an increase in consulting costs in preparation for our Form S-1 registration statement filing and also due to legal fees related to our amended agreements with Ucyclyd.

For the period from inception to March 31, 2012, general and administrative expenses amounted to $21.2 million. General and administrative expenses comprise primarily payroll related expenses of $7.5 million, professional and consulting costs of $11.5 million and office and rent related costs of $1.1 million.

Selling and Marketing Expenses

Selling and marketing expenses did not significantly change for the first quarter of 2012 compared to the same period in 2011.

For the period from inception to March 31, 2012, selling and marketing expenses amounted to $7.3 million. Selling and marketing expenses comprise primarily payroll related expenses of $3.8 million, professional and consulting costs of $1.3 million, and marketing related costs of $1.5 million.

Interest Income

Interest income consists of interest earned on our cash and cash equivalents. There was no change in the first quarter of 2012 compared to the same period in 2011.

For the period from inception to March 31, 2012, interest income amounted to $0.4 million which consists of interest earned on our cash and cash equivalents.

Interest Expense

We recognized $1.0 million in interest expense for the three months ended March 31, 2012 compared to none in the same period in 2011. The main components of our interest expense are $0.7 million interest expense incurred relating to our 2011 convertible notes and $0.3 million amortization of our debt discount.

For the period from inception to March 31, 2012, interest expense amounted to $6.3 million primarily related to our interest expense on our convertible notes payable and our loan and security agreement entered into in 2007.

Other Income (Expense), net

Other income of $0.4 million primarily relates to the change in fair values of our common and preferred stock warrants and call option liability associated with our convertible notes. During the three months ended March 31, 2012, we recorded a change in fair value of $0.5 million of expense and $0.2 million of income related to the common stock warrants and the preferred stock warrants, respectively. Additionally, we recorded $0.7 million to other income relating to the change in the fair value of call option liability upon issuance of convertible notes in February 2012. The call option related to our convertible notes is more fully described in Note 6 to our consolidated financial statements included elsewhere in this prospectus.

For the period from inception to March 31, 2012, other income amounted to $1.7 million, consisting primarily of the change in the fair value of the preferred stock liability associated with the Series C-2 convertible preferred stock.

 

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Comparison of the Year Ended December 31, 2010 and the Year Ended December 31, 2011

 

     Years Ended
December 31,
   

Increase/

(Decrease)

    %  Increase/
(Decrease)
 
(in thousands, except for percentages)    2010      2011      

Research and development

   $ 23,111       $ 17,236      $ (5,875     (25 )% 

General and administrative

     2,693         8,162        5,469        203   

Selling and marketing

     797         761        (36     (5

Interest income

     43         28        (15     (35

Interest expense

     1         2,554        2,553        NM   

Other income (expense), net

     1,106         (731     (1,837     NM   

Research and Development Expenses

Research and development expenses decreased by $5.9 million, or 25%, to $17.2 million for the year ended December 31, 2011 from $23.1 million for the year ended December 31, 2010.

The decrease in research and development expenses in 2011 as compared to 2010 was primarily due to:

 

   

lower clinical development expenses by $4.9 million primarily as a result of partial year (approximately nine-months) of expenses incurred related to our pivotal Phase III trial in UCD compared to full year of expenses incurred in 2010. Additionally, we initiated and completed a heart rhythm safety trial in Ravicti for UCD in 2010 with no corresponding trial in 2011;

 

   

lower manufacturing expenses of $1.3 million primarily as a result of manufacturing of Ravicti for our clinical trials that occurred in 2010 without similar expenses in 2011;

 

   

lower professional, consulting expenses and travel related expenses, which decreased by $0.4 million as a result of the completion of our pivotal Phase III trial in UCD in 2011;

 

   

lower preclinical related expenses of $0.6 million as a result of fewer ongoing preclinical studies in 2011 as compared to 2010.

The decrease was partially offset by:

 

   

higher clinical regulatory related expenses, which increased by $1.1 million in 2011 as a result of the higher expenses associated with the filing and submission of the NDA for Ravicti in UCD patients aged 6 years and above; and

 

   

the receipt of a U.S. therapeutic discovery project grant of $0.2 million, which decreased 2010 research and development expenses. There was no similar grant in 2011.

General and Administrative Expenses

General and administrative expenses increased by $5.5 million, or 203%, to $8.2 million for the year ended December 31, 2011 from $2.7 million for the year ended December 31, 2010. The increase in 2011 was primarily due to an increase in professional and consulting costs in preparation for a potential financing and also due to legal fees incurred in relation to our arbitration with Ucyclyd.

Selling and Marketing Expenses

Selling and marketing expenses did not significantly change from 2010 to 2011.

 

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Interest Income

Interest income consists of interest earned on our cash and cash equivalents. The decrease in interest income in 2011 to $28,000 from $43,000 in 2010 was primarily due to lower aggregate interest rates in 2011 as compared to 2010.

Interest Expense

Interest expense increased to approximately $2.6 million for the year ended December 31, 2011 from $1,000 for the year ended December 31, 2010. The increase in interest expense in 2011 was the result of a $1.0 million interest expense incurred relating to our convertible notes and a $1.6 million amortization of our debt discount.

Other Income (Expense), net

Other income (expense), net, decreased by $1.8 million to $0.7 million of expense for the year ended December 31, 2011 from $1.1 million of income for the year ended December 31, 2010. In 2011, the component of other income (expense), net primarily relates to the change in fair values related to common and preferred stock warrants and call option liability associated with our convertible notes. During the year-ended December 31, 2011, we recorded $0.9 million and $0.2 million in other expense to reflect the change in fair value of the common stock warrants and the preferred stock warrants, respectively. Also during the year ended December 31, 2011, we recorded $0.4 million in other income to reflect the change in the fair value of the call options related to our convertible notes. The call options are more fully described in Note 6 to our consolidated financial statements included elsewhere in this prospectus.

In 2010, other income (expense), net, relates to the re-measurement of the preferred stock liability in April 2010 upon the issuance of the second tranche of the Series C-2 preferred stock.

Comparison of the Year Ended December 31, 2009 and the Year Ended December 31, 2010

 

(in thousands, except for percentages)    Years Ended
December 31,
     Increase/
(Decrease)
     % Increase/
(Decrease)
 
   2009      2010        

Research and development

   $ 11,030       $ 23,111       $ 12,081         110

General and administrative

     1,909         2,693         784         41   

Selling and marketing

     462         797         335         73   

Interest income

     39         43         4         10   

Interest expense

     763         1         762         99   

Other income (expense), net

     525         1,106         581         111   

Research and Development Expenses

Research and development expenses increased by $12.1 million, or 110%, to $23.1 million for the year ended December 31, 2010 from $11.0 million for the year ended December 31, 2009.

The increase in research and development expenses in 2010 as compared to 2009 was primarily due to:

 

   

higher clinical development expenses, which increased by $9.4 million primarily as a result of: a full year of expenses incurred related to our pivotal Phase III trial in UCD and our Phase II clinical trial in HE as compared to a partial year for these trials in 2009, and initiation and completion of a heart rhythm safety trial in UCD in 2010 with no corresponding trial in 2009;

 

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higher manufacturing expenses, which increased by $1.4 million primarily as a result of manufacturing of Ravicti for our clinical trials that occurred in 2010 without similar expenses in 2009;

 

   

higher professional and consulting expenses, which increased by $1.0 million as a result of our greater clinical development efforts in 2010; and

 

   

higher clinical regulatory related expenses, which increased by $0.9 million as a result of the greater expenses incurred in 2010 for the preparation for the planned submission of the NDA for Ravicti in UCD patients aged 6 years and above.

The increase was partially offset by:

 

   

lower preclinical related expenses of $0.4 million as a result of fewer ongoing preclinical studies in 2010 as compared to 2009.

 

   

the receipt of a U.S. therapeutic discovery project grant totaling $0.2 million, which was offset against 2010 research and development expenses.

General and Administrative Expenses

General and administrative expenses increased by $0.8 million, or 41%, to $2.7 million for the year ended December 31, 2010 from $1.9 million for the year ended December 31, 2009. The increase in 2010 was primarily due to an increase in professional and consulting costs of $0.5 million as well as an increase in salary and related expenses of $0.2 million related to hiring two employees in finance and administration to address our infrastructure needs.

Selling and Marketing Expenses

Selling and marketing expenses increased by $0.3 million, or 73%, to $0.8 million for the year ended December 31, 2010 from $0.5 million for the year ended December 31, 2009. The net increase in 2010 is primarily due to increased consulting expenses and marketing research expenses of $0.4 million offset by a $0.1 million decrease in salaries.

Interest Income

The increase in interest income in 2010 was primarily due to the higher aggregate cash and cash equivalents in 2010 as compared to 2009.

Interest Expense

Interest expense decreased by $0.8 million, or 99%, to $1,000 for the year ended December 31, 2010 from $0.8 million for the year ended December 31, 2009. The decrease was due to the conversion of the convertible notes issued in 2008 and 2009 to Series C-1 convertible preferred stock in June 2009 and the repayment of outstanding bank loans in July 2009.

Other Income (Expense), net

Other income (expense), net increased by $0.6 million, or 111%, to $1.1 million for the year ended December 31, 2010 from $0.5 million for the year ended December 31, 2009. The increase in other income (expense), net, was due to the re-measurement of preferred stock liability in April 2010 upon issuance of the

 

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second tranche of the Series C-2 preferred stock, which resulted in an increase in non-cash income for the year ended December 31, 2010.

Liquidity and Capital Resources

Since our inception in November 2006, we have funded our operations primarily through proceeds from the sale of convertible preferred stock, bank debt and the issuance of convertible debt. We have not generated any revenue from the sale of any products in the last three years. We have incurred losses and generated negative cash flows from operations since inception. As of December 31, 2011 and March 31, 2012, our principal sources of liquidity were our cash and cash equivalents, which totaled $7.0 million and $3.7 million, respectively.

From inception through March 31, 2012, we have received net proceeds of $66.1 million from the sale of convertible preferred stock and $32.5 million from the issuance of convertible debt that has not converted into preferred stock as of March 31, 2012.

In April 2011, we entered into a bridge loan financing, or the April 2011 bridge financing, in which we issued $17.5 million in aggregate principal amount of convertible promissory notes in April 2011, or the April 2011 notes, and $8,285 in aggregate principal amount of convertible promissory notes in May 2011, or the May 2011 notes. The April 2011 notes and May 2011 notes bear interest at 6% per annum and will automatically convert into shares of our common stock immediately prior to the closing of this offering. For additional information, see Note 6 to our consolidated financial statements appearing elsewhere in this prospectus.

In October 2011, we entered into a bridge loan financing, or the October 2011 bridge financing, in which we issued $7.5 million in aggregate principal amount of convertible promissory notes in October 2011, or the October 2011 notes, $3,551 in aggregate principal amount of convertible promissory notes in November 2011, or the November 2011 notes, and $7.5 million in aggregate principal amount of convertible promissory notes in February 2012, or the February 2012 notes. The October 2011 notes, November 2011 and February 2012 notes bear interest at 6% per annum and will automatically convert into shares of our common stock immediately prior to the closing of this offering. For additional information, see Note 6 to our consolidated financial statements appearing elsewhere in this prospectus.

In April 2012, we entered into a $10.0 million loan and security agreement, or the loan agreement with Silicon Valley Bank and Leader Lending, LLC - Series B, or the lenders. The loan carries an interest rate of 8.88%, with interest only payments for the period of 9 months from May 1, 2012. The loan is then payable in equal monthly principal payments plus interest over a period of 27 months from February 1, 2013. In connection with the loan agreement, we granted a security interest in all of our assets, except intellectual property. Our obligations to the lender include restrictions on borrowing, asset transfers, placing liens or security interest on our assets including our intellectual property, mergers and acquisitions and distributions to stockholders. The loan agreement also requires us to provide the lenders monthly financials and compliance certificate within 30 days of each month end, annual audited financials within 180 days of each fiscal year-end and annual approved financial projections. We issued warrants to the lenders to purchase a total of 75,974 shares of common stock with an exercise price of $4.08 per share. The loan agreement requires immediate repayment of amounts outstanding upon an event of default, as defined in the loan agreement, which includes events such as a payment default, a covenant default or the occurrence of a material adverse change, as defined in the loan agreement.

Pursuant to the terms of the loan agreement, once we raise at least $30.0 million from the sale of equity securities or subordinated debt, the lenders also agreed to grant us a one-time single loan in the amount of $2.5 million, or the bank term loan. The lender’s obligation to lend terminates on the earlier of (i) an event of default or (ii) September 30, 2012. The principal amount outstanding for the bank term loan accrues interest at a per annum rate equal to the greater of (i) 8.88% and (ii) the Treasury Rate, as defined in the loan agreement, on the date the loan is funded plus 8.50%, with interest only payments for the period of 9 months from the date the loan is funded. The loan is then payable in equal monthly principal payments plus interest over a period of 27 months from the date the loan is funded.

 

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Our recurring operating losses raise substantial doubt about our ability to continue as a going concern. As a result, our independent registered public accounting firm included an explanatory paragraph in its report on our consolidated financial statements as of and for the year ended December 31, 2011 with respect to this uncertainty. We have no current source of revenue to sustain our present activities, and we do not expect to generate revenue until, and unless, the FDA or other regulatory authorities approve Ravicti for the treatment of UCD or until we exercise our option to purchase Ucylcyd’s worldwide rights to BUPHENYL and AMMONUL and begin commercializing them. Accordingly, our ability to continue as a going concern will require us to obtain additional financing to fund our operations.

Cash Flows

The following table sets forth the major sources and uses of cash for the periods set forth below (in thousands)

 

     Year Ended December 31     Three Months Ended
March  31
 
(In thousands)    2009     2010     2011     2011     2012  
                       (unaudited)  

Net cash (used in) provided by:

          

Operating activities

   $ (11,540   $ (25,889   $ (24,531   $ (3,838   $ (10,706

Investing activities

     (4     (40     (12     (2     (128

Financing activities

     20,528        22,435        24,982               7,552   

Net increase (decrease) in cash and cash equivalents

   $ 8,984      $ (3,494   $ 439      $ (3,840   $ (3,282

Net cash used in operating activities was $11.5 million, $25.9 million and $24.5 million for the years ended December 31, 2009, 2010 and 2011, respectively, and $3.8 million and $10.7 million for the three months ended March 31, 2011 and 2012, respectively. The primary use of cash was to fund our operations related to the development of Ravicti in UCD and HE in each of these years and for the three months ended March 31, 2011 and 2012. The lower net cash used in operating activities in 2009 was primarily due to reduced development expenses, lower sales and marketing and general and administrative expenses resulting from our reduction in workforce in June 2008. The increase in 2010 was due to increased development expenses primarily related to our UCD clinical trials. The slight decrease in 2011 was primarily due to a decrease in development expenses as we completed certain UCD clinical trials during 2011. The increase in operating activities for the three months ended March 31, 2012 was due mainly to the expense incurred for the purchase of Ravicti of $5.7 million.

Net cash used in investing activities amounted to approximately $4,000, $40,000, $12,000 and $2,000 for the years ended December 31, 2009, 2010 and 2011 and for the three months ended March 31, 2011, respectively, which consisted mainly of property and equipment purchases. For the three months ended March 31, 2012, net cash used in investing activities amounted to approximately $0.1 million, consisting mainly of the purchase of the option to purchase rights to BUPHENYL and AMMONUL of $0.3 million partially offset by a decrease in restricted cash of $0.2 million.

Net cash provided by financing activities amounted to $20.5 million, $22.4 million and $25.0 million for 2009, 2010 and 2011, respectively, and none and $7.6 million for the three months ended March 31, 2011 and 2012, respectively. The net cash provided by financing activities in 2009 consisted primarily of $22.1 million in net proceeds from the issuance of convertible preferred stock, and $5.0 million in proceeds from the issuance of convertible notes, partially offset by principal payments of $6.6 million under a loan and security agreement entered into in 2007. The net cash provided by financing activities in 2010 consisted primarily of net proceeds from the issuance of convertible preferred stock in the amount of $22.4 million. The net cash provided by financing activities in 2011 consisted primarily of net proceeds from the issuance of the April 2011 notes and October 2011 notes in the amount of $25.0 million. The net cash provided by financing activities for the three months ended March 31, 2012, related to the issuance of the February 2012 Notes in the amount of $7.5 million.

 

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Contractual Obligations and Commitments

The following table summarizes our contractual obligations and commitments as of March 31, 2012 (in thousands):

     Payments Due By Period  

Contractual Obligations

   Total      Less than
1 Year
     1-3
Years
     3-5
Years
     More than
5 Years
 

Principal obligations on the convertibles notes(1)

   $ 32,486       $ 32,486       $       $       $   

Interest obligations on the convertibles notes(1)

     2,776         2,776                           

Operating Leases(2)

     363         190         173                   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total(3)

   $ 35,625       $ 35,452       $ 173       $       $   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table summarizes our contractual obligations and commitments as of December 31, 2011 (in thousands):

 

     Payments Due By Period  

Contractual Obligations

   Total      Less than
1 year
     1-3
years
     3-5
years
     More than
5 years
 

Principal obligations on the convertible notes(1)

   $ 24,982       $ 24,982       $       $       $   

Interest obligations on the convertible notes(1)

     2,372         2,372                           

Operating leases(2)

     443         270         173                   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total(3)

   $ 27,797       $ 27,624       $ 173       $       $   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

(1) The principal and accrued interest under the convertible notes will convert into common stock upon the completion of our initial public offering.

 

(2) Operating lease obligations consist primarily of lease payments for our South San Francisco facility.

 

(3) This table does not include (a) any milestone payments, which may become payable to third parties under license agreements, as the timing and likelihood of such payments are not known, and (b) any royalty payments to third parties as the amounts, timing and likelihood of such payments are not known.

Amended Collaboration Agreement with Ucyclyd

On March 22, 2012, we entered into a purchase agreement with Ucyclyd under which we purchased the worldwide rights to Ravicti and restated collaboration agreement under which Ucyclyd granted us an option to purchase Ucyclyd’s worldwide rights to BUPHENYL and AMMONUL at a fixed price at a future defined date, plus subsequent milestone and royalty payments, subject to Ucyclyd’s right to retain AMMONUL for a predefined price. The restated collaboration agreement superseded the collaboration agreement with Ucyclyd, dated August 23, 2007, as amended.

Under the purchase agreement, we purchased all of the worldwide rights to Ravicti for an initial upfront payment of $6.0 million. We will also pay tiered mid to high single digit royalties on global net sales of Ravicti and may owe regulatory milestones of up to $15.8 million related to approval of Ravicti in HE, regulatory milestones of up to $7.3 million per indication for approval of Ravicti in indications other than UCD or HE, and net sales milestones of up to $38.8 million if Ravicti is approved for use in indications other than UCD (such as HE) and all annual sales targets are reached. In addition, the intellectual property license agreement executed between Ucyclyd and Brusilow Enterprises, LLC, or Brusilow, and the research agreement executed between Ucyclyd and Dr. Marshall L. Summar, or Summar, were assigned to us, and we have assumed the royalty obligation under the Brusilow agreement for sales of Ravicti in any indication, and the royalty obligations under the Summar agreement on sales of Ravicti to treat HE. We will also pay Brusilow an annual license extension fee to keep the Brusilow license in effect. The extension fee is payable until our first commercial sale of Ravicti following FDA approval.

 

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The Brusilow and Summar agreements provide that royalty obligations will continue, without adjustment, even if generic versions of the licensed products are introduced and sold in the relevant country.

Under the terms of the restated collaboration agreement, we have an option to purchase all of Ucyclyd’s worldwide rights in BUPHENYL and AMMONUL, subject to Ucyclyd’s option to retain AMMONUL. We will be permitted to exercise this option for 90 days beginning on the earlier of the date of the approval of Ravicti for the treatment of UCD and June 30, 2013, but in no event earlier than January 1, 2013. The upfront purchase price for AMMONUL and BUPHENYL is $22.0 million, which we may fund by drawing on a loan commitment from Ucyclyd. The loan commitment would be payable in eight quarterly payments and would bear interest at a rate of 9% per annum, and would be secured by the BUPHENYL and AMMONUL assets. If the Ravicti NDA for UCD is not approved by January 1, 2013, then Ucyclyd is obligated to make monthly payments of $0.5 million to us until the earliest of (1) FDA approval of the Ravicti NDA for UCD, (2) June 30, 2013 and (3) our written notification of our decision not to purchase BUPHENYL and AMMONUL.

If we exercise our option to purchase Ucyclyd’s worldwide rights to BUPHENYL and AMMONUL, then Ucyclyd has the time-limited right to elect to retain all rights to AMMONUL for a purchase price of $32.0 million. If Ucyclyd exercises this option, Ucyclyd will pay us a net payment of $13.0 million on closing of the purchase transaction, which reflects the purchase price for BUPHENYL being set-off against Ucyclyd’s retention payment for AMMONUL. If Ucyclyd retains rights to AMMONUL, subject to certain terms and conditions, we retain a right of first negotiation should Ucyclyd later decide to sell, exclusively license, or otherwise transfer the AMMONUL assets to a third party.

April 2011 Convertible Notes Payable

In connection with the April 2011 bridge financing, we entered into a convertible note and warrant purchase agreement, or the April 2011 note agreement, with existing investors pursuant to which we issued the April 2011 notes and the May 2011 notes raising $17.5 million. The principal and the interest under the April 2011 notes and the May 2011 notes are automatically convertible into common stock immediately prior to the close of our initial public offering, at a conversion price equal to our initial public offering price. The April 2011 notes and the May 2011 notes accrue interest at a rate of 6% per annum. For additional information, see Note 6 to our consolidated financial statements appearing elsewhere in this prospectus.

October 2011 and February 2012 Convertible Notes Payable

In October 2011, we entered into a convertible note and warrant purchase agreement, or the October 2011 note agreement, with existing investors pursuant to which we issued the October 2011 notes and the November 2011 notes raising $15.0 million and the February 2012 notes raising $7.5 million. The principal and the interest under the October 2011 notes, the November 2011 notes and the February 2012 notes are automatically convertible into common stock immediately prior to the close of our initial public offering, at a conversion price equal to our initial public offering price. The October 2011 notes, the November 2011 notes and the February 2012 notes accrue interest at a rate of 6% per annum. For additional information, see Note 6 to our consolidated financial statements appearing elsewhere in this prospectus.

Common Stock Warrants Liability

Pursuant to our April 2011 note agreement, we issued warrants to purchase shares of our common stock at an exercise price of $4.08 per share in April 2011, or the April 2011 warrants, and in May 2011, or the May 2011 warrants. Each of the April 2011 warrants and the May 2011 warrants contain a customary net issuance feature. The April 2011 warrants and the May 2011 warrants will expire if unexercised prior to the close of our initial public offering. For additional information, see Note 7 to our consolidated financial statements appearing elsewhere in this prospectus.

 

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Preferred Stock Warrants Liability

Pursuant to our October 2011 note agreement, we issued warrants to purchase shares of our preferred stock in October 2011, or the October 2011 warrants, in November 2011, or the November 2011 warrants, and February 2012, or the February 2012 warrants, at exercise prices dependent upon the occurrence of certain events. Each of the October 2011 warrants, the November 2011 warrants and the February 2012 warrants contain a customary net issuance feature. The October 2011 warrants, the November 2011 warrants and the February 2012 warrants will expire if unexercised prior to the close of our initial public offering. For additional information, see Note 7 to our consolidated financial statements appearing elsewhere in this prospectus.

Future Funding Requirements

We will likely need to obtain additional financing to fund our future operations, including the development, approval and commercialization of Ravicti in UCD and supporting sales and marketing activities related to BUPHENYL and AMMONUL (if not retained by Ucyclyd), a potential Phase III trial in HE, as well as the development of any additional product candidates we might acquire or develop on our own. Our future funding requirements will depend on many factors, including, but not limited to:

 

   

our ability to successfully commercialize Ravicti for the treatment of UCD, and Ucyclyd’s worldwide rights to BUPHENYL and AMMONUL if purchased from Ucyclyd;

 

   

the amount of sales and other revenues from products that we may commercialize, if any, including the selling prices for such products and the availability of adequate third-party reimbursement;

 

   

selling and marketing costs associated with our UCD products, including the cost and timing of expanding our marketing and sales capabilities and establishing a network of specialty pharmacies;

 

   

the progress, timing, scope and costs of our nonclinical studies and 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 and the costs of post-marketing studies that may be required by regulatory authorities;

 

   

the costs of obtaining clinical and commercial supplies of Ravicti, and BUPHENYL and AMMONUL if we purchase these products from Ucyclyd;

 

   

payments of milestones and royalties to third parties, including Ucyclyd;

 

   

cash requirements of any future acquisitions of product candidates;

 

   

the time and cost necessary to respond to technological and market developments;

 

   

the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; and

 

   

any changes made to, or new developments in, our restated collaboration agreement with Ucyclyd or any new collaborative, licensing and other commercial relationships that we may establish.

We have not generated any revenue from the sale of any products in the last three years. We do not know when, or if, we will generate any revenue. We do not expect to generate any revenue unless or until we obtain marketing approval of, and commercialize, Ravicti, or if we purchase Ucyclyd’s worldwide rights to

 

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BUPHENYL and AMMONUL (if not retained by Ucyclyd). We expect our continuing operating losses to result in increases in cash used in operations over the next several years.

We believe that our current cash and cash equivalents, together with the net proceeds from this offering, as well as potential payments from Ucyclyd beginning January 1, 2013 if Ravicti is not approved by the FDA prior to that, will be sufficient to fund our operations through commercial launch of Ravicti in UCD, assuming commercialization occurs in the first half of 2013. We may raise additional funds within this period of time through collaborations and public or private debt or equity financings.

We have based these estimates on a number of assumptions that may prove to be wrong, and changing circumstances beyond our control may cause us to consume capital more rapidly than we currently anticipate. For example, our ongoing clinical trial of Ravicti in pediatric patients aged 29 days through 5 years may encounter technical or other difficulties that could increase our development costs more than we currently expect or if the FDA requires us to conduct additional clinical trials prior to approving Ravicti. Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates, we are unable to estimate the amounts of increased capital outlays and operating expenditures associated with our current and anticipated clinical trials.

Additional financing may not be available when we need it or may not be available on terms that are favorable to us. We may seek to raise additional capital through a combination of private and public equity offerings and debt financings. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of existing stockholders will be diluted, and the terms may include liquidation or other preferences that adversely affect the rights of existing stockholders. Debt financing, if available, would result in increased fixed payment obligations and may involve agreements that include covenants limiting or restricting our ability to take specific actions such as incurring debt, making capital expenditures or declaring dividends.

If adequate funds are not available to us on a timely basis, or at all, we may be required to terminate or delay clinical trials or other development activities for Ravicti, or delay our establishment of sales and marketing capabilities or other activities that may be necessary to commercialize Ravicti, BUPHENYL and AMMONUL, if we obtain marketing approval. We may elect to raise additional funds even before we need them if the conditions for raising capital are favorable.

Off-Balance Sheet Arrangements

We do not currently have, nor have we ever had, any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts.

Quantitative and Qualitative Disclosure About Market Risk

Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of U.S. interest rates. We had cash and cash equivalents of $6.6 million, $7.0 million and $3.7 million at December 31, 2010 and 2011 and March 31, 2012, respectively. Given the short-term nature of our cash equivalents, we believe that our interest rate risk is not significant to our consolidated financial statements. Our April and October 2011 notes carry a fixed interest rate and, as such, are not subject to interest rate risk. We do not have any foreign currency or other derivative financial instruments.

 

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Jumpstart Our Business Startups Act of 2012

The JOBS Act permits an “emerging growth company” such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We are choosing to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.

Recent Accounting Pronouncements

Effective January 1, 2012, we adopted the Financial Accounting Standards Board, or FASB, Accounting Standards Update, or ASU, No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”),” issued in May 2011. This pronouncement was issued to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and IFRS. ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value measurements. This pronouncement is effective for reporting periods beginning on or after December 15, 2011. The new guidance will require prospective application. The adoption of this accounting standard update required expanded disclosure only and did not have an impact on our consolidated financial position, results of operations or cash flows.

In December 2011, FASB issued ASU No. 2011-11, “Balance Sheet (Topic 210).” This update provides enhanced disclosure requirements regarding the nature of an entity’s right of offset related to arrangements associated with its financial instruments and derivative instruments. The new guidance requires the disclosure of the gross amounts subject to rights of set-off, the amounts offset in accordance with the accounting standards followed, and the related net exposure. This pronouncement is effective for financial reporting period beginning on or after January 1, 2013 and full retrospective application is required. We do not expect that the adoption of this ASU will have any material impact on our consolidated financial statements.

 

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BUSINESS

Overview

We are a biopharmaceutical company focused on the development and commercialization of novel therapeutics to treat disorders in the areas of orphan diseases and hepatology. Our product candidate, Ravicti™ (glycerol phenylbutyrate), is designed to lower ammonia in the blood. Ammonia is produced in the intestine after a person eats protein and is normally detoxified in the liver by conversion to urea. Elevated levels of ammonia are potentially toxic and can lead to severe medical complications which may include death. We are developing Ravicti to treat two different diseases in which blood ammonia is elevated: the most prevalent urea cycle disorders, or UCD, and hepatic encephalopathy, or HE. UCD are inherited rare genetic diseases caused by a deficiency of one or more enzymes or protein transporters that constitute the urea cycle, which in a healthy individual removes ammonia through the conversion of ammonia to urea. HE may develop in some patients with liver scarring, known as cirrhosis, or acute liver failure and is a chronic disease which fluctuates in severity and may lead to serious neurological damage. On December 23, 2011, we submitted a New Drug Application, or NDA, to the U.S. Food and Drug Administration, or FDA, for Ravicti for the chronic management of UCD in patients aged 6 years and above. The FDA accepted the NDA for review in February 2012. Under the Prescription Drug User Fee Act, or PDUFA, the FDA is due to notify us regarding Ravicti’s approval status by October 23, 2012, unless that action date is extended by the FDA. In April 2012, we submitted data from the switchover portion of a clinical trial in UCD patients aged 29 days through 5 years and a revised draft package insert requesting approval of Ravicti to include this patient population. We currently expect to commercially launch Ravicti in the first half of 2013.

Ravicti was granted orphan drug designation by the FDA for the maintenance treatment of patients with UCD. Orphan drug designation is given to a drug candidate intended to treat a rare disease or condition that affects fewer than 200,000 individuals in the United States. We have also been granted fast track designation by the FDA for this indication.

We believe UCD occur in approximately 1 in 10,000 births in the United States. We estimate there are approximately 2,100 cases of UCD in the United States of which approximately 1,100 have been diagnosed. However, we estimate only 425 patients are currently treated with BUPHENYL® (sodium phenylbutyrate) Tablets and Powder, which is the only branded therapy approved by the FDA for chronic management of the most prevalent UCD. Additionally, there are approximately 90 patients currently on Ravicti in our ongoing long-term safety clinical trials.

We believe BUPHENYL use is limited due to the combination of high pill burden or large quantity of powder that must be taken, frequency of dosing (3-6 times per day), the unpleasant taste and smell, and tolerability issues. In addition, the sodium content of the maximum daily dose of BUPHENYL exceeds the FDA’s recommended daily allowance, which may lead to high blood pressure.

Significantly elevated ammonia levels with corresponding neurological symptoms are known as hyperammonemic, or HA, crises. We believe that Ravicti may reduce HA crises as compared to BUPHENYL, and, if approved, will offer benefits that enhance tolerability and increase compliance in support of improved disease management. Four clinical trials have shown ammonia control with Ravicti to be non-inferior and directionally favorable to BUPHENYL. Ravicti is nearly tasteless and odorless and does not contain any sodium. Ravicti uses the same vehicle for ammonia removal as BUPHENYL but requires a much smaller volume of drug. For example, approximately 1 tablespoon of Ravicti liquid is equivalent to the FDA-approved maximum daily dose of 40 tablets of BUPHENYL. The smaller volume of drug required for Ravicti is due to the differences in physical and chemical properties between Ravicti and BUPHENYL. Based on our market research with physicians and patient preference data from our clinical trials, we anticipate that most BUPHENYL patients for whom Ravicti is indicated under the FDA-approved label will transition to Ravicti if the drug is approved.

 

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In November 2010, we announced the successful completion of a pivotal Phase III trial for Ravicti in the treatment of UCD in adults in accordance with a Special Protocol Assessment agreement, or SPA, with the FDA. A SPA is an agreement with the FDA that a Phase III trial’s design, clinical endpoints, patient population and statistical analyses are acceptable for FDA approval. This four-week, multi-center, randomized, double-blind, placebo-controlled, cross-over study met its primary endpoint of demonstrating the non-inferiority of Ravicti to BUPHENYL in controlling blood ammonia in adults aged 18 years and above with UCD. An open-label pediatric Phase II trial in 11 UCD patients aged 6 through 17 years that compared Ravicti to BUPHENYL also demonstrated the non-inferiority of Ravicti to BUPHENYL in ammonia control. We are currently conducting a clinical trial in UCD patients aged 29 days through 5 years designed to demonstrate the safety and efficacy in this patient population. The efficacy portion of this trial is complete and a complete study report was submitted to the FDA in April 2012; however, the results of the 12-month safety extension portion of the study will not be available until the second quarter of 2013. As part of the April update to the FDA, we submitted a revised draft package insert requesting approval of Ravicti for patients aged down to 29 days. If the FDA classifies this submission as a major amendment, the PDUFA action date will likely be delayed.

We originally obtained rights to develop Ravicti from Ucyclyd Pharma, Inc., or Ucyclyd, a wholly owned subsidiary of Medicis Pharmaceutical Corporation in 2007 pursuant to a collaboration agreement. Under the terms of the original collaboration agreement, we obtained: limited research and development rights to Ravicti for UCD, HE and other indications; the right to promote BUPHENYL and AMMONUL in the United States for UCD, which right was later terminated in a subsequent amendment to the collaboration agreement; and certain future rights to purchase the worldwide rights to BUPHENYL, AMMONUL and Ravicti. In March 2012, pursuant to an asset purchase agreement, or purchase agreement, with Ucyclyd we purchased all of the worldwide rights to Ravicti for an upfront payment of $6.0 million, future payments based upon the achievement of regulatory milestones in indications other than UCD, sales milestones, and mid to high single digit royalties on global net sales of Ravicti. In addition, we simultaneously entered into an amended and restated collaboration agreement, or restated collaboration agreement, with Ucyclyd pursuant to which we have an option to purchase all of Ucyclyd’s worldwide rights in BUPHENYL and AMMONUL® (sodium phenylacetate and sodium benzoate) injection 10%/10%, the only adjunctive therapy currently FDA-approved for the treatment of HA crises in patients with the most prevalent UCD, for an upfront payment of $22.0 million, plus subsequent milestone and royalty payments. We will be permitted to exercise this option for a period of 90 days beginning on the earlier of the date of the approval of Ravicti for the treatment of UCD and June 30, 2013, but in no event earlier than January 1, 2013. To fund this upfront payment, we may draw on a loan commitment from Ucyclyd, which loan would be payable over eight quarters. If we exercise our option, Ucyclyd has a time-limited option to retain AMMONUL at a purchase price of $32.0 million. If Ucyclyd exercises its option and retains AMMONUL, the upfront purchase price for Ucyclyd’s worldwide rights to BUPHENYL will be $19.0 million resulting in a net payment from Ucyclyd to us of $13.0 million upon close of the transaction.

To expand the commercial potential of Ravicti we have completed a Phase II trial assessing the safety and efficacy of Ravicti in the treatment of episodic HE. Episodic HE can be diagnosed clinically through a set of signs and symptoms. The Phase II trial met its primary endpoint, which was to demonstrate that the proportion of patients experiencing an HE event was significantly lower on Ravicti versus placebo, both administered in addition to standard of care, including lactulose and/or refaximin. The FDA has also granted orphan drug designation for Ravicti for this indication. HE is a serious but potentially reversible neurological disorder that can occur in patients with cirrhosis or acute liver failure. It comprises a spectrum of neuropsychiatric abnormalities and motor disturbances that are associated with varying degrees of disability, ranging from subtle to lethal. HE is believed to occur when the brain is exposed to gut-derived toxins that are normally removed from the blood by a healthy liver. We believe that ammonia plays a central role in this disease, and the most commonly utilized therapies for the treatment of HE are believed to act by reducing ammonia. Published epidemiological data suggest that there are approximately 140,000 patients in the United States who have episodic HE. We believe Ravicti, if approved, would treat episodic HE through a systemic reduction of ammonia.

 

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Business Strategy

Our strategy is to commercialize a product portfolio, including Ravicti, for the treatment of UCD and to develop Ravicti for the treatment of HE and other indications. The key elements of our strategy are to:

 

   

Obtain FDA approval of Ravicti. We intend to seek marketing approval for Ravicti for the chronic management of UCD in patients down to 29 days of age. On December 23, 2011, we submitted an NDA to the FDA for approval of Ravicti for UCD patients 6 years and above based on data from our Phase II and III clinical trials that demonstrated non-inferiority and directionally favorable ammonia control as compared to BUPHENYL. In April 2012, we submitted a revised draft package insert to the FDA requesting approval of Ravicti for UCD patients down to 29 days of age based on data submitted in the NDA and data from our ongoing clinical trial in patients aged 29 days through 5 years.

 

   

Commercialize Ravicti and improve patient care in UCD. Subject to obtaining FDA approval of Ravicti for the treatment of UCD, we intend to establish sales, marketing, and reimbursement functions to commercialize Ravicti in the United States. A cornerstone of our strategy will be to facilitate the rapid transition of patients from BUPHENYL to Ravicti with a small, scientifically-focused sales force of approximately 10 representatives and a network of specialty pharmacies. By distributing directly through specialty pharmacies, we intend to provide patients with access to enhanced services that assist in overcoming challenges in healthcare delivery and in financing treatment posed by therapies that are necessarily expensive.

 

   

Market BUPHENYL and AMMONUL for patients ineligible for Ravicti. We anticipate that we will exercise our option to purchase all of Ucyclyd’s worldwide rights to BUPHENYL and AMMONUL during the applicable option period. We intend to market BUPHENYL for use by UCD patients who do not transition to Ravicti or who otherwise may be ineligible to use Ravicti. If Ucyclyd does not retain AMMONUL, we also intend to sell AMMONUL for the treatment of HA crises in UCD patients. Outside the United States we intend to assume Ucyclyd’s existing distribution agreements for BUPHENYL and for AMMONUL. If Ucyclyd exercises its option to retain AMMONUL, we will not have rights to sell AMMONUL in the United States or any other territory.

 

   

Develop Ravicti for the treatment of HE. Based on the positive results of our Phase II trial assessing the safety and efficacy of Ravicti in the treatment of episodic HE, we are planning to request an end of Phase II meeting with the FDA for the fourth quarter of 2012, which is critical for evaluating our Phase III clinical options with respect to Ravicti in this indication.

 

   

Expand Ravicti into additional indications and acquire additional products and product candidates. We may explore the use of Ravicti in indications other than UCD and HE. We intend to continue to identify and may license or acquire products or product candidates being developed for orphan diseases and hepatology.

UCD & HE: Diseases Related to Elevated Ammonia Levels

UCD and HE are generally characterized by elevated levels of ammonia in the bloodstream. Ammonia is a potent neurotoxin, primarily produced in the intestine as a byproduct of protein metabolism. Individuals with a healthy liver remove ammonia by converting it to urea, which is excreted in urine. In both UCD and HE, the liver’s ability to remove ammonia is diminished. UCD patients have a genetic disability, and individuals with HE have an acquired disability related to a decline in liver function that occurs in patients with more severe cases of cirrhosis.

In both UCD and HE patients, ammonia can build up to toxic levels which can lead to severe medical complications, including death. Both UCD and HE fluctuate in severity, and patients may experience crises which typically require hospitalization and may result in irreversible neurological damage.

 

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UCD

Background

UCD are inherited genetic diseases caused by a deficiency of one of the enzymes or protein transporters that constitute the urea cycle. The urea cycle involves a series of biochemical steps in which ammonia, a potent neurotoxin, is converted to urea, which is excreted in the urine. If left untreated, UCD can cause HA crises which may result in irreversible brain damage, coma or death. UCD symptoms may first occur at any age depending on the severity of the disorder, with more severe defects presenting earlier in life.

Diagnosis and Prevalence

UCD are diagnosed either through newborn screening or when symptoms present. Current newborn screening can only detect three of the UCD subtypes and does not detect the most prevalent subtype. Thus, screening is believed to identify only approximately one-third of newborns with UCD. Initial UCD symptoms range from catastrophic illness with coma occurring within a few days of birth to milder symptoms such as difficulty sleeping, headache, nausea, vomiting, disorientation and seizures, particularly in patients who present later in life. Because these symptoms are common to a number of ailments, physicians often do not consider the possibility of UCD and therefore may not measure levels of blood ammonia. As a result, the most mildly affected patients can go undiagnosed for decades despite having symptoms. Because many cases of UCD remain undiagnosed and because infants born with severe UCD often die without a definitive diagnosis, the exact incidence and prevalence of UCD are unknown and, we believe, likely underestimated.

We believe UCD occur in approximately 1 in 10,000 births in the United States. We estimate that there are approximately 2,100 individuals in the United States that suffer from UCD. We estimate that only half, or approximately 1,100 patients with UCD in the United States, have been diagnosed. Based on demographic data for those patients enrolled in the National Institute of Health sponsored UCD consortium, or UCDC, longitudinal study, we estimate that in the United States 28% of the diagnosed patient population is under 6 years of age, 32% is aged 6 through 17 years and 40% is 18 years of age or older.

Current Treatment Options for UCD

Management of UCD involves decreasing ammonia production through reduction of protein in the diet, amino acid supplementation, the use of dietary supplements such as arginine and citrulline, and the use of ammonia lowering agents, including sodium benzoate and BUPHENYL. We believe that patients with mild to moderate UCD are typically treated with dietary management and that patients with more severe UCD are generally treated with BUPHENYL but are often noncompliant. Liver transplantation is an option reserved for the most severely affected patients, typically those who present very early in life. Because liver transplantation is technically difficult in newborns, a company called Cytonet GmbH & Co. is developing a therapy for severely affected newborns, which involves the infusion of human liver cells with the aim of prolonging crisis-free survival until the patients are old enough to undergo a liver transplantation.

BUPHENYL, approved by the FDA in 1996, is the only branded therapy currently FDA-approved for the chronic management of the most prevalent UCD. It is available in powder and tablet forms. A generic of the tablet form of BUPHENYL was approved by the FDA in November 2011. Similar to Ravicti, BUPHENYL removes ammonia from the bloodstream and patients take the drug for the balance of their life to help maintain control of their blood ammonia. BUPHENYL is also available for the treatment of UCD in select countries throughout Europe, the Middle East, and the Asia-Pacific Region. In Europe and the Middle East the product is sold under the brand name AMMONAPS®.

When UCD are not well controlled, HA crises may occur. In these acute situations, AMMONUL is often administered intravenously, and dialysis is sometimes used. AMMONUL is currently the only FDA-approved adjunctive therapy for the treatment of HA crises in patients with the most prevalent UCD. Currently, AMMONUL is not approved for use outside the United States, but is being prescribed by physicians in parts of Europe.

 

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Limitations of Treatment Options for UCD

We believe that approximately 425 of the estimated 1,100 patients currently diagnosed with UCD are treated with BUPHENYL, approximately 90 patients are currently taking Ravicti in one of our clinical trials and the remainder go untreated or elect to manage their disease through protein restriction and/or the use of dietary supplements. Although BUPHENYL is an effective treatment and in many cases is lifesaving, it has important limitations including a high pill burden or large quantity of powder that must be taken, unpleasant taste and smell, and frequent dosing (3-6 times per day), which make compliance for many UCD patients difficult. The amount of BUPHENYL prescribed is based on a patient’s weight or body surface. The maximum daily dose of 20 grams requires patients to consume either 40 vitamin-sized uncoated tablets or 6.9 teaspoons of powder mixed with liquid or food. Approximately 30% of all patients on BUPHENYL are taking or have taken medications to treat gastrointestinal side effects. The powder form of BUPHENYL is often mixed with food, which can result in food aversion. Due to palatability issues, gastrointestinal side effects associated with BUPHENYL and symptoms of their disease, we believe that up to 45% of pediatric patients have or have had a feeding tube. In addition, the sodium content of the maximum daily dose of BUPHENYL exceeds the FDA’s recommended daily allowance, which may lead to high blood pressure.

Despite the life-threatening nature of UCD and the irreversible brain damage that can occur if a patient’s disease becomes uncontrolled and an acute crisis occurs, non-compliance is common. For example, a peer reviewed journal article discussing data from a 21-year, open-label, uncontrolled, multi-center study in 206 UCD patients, which was used to support FDA approval of AMMONUL, reports that approximately 10% of HA crises were attributed to non-compliance with BUPHENYL. This study was initiated originally by Brusilow in 1982 and later transferred to Ucyclyd. In addition, approximately 22% of HA crises reported by patients on BUPHENYL in the year before their enrollment in our pivotal study were attributed to non-compliance.

Many patients with mild to moderate disease manage their condition through protein restriction alone and risk long-term complications if the underlying disease is not well-controlled. Common neurological manifestations of patients with poorly controlled mild to moderate disease include hyperactive behavior, self-injurious behavior, stroke-like episodes, behavioral problems, cognitive dysfunction, and psychiatric symptoms. Recent clinical research suggests that even mildly symptomatic patients demonstrate cognitive deficits. Even mild to moderately affected patients risk an HA crisis if their disease is poorly controlled. According to data gathered by the UCDC, approximately 40% of patients not taking BUPHENYL who enrolled in the consortium sponsored longitudinal study had reported at least one acute crisis prior to enrollment.

Ravicti for the Treatment of UCD

Ravicti is being developed for the chronic management of patients with UCD and is intended for oral administration. Both Ravicti and BUPHENYL function as systemic ammonia lowering agents and provide an alternate pathway to the urea cycle for removing ammonia from the bloodstream. Both BUPHENYL and Ravicti release the active ingredient, phenylbutyrate, or PBA, which is converted to phenylacetic acid, or PAA. PAA facilitates the removal of ammonia when it is converted to phenylacetylglutamine, or PAGN, which is excreted in urine and replaces urea as a vehicle for ridding the body of ammonia. Due to its physical and chemical properties, Ravicti contains the same quantity of the active ingredient as BUPHENYL in a much smaller drug volume and has a longer half-life.

Key Advantages of Ravicti

Our analysis of data from our Phase II and Phase III trials evaluated the non-inferiority of Ravicti as compared to BUPHENYL in controlling blood ammonia levels in adult and pediatric UCD patients. A non-inferiority trial compares a test drug to an established treatment with the goal of showing that any difference in the performance of the test drug is small enough to support a conclusion that the test drug is not inferior to the established treatment, and that the test drug is, therefore, also effective. We successfully demonstrated non-inferiority in each of our Phase II and Phase III trials. We believe Ravicti provides incremental benefits in

 

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part due to its slow release profile, which appears to provide better late afternoon and nighttime control of ammonia levels. The following summarizes the expected key advantages of Ravicti as compared to BUPHENYL:

 

   

Ammonia control: Four clinical trials have shown that blood ammonia is lower on Ravicti and statistically as good as, or non-inferior, to BUPHENYL. A pooled analysis of the data from the Phase II and Phase III trials included in the NDA among UCD patients down to 29 days of age was performed in which all ammonia values obtained over 24 hours on Ravicti from all clinical trials were combined and compared with similar values obtained on BUPHENYL. Ammonia values as measured by 24-hour area-under-the-curve, which is a measure of the total systemic ammonia exposure experienced by patients over 24 hours, demonstrated that blood ammonia was approximately 21.9% lower after treatment with Ravicti as compared to BUPHENYL (ųmol.h/L = 774.11 on Ravicti and ųmol.h/L = 991.19 on BUPHENYL; p = 0.004). We believe the ammonia control provided by Ravicti is responsible for improved executive function seen in UCD patients aged 6 through 17 years after 12 months of treatment with Ravicti.

 

   

Improved palatability to drive compliance: Ravicti is a nearly odorless and tasteless liquid and requires a smaller daily drug volume (e.g., approximately 1 tablespoon contains the same amount of PBA as 40 tablets of BUPHENYL), all of which we believe makes Ravicti easier and more palatable to swallow. Approximately 10% of patients enrolled in our studies were receiving BUPHENYL through a gastrostomy tube, or G-tube.

 

   

Safety: In the 12-month safety extension to our pivotal Phase III trial, patients on Ravicti experienced approximately 40% fewer HA crises than they reported having experienced in the prior year while on BUPHENYL. In addition, unlike Ravicti, which contains no sodium, the sodium content of the maximum daily dose of BUPHENYL exceeds the FDA’s recommended daily allowance, which may lead to high blood pressure.

 

   

Patient preference. In our Phase II trial in patients down to 29 days of age, 34 of 36 patients expressed a preference for Ravicti over BUPHENYL. Forty of the forty-four patients in our pivotal Phase III trial agreed to continue 12 months of treatment and monthly monitoring with Ravicti beyond the initial four-week treatment period. Sixty-seven of sixty-nine patients who completed 12 months of treatment with Ravicti elected to enroll in an expanded access protocol to continue receiving Ravicti.

Registration Plan

In November 2010, we successfully completed our pivotal Phase III trial in adults under an SPA with the FDA. On December 23, 2011, we submitted an NDA for Ravicti for the chronic management of UCD patients aged 6 years and above. We included data from our Phase II and Phase III trials in patients aged 6 years and above as well as safety data from 69 UCD patients with 12 months of treatment on Ravicti and the results of two nonclinical carcinogenicity studies in the NDA submission. We continue to gather data from our ongoing continued access protocol designed to provide more experience with Ravicti treatment. We are also currently conducting a clinical trial in UCD patients aged 29 days through 5 years designed to demonstrate the safety and efficacy of Ravicti in this age group. The efficacy portion of this trial is complete and a complete study report was submitted to the FDA in April 2012; however, the data from the 12-month safety extension portion of the study will not be available until the second quarter of 2013. As part of the April update to the FDA, we submitted a revised draft package insert requesting approval of Ravicti for UCD patients down to 29 days of age.

We hold FDA orphan drug designation for the use of Ravicti in treating UCD. Ravicti was granted orphan designation for UCD based upon a potential safety benefit over BUPHENYL because of the absence of sodium. We will not receive orphan drug exclusivity in UCD unless the FDA, in reviewing the NDA, concludes that Ravicti is safer or more effective than BUPHENYL or makes a major contribution to patient care.

 

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We also received fast track designation for the NDA for Ravicti. Fast track status is intended to expedite or facilitate the process for reviewing new drugs and biological products that are intended to treat a serious or life-threatening condition and demonstrate the potential to address unmet medical needs for the condition.

Ravicti Clinical Development in UCD Patients

Our Phase II and Phase III trials were designed to demonstrate the safety and efficacy of Ravicti as compared to BUPHENYL in adult and pediatric UCD patients. Our objective in these trials was to demonstrate the non-inferiority of Ravicti as compared to BUPHENYL with respect to ammonia control. In each study, patients were enrolled on their prescribed dose of BUPHENYL and then switched to an amount of Ravicti that delivered the same amount of PBA. Ammonia control on each drug was assessed by measuring blood ammonia levels over 24 hours in a monitored clinical setting, where both diet and drug dosing were tightly controlled. All three studies demonstrated the non-inferiority of Ravicti as compared to BUPHENYL. Ravicti was well tolerated, and its safety profile was comparable to that of BUPHENYL in all of these trials.

Pivotal Phase III Trial. We conducted a pivotal Phase III trial of Ravicti in adult patients 18 years of age or older with UCD. The four-week, multi-center, randomized, double-blind, placebo-controlled cross-over study was designed to evaluate the non-inferiority of Ravicti to BUPHENYL. The study was conducted under an SPA granted by the FDA in June 2009. The primary efficacy measure was blood ammonia control, assessed as 24-hour area under the curve on days 14 and 28, the last day of each two-week treatment period. The primary efficacy measure of 24-hour area under the curve was intended to assess comparative ammonia exposure on the two drugs. Subjects were administered a BUPHENYL dose equivalent to their prescribed dose before study enrollment or a dose of Ravicti which delivered the same amount of PBA. The double-blind design required that all patients receive active or placebo BUPHENYL tablets or powder, as well as either active or placebo Ravicti, throughout the study. The drugs were administered three times a day with meals, and diet was strictly controlled.

In accordance with the SPA, our pivotal Phase III trial was designed as a non-inferiority trial comparing the ratio of mean ammonia values obtained from treatment with Ravicti against BUPHENYL. A non-inferiority trial compares a test drug to an established treatment with the goal of showing that any difference in the performance of the test drug is small enough to support a conclusion that the test drug is not inferior to the established treatment, and that the test drug is, therefore, also effective. In a non-inferiority trial, the permitted difference between the performance of the test drug and the established treatment is defined in advance. This is referred to as the non-inferiority margin. If the trial results show that the test drug performed at least as well as the established treatment within the non-inferiority margin, the test drug is determined to have been shown non-inferior to the established treatment in the trial and the non-inferiority objective, or endpoint, for the trial will be considered to have been met. The non-inferiority margin agreed upon with the FDA was 1.25 which is a conventional margin applied to similar studies. Accordingly, non-inferiority of Ravicti would be demonstrated if the upper 95% confidence interval of ammonia on Ravicti was not more than 25% higher than that seen on BUPHENYL. A 95% confidence interval means that if the trial was run multiple times, 95% of the time, ammonia levels on Ravicti would not be more than 25% higher than that seen on BUPHENYL.

The study enrolled 46 adults at 19 sites in North America. Of the 46 adults enrolled, 45 subjects received at least one dose of study drug and 44 subjects completed the study and are included in the primary efficacy analysis. Subjects were required to be on a stable dose of BUPHENYL before enrollment.

This trial met its primary endpoint of demonstrating the non-inferiority of Ravicti to BUPHENYL. Ravicti was generally well tolerated. Twenty-three subjects reported at least one adverse event during BUPHENYL treatment and 27 subjects reported at least one adverse event during Ravicti treatment. The most common adverse events reported during BUPHENYL treatment were dizziness, headache, nausea, diarrhea and abdominal pain or discomfort. During Ravicti treatment, the most common adverse events reported were diarrhea, flatulence, headache, vomiting, fatigue, decreased appetite and abdominal pain or discomfort. There was one

 

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serious adverse event, gastroenteritis, during treatment with Ravicti which was deemed not to be drug related. No deaths occurred during the study, and no clinically significant lab or electrocardiogram changes were observed for either treatment. One patient experienced an HA crisis during BUPHENYL treatment. In addition, one subject withdrew early from the study during BUPHENYL treatment because of high ammonia and headache. We had no HA crises or subject withdrawals from the study during dosing with Ravicti.

All subjects completing the study were eligible to enter a 12-month, open-label safety study. Forty of the forty-four patients in the pivotal Phase III trial agreed to continue treatment and monthly monitoring with Ravicti.

Phase II Adult Trial. We completed a Phase II trial of Ravicti in adult patients aged 18 years or older with UCD. This trial was an open-label, switchover study of the safety, tolerability, pharmacokinetic profile, and ammonia control of Ravicti compared to BUPHENYL. The study was conducted at four centers in the United States and enrolled 13 adult UCD patients, 10 of whom completed the trial. Subjects were required to be on a stable dose of BUPHENYL before enrollment. Upon enrollment, all subjects received BUPHENYL for seven days and were then admitted to a monitored clinical setting for overnight observation and 24-hour pharmacokinetic and ammonia measurements and urine collection. Subjects were then switched over to Ravicti, stayed on the Ravicti dose for seven days and were then re-admitted to the monitored clinical setting for repeated pharmacokinetic and ammonia measurements, and urine collection. Ravicti was well tolerated and exhibited a similar safety profile to BUPHENYL. There were two serious adverse events related to HA crises; both occurred during BUPHENYL treatment.

Phase II Pediatric Trial Aged 6 through 17 years. We completed a second Phase II trial at five centers in North America in UCD patients aged 6 through 17 years. This trial included two phases: a two-week, open-label, switchover comparison of the safety, tolerability, pharmacokinetic characteristics and ammonia control of Ravicti compared to BUPHENYL, and a 12-month safety extension. The switchover phase enrolled 11 UCD patients all of whom completed the study and enrolled in the extension phase. The extension portion of the trial enrolled an additional 6 patients for a total of 17 patients. Subjects were required to be on a stable dose of BUPHENYL before enrollment. Upon enrollment in the switchover phase, all subjects received BUPHENYL for seven days and were then admitted to a monitored clinical setting for overnight observation and 24-hour pharmacokinetic and ammonia measurements and urine collection. Subjects were then switched over to Ravicti. Subjects stayed on the Ravicti dose for seven days and were then re-admitted to the monitored clinical setting for repeated pharmacokinetic, ammonia and urine collection. Ravicti was well tolerated and exhibited a safety profile similar to BUPHENYL.

Efficacy Results of Phase II and Phase III Trials in Patients Aged 6 Years and Above. The non-inferiority endpoint was achieved in the pivotal Phase III trial and in the two Phase II clinical trials. The non-inferiority endpoint was prospectively defined in the pivotal Phase III trial and in the Phase II pediatric trial in patients aged 6 years and above, and the same non-inferiority analysis was conducted on a post hoc, retrospective basis in the Phase II adult trial.

 

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During these Phase II and Phase III trials, Ravicti demonstrated a differentiated rate of gastrointestinal absorption and pharmacokinetic profile as compared with BUPHENYL. This was demonstrated by PBA entering the circulation more slowly when administered as Ravicti than as BUPHENYL. We believe that this slow release profile of Ravicti as compared with BUPHENYL explains the lower ammonia levels observed on Ravicti over late afternoon and nighttime hours.

 

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Open-Label Studies. We enrolled 77 adult and pediatric UCD patients in our two 12-month open-label safety studies, 69 of whom completed the studies. We also currently have approximately 70 patients enrolled in our continued access protocol designed to provide more experience with Ravicti treatment. As depicted in the chart below, Ravicti continues to demonstrate a durable effect on ammonia control, with mean fasting ammonia values well below the upper limit of normal.

 

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We have also seen a decrease in the rate and severity of HA crises versus what patients in these studies reported they experienced in the year before trial enrollment, when all patients were on BUPHENYL in an uncontrolled environment. During one year of treatment with Ravicti in our clinical trials, patients aged 6 years and above experienced approximately 40% fewer HA crises versus the prior 12 months and their peak ammonia values during crises were lower. Neuropsychological evaluations at baseline and after 12 months of treatment with Ravicti also show evidence of clinically significant improvements in executive function among pediatric patients aged 6 through 17 years, including behavioral regulation (e.g., flexibility, inhibitory control) and metacognitive skills (e.g., goal setting, planning, self-monitoring).

Pharmacokinetic Differences in PAA Production Between Adult and Pediatric UCD Patients Receiving Ravicti. Data from our clinical studies and mathematical modelling to predict pharmacokinetics indicates that metabolism and elimination of Ravicti and BUPHENYL varies with body surface area. In particular, exposure to both drugs’ active moiety, PAA, tends to be higher among pediatric patients versus adults. High levels of PAA have been associated with reversible toxicity in previously published studies involving cancer patients who received intravenously infused PAA. No relationship has been observed so far between adverse events and PAA levels in our clinical studies of Ravicti in UCD patients, and PAA exposure among UCD patients administered Ravicti has been below the range associated with toxicity in these previously published studies.

Pediatric Study Under 6 Years. In response to concerns raised by the FDA during our pre-NDA meeting that data from our Phase II trial in pediatric patients aged 6 to 17 years showed a higher level of PAA than that seen

 

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in adult UCD patients receiving Ravicti and that pediatric patients receiving Ravicti had higher PAA levels than pediatric patients receiving BUPHENYL, we accelerated the evaluation of the safety, pharmacokinetics, and ammonia control of Ravicti in pediatric patients under 6 years of age. We initiated a study in 15 pediatric UCD patients aged 29 days through 5 years in the second half of 2011. The protocol is generally similar in design to the study for pediatric patients aged 6 through 17 years described above, in that it consists of an open-label BUPHENYL to Ravicti switchover comparison of the safety, pharmacokinetics and ammonia control during treatment with the two drugs followed by a 12-month open-label extension study. Similar to the findings in prior studies among the 15 patients who enrolled in and completed the switchover part of the study, ammonia tended to be lower on Ravicti as compared with BUPHENYL. We have completed pharmacokinetic analyses and findings to date suggest that PAA levels continue to reflect age related differences in body surface area and are similar for Ravicti and BUPHENYL.

Pooled Analysis of Pediatric Data. In a post-hoc analysis of pooled ammonia data from the two pediatric studies encompassing the age range of 29 days up to 18 years of age, total daily ammonia exposure was significantly lower during treatment with Ravicti as compared with BUPHENYL as depicted in the figure below.

 

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Ravicti Nonclinical Development

As part of the development program for Ravicti for treatment of UCD, we conducted nonclinical genotoxicity and carcinogenicity studies to assess the tumorigenic potential of Ravicti in animals and to assess the relevant risk in humans. In a 24-month carcinogenicity study in male and female rats, six different tumor types occurred at an incidence suggestive of a relationship to Ravicti administration. In July 2011, we convened an expert panel of oncologists, industry and former FDA toxicologists, and human and veterinary pathologists to review the results of the study and provide guidance on the human relevance and potential risks associated with the findings. The expert panel reviewed the data from the study in detail, as well as additional relevant published data. The members of the panel determined unanimously that the results of the rat study were not predictive of human risk. The panel reviewed data related to the incidence of tumors in the adrenal, pancreas, thyroid, uterus, Zymbal’s gland, and cervix of the rats. While the panel did not indicate which were the primary or most

 

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important reasons for their conclusions, the specific bases for the conclusion of the expert panel that the results of the rat study were not predictive of human risk were as follows:

 

   

Ravicti and its metabolites, including PBA, PAA and PAGN, have been demonstrated not to damage DNA in a wide range of in vitro tests.

 

   

There was no evidence of tumors in the targeted tissues in transgenic mice rendered susceptible to cancer, primates or in shorter duration rat studies, and as a result the panel concluded the tumors appeared to be specific to the rat study.

 

   

The tumors seen in the higher dose groups in the study were of the same type seen in control rats and all were late occurring and of low incidence.

 

   

Metabolic consequences of long-term exposure to Ravicti in normal rats and UCD patients are substantially different.

 

   

With respect to the specific tumor types, the panel noted the following: (1) With respect to adrenal tumors, adenocarcinoma of the adrenal cortex is extremely rare in humans and there are no known chemicals that cause abnormal masses in this organ in humans, cancerous lesions of the adrenal cortex were nonspecific and one of the most common findings in endocrine tissues of aged rats, and rodent endocrine tumors have uniformly been shown not to have human relevance for carcinogenicity in endocrine tissues for nongenotoxic agents; (2) in the opinion of the panel experts, there exists well-documented and accepted rat-specific mechanisms which cause the tumors observed in the study in the pancreas, thyroid, and uterus of rats; (3) tumors of Zymbal’s gland do not indicate tumor risk for humans when they are found in carcinogenicity studies performed with nongenotoxic agents, as these tissues are not present in humans; and (4) cervical tumors were not compound-related, were not relevant to humans, and, therefore, did not suggest a carcinogenic risk to patients that would be treated with Ravicti.

We have not seen any incidence of cancer to date in any of our clinical trials of Ravicti in UCD patients, and we are not aware of any reported cases of cancer in patients taking BUPHENYL. Liver cancer was identified in three patients in our HE study, two of whom had a predisposing history of hepatitis C and one of whom had cirrhosis of unknown cause. A white paper summarizing the outcome of the expert panel review was submitted to the FDA along with the carcinogenicity studies results as part of the Ravicti NDA for UCD. While we expect the white paper will be reviewed as part of the NDA review, we have not had any additional discussions with the FDA regarding the white paper or received a formal or informal response. If we are unable to explain these data to the satisfaction of the FDA, the FDA may request that we conduct additional nonclinical studies and the approval of Ravicti may be delayed or denied.

HE

Background

HE is a serious but potentially reversible neurological disorder that can occur in patients with cirrhosis or acute liver failure. HE is believed to occur when the brain is exposed to gut-derived toxins that are normally removed from the blood by a healthy liver. While a variety of gut-derived toxins may contribute to HE, we believe that ammonia plays a central role in this disease. The spectrum of symptoms which constitute HE is very similar to that for UCD, including neuropsychiatric abnormalities and motor disturbances that are associated with varying degrees of disability ranging from subtle to lethal. The manifestations of HE vary over time. Similar to UCD patients who may experience HA crises, patients with episodic HE often experience periods where their symptoms worsen, or HE events. HE events are manifested by symptoms ranging from disorientation to coma, and frequently require hospitalization. Our HE development program is targeting patients with episodic HE who

 

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have experienced past HE events and is designed to determine whether treatment with Ravicti will decrease the number of HE events.

Diagnosis and Prevalence

Symptoms in patients with episodic HE can range from subtle changes in personality to overt disorientation and impaired consciousness that can progress to coma or death, if untreated. Published epidemiological data suggest that there are approximately one million patients in the United States with cirrhosis of whom an estimated 140,000 have clinically recognizable episodic HE. HE is diagnosed based on the presence of compatible signs and symptoms in a patient with cirrhosis in whom other causes of brain dysfunction have been excluded. In contrast to patients with episodic HE in whom the manifestations are recognizable clinically, patients with minimal HE exhibit normal mental and neurological status upon clinical examination and need standardized neurological testing to establish a diagnosis.

The West Haven criteria, a widely used approach, grade the severity of episodic HE based upon a clinical assessment of a patient’s mental status, behavior, short term memory, alteration of consciousness and neuromuscular function. The scale for episodic HE ranges from Grade 1 to 4. Stable patients with Grade 1 or 2 HE are typically ambulatory and can usually be managed as outpatients. By contrast, Grade 3 and 4 patients are hospitalized and often require intensive support. Prevention of HE events is therefore important both from the standpoint of patient well-being and health care costs.

Current Therapies and Limitations

The most commonly utilized agents for the treatment of HE are poorly or non-absorbable sugars, such as lactulose or lactitol, and rifaximin, a poorly absorbed non-systematic oral antibiotic manufactured by Salix Pharmaceuticals, Ltd. These agents are believed to limit the local production of ammonia in the intestine. Other products currently in early development include Ocera Pharmaceutical’s AST-120, a non-specific adsorbent believed to bind putative toxins in the intestine, and OCR-002, which is believed to lower ammonia. BUPHENYL is not an appropriate treatment for most HE patients given the FDA warning regarding the use of the drug in patients with sodium retention and edema which is common for patients with HE.

Abdominal cramping, diarrhea and flatulence are common side effects with lactulose, making the drug difficult for many patients to tolerate. Moreover, a published review of clinical trials involving lactulose and lactitol in the treatment of HE concluded that those agents failed to demonstrate a statistically significant benefit.

Rifaximin 550 mg tablets were FDA approved in March 2010 for the reduction in risk of overt HE recurrence in patients 18 years of age or older. Although rifaximin represents the current standard of care, approximately 20% of patients experienced breakthrough HE events while taking rifaximin over a period of six months in a pivotal study. We believe, the treatment of HE remains a major unmet medical need.

Ravicti for the Treatment of HE

Rationale for Ravicti Treatment in HE

HE is widely assumed by clinicians to involve the systemic accumulation of ammonia resulting from impaired liver function. Therefore, we believe Ravicti, which lowers ammonia systemically, can be beneficial in managing this disease. Moreover, given its mechanism of action of removing ammonia from the body, Ravicti could potentially be complementary to currently approved agents that limit the local production of ammonia.

 

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Ravicti Clinical Development in HE Patients

Our HE clinical program comprises two trials which have enrolled patients with cirrhosis. Based on the positive results of our recently completed Phase II trial, we are planning to request an end of Phase II meeting with the FDA for the fourth quarter of 2012, which is critical for evaluating our Phase III clinical options with respect to Ravicti for HE. Our Phase II clinical trial design was similar to that used to evaluate rifaximin, the only therapy approved by the FDA for episodic HE within the last 30 years. The rifaximin trial, conducted by Salix Pharmaceuticals, or Salix, was a single pivotal Phase III trial which enrolled 299 patients. The primary endpoint was time to the first HE event with the key secondary endpoint of time to hospitalization.

Phase I Trial. Ucyclyd conducted a Phase I safety and pharmacokinetic study in healthy adults and adults with cirrhosis. The trial was an open-label, single and multiple dose study of Ravicti in 24 cirrhotic and 8 healthy subjects. Ravicti was generally well tolerated. There were no serious adverse events or withdrawals due to adverse events. The most common individual adverse events were increased body temperature and decreased platelet count. While patients with the most severely impaired liver function tended to metabolize Ravicti somewhat more slowly than healthy adults, even these patients were able to effectively metabolize Ravicti and thereby utilize the drug for waste removal.

Phase II Trial. We have recently completed a Phase II trial of patients with episodic HE. Part A of this study involved an open-label dose escalation to assess the safety and pharmacokinetics of Ravicti in 15 patients with cirrhosis and HE. We assessed doses of 6mL and 9mL taken twice per day. The 6mL dose lowered mean fasting ammonia levels to below the average upper limit of normal and exhibited superior tolerability compared to the 9mL dose, which showed little incremental ammonia effect. The 6mL dose was therefore selected as the dose for Part B of the study.

Part B was a multi-center, randomized, double-blind trial of Ravicti versus placebo in patients with episodic HE. This study shared many of the essential features of Salix Pharmaceutical’s pivotal trial for rifaximin in HE. In the Salix pivotal study rifaximin reduced the risk of occurrence of an HE event and risk of hospitalization due to an HE event. We followed the general design of the Salix study, recruited similar patients and applied similar definitions of HE events as the primary outcome measure. However the duration of our study was 4 months in contrast to Salix’s study which was 6 months. In order to be included in our study, patients must have had at least two HE events in the previous six months. The primary efficacy measure was similar to the rifaximin trial and was defined as the proportion of patients that exhibited at least one HE event while on the study. Secondary measures included total HE events during the study, pharmacokinetics, hospitalizations due to HE, subjects with one or more symptomatic days, and impact on severe HE and minimal HE, which involves mild neurological impairment as detected by standardized testing.

Patients were allowed to continue standard of care therapy (including lactulose and/or rifaximin) while enrolled in the trial. Unlike the rifaximin pivotal trial which required that patients exit after experiencing their first HE event, our trial allowed patients to remain in the trial at the physician’s discretion after experiencing an HE event. Patients’ standard of care therapy also could be modified by their physician during the trial after experiencing their first HE event. For example, a physician could introduce rifaximin to patients not taking rifaximin at study entry.

The trial enrolled 178 patients: 88 patients from 28 sites in the US, 50 patients from 9 sites in Russia, and 40 patients from 7 sites in the Ukraine. The ex-US sites were included both to facilitate enrollment and diversify the background standard of care. All sites were pre-qualified and continuously monitored by us throughout the study to ensure adherence to the protocol and Good Clinical Practices.

The trial met its primary endpoint: the proportion of patients experiencing at least one HE event was significantly lower on Ravicti versus placebo (21.1% vs. 36.4%, p = 0.0214). Patients receiving Ravicti also experienced fewer total HE events in the course of the study versus placebo (35 vs. 57; p = 0.0354). In addition, fewer patients on Ravicti experienced one or more symptomatic days versus placebo (13 vs. 27; p = 0.0148).

 

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While not statistically significant, there were trends favoring Ravicti in numbers of patients hospitalized for HE events, total HE-related hospitalizations and total hospital days for HE-related admissions, suggesting a potentially important pharmacoeconomic benefit to the treatment of HE with Ravicti. Some of the trial data are summarized in the following table:

 

     Ravicti n=90     Placebo n=88     %
Reduction
     p Value  

Primary Efficacy Endpoint:

         

Proportion of patients with at least one HE event — Number of subjects (%)

     19 (21.1%     32 (36.4%     41%         0.0214   

Secondary Endpoints:

         

Total HE events

     35        57        38%         0.0354   

Subjects with a symptomatic day

     13        27        52%         0.0148   

Total HE hospitalizations

     13        25        48%         0.064   

We are continuing to analyze data related to the secondary endpoints from this study, including a secondary endpoint related to minimal HE which was not met.

The population most similar to that enrolled in the rifaximin pivotal trial was the subgroup of patients on no therapy or lactulose only at study entry. In this population, Ravicti significantly reduced the proportion of patients experiencing at least one HE event versus placebo (10% vs. 32.2%; p = 0.0031) as well as the proportion of patients who experienced the more severe West Haven grade > 2 events versus placebo (5% vs. 25.4%; p = 0.0017), and the total number of HE events on study (7 vs. 31; p = 0.0002). Among these patients, this corresponds to an 82% reduction in the risk of experiencing a grade 2 HE event on Ravicti as compared with placebo.

 

LOGO

Among patients who received rifaximin at any time during the study (n=69), those receiving Ravicti as well experienced fewer total HE events, fewer patients hospitalized for HE events and fewer total HE hospitalizations. While the differences were not statistically significant, these trends may suggest a possible benefit of Ravicti in

 

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patients who have experienced HE events while taking rifaximin. However, the proportion of patients taking rifaximin at study entry that experienced at least one HE event while on study was similar for Ravicti and placebo (43.3% vs. 44.8%; non-significant). A summary of the results of patients on rifaximin at baseline and/or after their first HE event during the study is as follows:

 

     Ravicti + Rifaximin      Rifaximin + Placebo  

Subjects with HE Events*

     13         22   

Total HE Events*

     28         42   

Total HE hospitalizations**

     11         20   

Annualized hospitalization rate (hosp/pt/yr)**

     1.74         3.21   

 

* Patients on rifaximin either at baseline or after first HE event (Ravicti n=31; Placebo n=38)

 

** Patients on rifaximin at baseline (Ravicti n=30; Placebo n=29)

The rate of adverse events was similar on Ravicti versus placebo. There were three deaths in the study, two on Ravicti and one on placebo, all of which were judged by the clinical investigators to be unrelated to the study drug. There were 20 serious adverse events, or SAEs, on Ravicti, of which one was deemed possibly related to Ravicti by blinded assessment at the time of the study, and 12 SAEs on placebo, of which four were deemed possibly related to the placebo by blinded assessment at the time of the study. We believe the higher number of SAEs in the Ravicti group reflects the greater number of Child-Pugh C patients (i.e., the most severely ill patients) randomized to Ravicti versus placebo (21 vs. 8).

We are currently conducting additional analyses of the study results and planning for an end of Phase II meeting with the FDA in the fourth quarter of 2012 to discuss these findings and gain the agency’s input on our plans for a Phase III trial in HE. The complete and final results have been submitted for consideration for presentation at The Liver Meeting® of the American Association for the Study of Liver Diseases.

Sales, Marketing and Distribution

The two current branded products FDA-approved for the most prevalent UCD, BUPHENYL and AMMONUL, are not currently promoted in the United States by a sales force, and market education and support efforts are limited. If Ravicti is approved by the FDA, we plan to establish sales, marketing, and reimbursement functions, in the United States, consistent with those maintained by other companies to support orphan medications marketed to small patient populations. We plan to hire approximately 10 representatives to reach the specialists involved in treating the majority of patients with UCD. We intend to distribute our UCD product portfolio through a limited network of specialty pharmacies with a single dedicated call center responsible for interfacing with patients, physicians and payors. We believe this strategy will be critical to our commercial success as it supports a case managed approach to getting patients on treatment quickly and supporting long-term compliance.

A cornerstone of our strategy will be to facilitate the rapid transition of patients approved under FDA-labeling from BUPHENYL to Ravicti. Based on our market research with physicians and patient preference data from our clinical trials, we anticipate that most BUPHENYL patients will rapidly transition to Ravicti if it is approved by the FDA for commercial sale. If Ravicti is approved, and we purchase Ucyclyd’s worldwide rights to BUPHENYL, we will continue to sell BUPHENYL for any patients who are not included in the FDA-approved Ravicti label or who may prefer BUPHENYL. If we purchase Ucyclyd’s worldwide rights to AMMONUL, we will also sell AMMONUL for the treatment of HA crises in UCD patients.

As part of the NDA submission for Ravicti for the treatment of UCD, we proposed a Risk Evaluation and Mitigation Strategy, or REMS, to address concerns raised by the FDA in our pre-NDA meeting regarding differences seen in the pharmacokinetic profile of Ravicti between adults and children and potential use of Ravicti in children below the age of 6 years prior to its approval for use in this age group. The proposed REMS program is intended to support informed dosing and treatment decisions between patients and their healthcare

 

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providers by educating them on the safe use of Ravicti and to limit access to Ravicti only to patients aged 6 years and over until such time as the Ravicti label is expanded to include this patient population. If required, the REMS will be administered though our single dedicated call center which will enable us to maintain control over distribution and facilitate education of patients and healthcare providers. The proposed REMS may not be sufficient to address the FDA’s concern regarding the potential safety risks of Ravicti in pediatric patients. The specific elements of any required REMS will be negotiated with FDA during the NDA review process.

Once the transition of patients from BUPHENYL to Ravicti is underway, we will devote increasing resources to expanding the number of diagnosed and treated patients through ongoing market education. Our sales and marketing organization will be structured for flexibility in anticipation of additional products.

Outside the United States we will assume Ucyclyd’s existing distribution agreements for BUPHENYL and AMMONUL, if we acquire those products.

Third-Party Reimbursement

Sales of pharmaceutical products depend in significant part on the availability of coverage and adequate reimbursement by third-party payors, such as state and federal governments, including Medicare and Medicaid, managed care providers, and private insurance plans. Decisions regarding the extent of coverage and amount of reimbursement to be provided for Ravicti and BUPHENYL will be made on a plan by plan, and in some cases, patient by patient, basis. Particularly given the rarity of UCD, we anticipate that securing coverage and appropriate reimbursement from third-party payors will require targeted education. To that end, we plan to establish a dedicated group of reimbursement experts focused on ensuring that clinically qualified patients have affordable access to therapy.

Within the Medicare program, as a self-administered drug, Ravicti would be, and BUPHENYL is, reimbursed under the expanded prescription drug benefit, known as Medicare Part D. This program is a voluntary Medicare benefit administered by private plans that operate under contracts with the federal government. These Part D plans negotiate discounts with drug manufacturers, which are passed on to each of the plan’s enrollees. Historically, Part D beneficiaries have been exposed to significant out-of-pocket costs after they surpass an annual coverage limit and until they reach a catastrophic coverage threshold. However, changes made by recent legislation will reduce this patient coverage gap, known as the donut hole, by transitioning patient responsibility in that coverage range from 100% in 2010 to only 25% in 2020. To help achieve this reduction, beginning in 2011, pharmaceutical manufacturers are required to pay quarterly discounts of 50% off the negotiated price of branded drugs issued to Medicare Part D patients in the donut hole.

An ongoing trend has been for third-party payors, including the United States government, to apply downward pressure on the reimbursement of pharmaceutical products. Also, the trend towards managed health care in the United States and the concurrent growth of organizations such as health maintenance organizations may result in lower reimbursement for pharmaceutical products. We expect that these trends will continue as these payors implement various proposals or regulatory policies, including various provisions of the recent health reform legislation that affects reimbursement of these products. There are currently, and we expect that there will continue to be, a number of federal and state proposals to implement controls on reimbursement and pricing, directly and indirectly.

Research and Development

We are conducting development activities to expand the commercial potential of Ravicti. We sponsor and conduct clinical research activities with investigators and institutions to measure key clinical outcomes that can influence market adoption of Ravicti.

 

 

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In the years ended December 31, 2009, 2010, and 2011, and for the three months ended March 31, 2012, we incurred $11.0 million, $23.1 million, $17.2 million and $8.9 million, respectively, of research and development expense.

Ucyclyd Asset Purchase Agreement and Amended and Restated Collaboration Agreement

On March 22, 2012, we entered into a purchase agreement with Ucyclyd under which we purchased the worldwide rights to Ravicti and a restated collaboration agreement under which Ucyclyd granted us an option to purchase Ucyclyd’s worldwide rights to BUPHENYL and AMMONUL at a fixed price at a future defined date, plus subsequent milestone and royalty payments, subject to Ucyclyd’s right to retain AMMONUL for a predefined price. The restated collaboration agreement superseded the collaboration agreement with Ucyclyd, dated August 23, 2007, as amended.

Asset Purchase Agreement. Under the purchase agreement, we purchased all of the worldwide rights to Ravicti for an initial upfront payment of $6.0 million. We will also pay tiered mid to high single digit royalties on global net sales of Ravicti and may owe regulatory milestones of up to $15.8 million related to approval of Ravicti in HE, regulatory milestones of up to $7.3 million per indication for approval of Ravicti in indications other than UCD or HE, and net sales milestones of up to $38.8 million if Ravicti is approved for use in indications other than UCD (such as HE) and all annual sales targets are reached. In addition, the intellectual property license agreement executed between Ucyclyd and Brusilow Enterprises, LLC, or Brusilow, and the research agreement executed between Ucyclyd and Dr. Marshall L. Summar, or Summar, were assigned to us, and we have assumed the royalty obligation under the Brusilow agreement for sales of Ravicti in any indication, and the royalty obligations under the Summar agreement on sales of Ravicti to treat HE. We will also pay Brusilow an annual license extension fee to keep the Brusilow license in effect, which extension fee is payable until our first commercial sale of Ravicti following FDA approval. The Brusilow and Summar agreements provide that royalty obligations will continue, without adjustment, even if generic versions of the licensed products are introduced and sold in the relevant country.

Subject to Ucyclyd’s right to commercialize BUPHENYL and AMMONUL for UCD for as long as it owns these products, the purchase agreement prohibits Ucyclyd from developing or commercializing any product for the treatment of UCD or HE that comprises, incorporates or contains glycerol phenylbutyrate, sodium phenylbutyrate or any other active pharmaceutical ingredient that converts to PAA. This restriction is in force until the later of (a) the expiration of the last patent covering Ravicti in the United States, or (b) the expiry of any other market exclusivity granted by the FDA for Ravicti. Thereafter, the restriction will remain in force on a country-by-country basis until the later of (a) the expiration of the last patent covering Ravicti in the applicable country, or (b) the expiration of any other market exclusivity granted for Ravicti by the governing regulatory agency in the applicable country. This restriction does not prevent Ucyclyd from developing or commercializing BUPHENYL or AMMONUL for indications other than UCD or HE, and Ucyclyd will retain the right to develop or commercialize the active ingredient(s) of BUPHENYL or AMMONUL for indications other than UCD or HE even if we purchase Ucyclyd’s worldwide rights to BUPHENYL and AMMONUL pursuant to the restated collaboration agreement.

As part of our purchase of the worldwide rights to Ravicti, and in return for the payment of the royalties described above, we received a license to Ucyclyd’s manufacturing technology for use with respect to Ravicti. In addition, concurrent with our purchase of Ravicti, Ucyclyd granted us a royalty-bearing license to any developed Ucyclyd formulation technology that may be useful to our efforts with respect to Ravicti in UCD and HE, and we received a right to use and reference certain Ucyclyd-owned data relating to BUPHENYL and AMMONUL.

Under the terms of the purchase agreement, Ucyclyd has an option to purchase the right to use and reference any and all data we control with respect to Ravicti and any other product that comprises, incorporates or contains glycerol phenylbutyrate, sodium phenylbutyrate or any other active pharmaceutical ingredient that converts to

 

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PAA. If exercised, Ucyclyd’s right to use and reference our data is limited to use only for development of products (other than Ravicti) for the treatment of a specific indication that we are not currently pursuing, and other new indications that are requested by Ucyclyd and as approved by us, with our right to withhold such approval subject to certain terms and conditions. If Ucyclyd exercises this option and we approve a new indication, we are obligated to disclose any relevant patents and discuss in good faith a nonexclusive, field-limited license to such patents to be entered on commercially reasonable terms and conditions. This option is exercisable any time until our acquisition of BUPHENYL and AMMONUL (subject to Ucyclyd’s right to retain AMMONUL) or the expiry of our option period. If Ucyclyd exercises the option, Ucyclyd will pay us a one-time up-front payment, and may owe us an additional regulatory milestone payment. In addition, Ucyclyd will pay us a mid single digit royalty on net sales of products for any new indications (excluding the specific indication mentioned above), not to exceed an aggregate dollar value.

The purchase agreement cannot be terminated by either party. However, we will have a license to certain Ucyclyd manufacturing technology, and Ucyclyd may have a license to certain of our technology, and the party granting a license will be permitted to terminate the license if the other party fails to comply with any payment obligations relating to the license and does not cure such failure within a defined time period. The license with Brusilow that was assigned to us may be terminated for any uncured breach, including of payment obligations and if we do not meet certain diligence obligations in our development and commercialization of Ravicti.

Amended and Restated Collaboration Agreement. Under the terms of the restated collaboration agreement, we have an option to purchase all of Ucyclyd’s worldwide rights in BUPHENYL and AMMONUL, subject to Ucyclyd’s option to retain AMMONUL. We will be permitted to exercise this option for 90 days beginning on the earlier of the date of the approval of Ravicti for the treatment of UCD and June 30, 2013, but in no event earlier than January 1, 2013. The upfront purchase price for AMMONUL and BUPHENYL is $22.0 million, which we may fund by drawing on a loan commitment from Ucyclyd. The loan would be payable in eight quarterly payments and would bear interest at a rate of 9% per annum, and would be secured by the BUPHENYL and AMMONUL assets. If the Ravicti NDA for UCD is not approved by January 1, 2013, then Ucyclyd is obligated to make monthly payments of $0.5 million to us until the earliest of (1) FDA approval of the Ravicti NDA for UCD, (2) June 30, 2013 and (3) our written notification of our decision not to purchase BUPHENYL and AMMONUL.

If we exercise our option to purchase Ucyclyd’s worldwide rights to BUPHENYL and AMMONUL, then Ucyclyd has the time-limited right to elect to retain all rights to AMMONUL for a purchase price of $32.0 million. If Ucyclyd exercises this option, Ucyclyd will pay us a net payment of $13.0 million on closing of the purchase transaction, which reflects the purchase price for BUPHENYL being set-off against Ucyclyd’s retention payment for AMMONUL. If Ucyclyd retains rights to AMMONUL, subject to certain terms and conditions, we retain a right of first negotiation should Ucyclyd later decide to sell, exclusively license, or otherwise transfer the AMMONUL assets to a third party.

If we acquire BUPHENYL, we will pay Ucyclyd royalties on any net sales in the United States of BUPHENYL to UCD patients outside of the FDA-approved labeled age range for Ravicti. The royalties on BUPHENYL net sales will be payable at the Ravicti royalty rate then in effect pursuant to the purchase agreement. If we purchase Ucyclyd’s worldwide rights to AMMONUL, AMMONUL net sales will be included in the calculation of commercial milestone payments due to Ucyclyd under the purchase agreement, and we will pay regulatory milestones of up to $11.5 million based on the development of AMMONUL for HE and up to $2.0 million for each additional indication that we decide to pursue. We will also pay Ucyclyd low double digit royalties on global net sales of AMMONUL in all indications, including UCD, if we obtain regulatory approval for an indication other than UCD. If we purchase Ucyclyd’s worldwide rights to AMMONUL and BUPHENYL, upon closing of the purchase transaction we will assume Ucyclyd’s rights in the purchased products subject to Ucyclyd’s current obligations to certain third-party distributors and licensees. The restated collaboration agreement provides that royalty obligations will continue, without adjustment, even if generic versions of these products are introduced and sold in the relevant country.

 

 

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The restated collaboration agreement will expire if we fail to exercise our purchase option or if we exercise our purchase option but fail to pay the initial purchase price or otherwise fail to consummate the purchase within the required time period. In addition, our ability to consummate the purchase transaction contemplated under the restated collaboration agreement may require that we obtain clearance from the Federal Trade Commission, or FTC, or Department of Justice pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, or the HSR Act. If the FTC or the Antitrust Division of the Department of Justice, or the Antitrust Division, were to challenge the transaction and we were unable to resolve the challenge through a consent decree, either party could terminate the restated collaboration agreement and we would lose our rights to BUPHENYL and AMMONUL. Following our purchase of these rights, the restated collaboration agreement cannot be terminated by either party. However, we will have a license to specified Ucyclyd manufacturing technology, and Ucyclyd will be permitted to terminate this license if we fail to comply with any payment obligations relating to the license and we fail to cure this failure within a defined time period.

Manufacturing

We currently have no manufacturing facilities and limited personnel with manufacturing experience. We rely on third-party manufacturers to produce bulk drug substance and drug products required for our clinical trials. We plan to continue to rely upon contract manufacturers and, potentially, collaboration partners to manufacture commercial quantities of our drug product candidates if and when we receive approval for marketing by the applicable regulatory authorities.

We have clinical supplies of Ravicti manufactured for us by two alternate drug substance suppliers, Helsinn and DSM on a purchase order basis. We have included both Helsinn and DSM as suppliers of drug substance in the Ravicti NDA. If either or both Helsinn and DSM are approved by the FDA, we believe our commercial requirements of drug substance can be satisfied without significant delay or material additional costs. We purchase finished Ravicti drug product from Lyne on a purchase order basis in accordance with a clinical supply agreement. We do not have an agreement in place for and we have not identified a secondary fill/finish supplier. We do not have a long-term commercial supply arrangement in place with any of our contract manufacturers. If we need to identify an additional fill/finish manufacturer, we would not be able to do so without significant delay and likely significant additional cost.

Prior to our acquisition of the worldwide rights to Ravicti from Ucyclyd, Ucyclyd owned all Ravicti manufacturing technology developed by Helsinn, other than generally applicable confidential know-how. Pursuant to the purchase agreement with Ucyclyd, Ucyclyd continues to own all Ravicti manufacturing technology developed as of August 23, 2007, and we own all Ravicti manufacturing technology developed after that date. We have a license to the Ravicti manufacturing technology owned by Ucyclyd.

If we purchase BUPHENYL and AMMONUL under the restated collaboration agreement with Ucyclyd, we will assume all of Ucyclyd’s rights and obligations under its manufacturing agreements for these products.

Our third-party manufacturers, their facilities and all lots of drug substance and drug products used in our clinical trials are required to be in compliance with current Good Manufacturing Practices, or cGMP. The cGMP regulations include requirements relating to organization of personnel, buildings and facilities, equipment, control of components and drug product containers and closures, production and process controls, packaging and labeling controls, holding and distribution, laboratory controls, records and reports, and returned or salvaged products. The manufacturing facilities for our products must meet cGMP requirements and FDA satisfaction before any product is approved and we can manufacture commercial products. Our third-party manufacturers are also subject to periodic inspections of facilities by the FDA and other authorities, including procedures and operations used in the testing and manufacture of our products to assess our compliance with applicable regulations. Failure to comply with statutory and regulatory requirements subjects a manufacturer to possible legal or regulatory action, including warning letters, the seizure or recall of products, injunctions, consent decrees placing significant restrictions on or suspending manufacturing operations and civil and criminal penalties. These actions could have a material impact on the availability of our

 

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products. Contract manufacturers often encounter difficulties involving production yields, quality control and quality assurance, as well as shortages of qualified personnel. For example, we recently discovered a contaminated lot of Ravicti, which we believe was caused by a failure in a filtration step by one of our third-party drug substance manufacturers. As a result, we have a limited commercial supply of Ravicti, and we have to manufacture another lot, which could cause a delay in the commercial launch of Ravicti.

Competition

We face competition from established pharmaceutical and biotechnology companies, as well as from academic institutions, government agencies and private and public research institutions, among others, which may in the future develop products to treat UCD or HE. Our commercial opportunity may be reduced significantly if our competitors develop and commercialize products that are safer, more effective, more convenient, have fewer side effects or are less expensive than Ravicti, or BUPHENYL and AMMONUL. Public announcements regarding the development of competing drugs could adversely affect the commercial potential of Ravicti.

Currently, there is no cure for UCD. Management of UCD involves decreasing ammonia levels through reduction of protein in the diet, amino acid supplementation and the use of ammonia lowering agents, including sodium benzoate and BUPHENYL. Liver transplantation is an option reserved for the most severely affected patients, typically those who present very early in life. If a curative treatment for UCD is developed, Ravicti and BUPHENYL may become obsolete for that indication.

BUPHENYL is the only branded therapy currently FDA-approved for the chronic management of patients with the most prevalent UCD. We are aware of one generic sodium phenylbutyrate tablet product manufactured by Ampolgen Pharmaceuticals, LLC, which received FDA approval in November 2011 under an abbreviated new drug application, or ANDA. We are aware that other companies, including Forte BV and Navinta LLC, are developing taste masking technologies for sodium phenylbutyrate. We do not know whether these technologies will be introduced to the market and if so, the timing or success of such introduction. In addition, Orphan Europe is conducting a clinical trial of carglumic acid to treat some of the UCD enzyme deficiencies for which we expect Ravicti to be approved. Carglumic acid is approved to treat HA crises resulting from a different rare disorder than UCD and is sold under the name Carbaglu. If the results of this trial are successful and Orphan Europe is able to complete development and obtain approval of Carbaglu to treat additional UCD enzyme deficiencies, we would face competition from this compound. AMMONUL is the only FDA-approved adjunctive therapy for HA crises in patients with the most prevalent UCD.

Currently, there is no cure for HE other than liver transplantation, which is limited by donor availability and patient eligibility. Although lactulose has been commonly used, rifaximin is the only FDA-approved therapy for reduction in risk of episodic HE recurrence. In addition to currently marketed treatments for HE, Ocera Therapeutics, Inc. has conducted two Phase II trials of one of their compounds to treat mild HE and is conducting a Phase II trial of a second compound measuring ammonia control versus placebo in patients with cirrhosis. To be commercially viable in HE, we must demonstrate Ravicti is at least as safe and effective as competitive products or can be used safely in combination. If a curative treatment for HE is developed other than liver transplantation, Ravicti may become obsolete for that indication.

Intellectual Property

We intend to seek patent protection in the United States and internationally for our products and product candidates. Our policy is to pursue, maintain and defend patent rights developed internally and to protect the technology, inventions and improvements that are commercially important to the development of our business. We cannot be sure that patents will be granted with respect to any of our pending patent applications or with respect to any patent applications filed by us in the future, nor can we be sure that any of the existing patents upon which our product candidates rely or any patents granted to us in the future will be commercially useful in protecting our technology. We also rely on trade secrets to protect our product candidates. Our commercial

 

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success 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, please see “Risk Factors — Risks Related to Our Intellectual Property.”

Our success depends in part on our ability to:

 

   

obtain and maintain proprietary and marketing exclusivity rights for Ravicti, and BUPHENYL and AMMONUL if we purchase those products;

 

   

preserve trade secrets;

 

   

prevent third parties from infringing upon the proprietary rights; and

 

   

operate our business without infringing the patents and proprietary rights of third parties, both in the United States and internationally.

The anticipated market protection for Ravicti includes orphan drug exclusivity and issued patents.

Ravicti was granted orphan drug designation for the maintenance treatment of UCD and for the intermittent or chronic treatment of patients with cirrhosis and any grade HE. If we are awarded orphan drug exclusivity for each indication, we would receive seven years of orphan exclusivity from the date of the FDA approval for each indication, which we believe would help protect our competitive position in the market. Whether Ravicti will receive orphan exclusivity for the UCD indication will depend on whether the FDA concludes that Ravicti is safer than BUPHENYL, which shares the same active substance as Ravicti, and comparable in terms of effectiveness. Should the FDA determine that the safety of Ravicti in treating UCD is not sufficiently better, or that the product does not have comparable effectiveness, Ravicti may not be granted orphan exclusivity.

We have licensed the rights to the Ravicti composition of matter patents from Brusilow, which have been issued in the United States, Canada, and the primary countries of the European Union. Upon the expiration of the Ravicti composition of matter patents, our license agreement with and our license payment obligations to Brusilow will terminate and we will have a fully paid, royalty-free, sublicensable license. We will continue to have payment obligations to Brusilow as part of an amendment to the license in 2007. The United States composition of matter patent will expire in 2015, without taking into account the patent term restoration under the Drug Price Competition and Patent Term Restoration Act of 1984, known as the Hatch-Waxman Amendments. Based on current projections, we expect to receive an extension under the Hatch-Waxman Amendments, which would extend this patent coverage for approximately an additional three years to 2018. We also expect to receive three-year Hatch-Waxman exclusivity based on the submission of new and essential clinical trials conducted or sponsored by us in support of the new product. This exclusivity would prevent the FDA from giving final approval to any generic forms of Ravicti for a period of three years from the anniversary date of the approval of Ravicti. It would also prohibit the agency from approving any 505(b)(2) NDAs that seek to reference the agency’s approval of Ravicti for a period of three years. This three year period would run in parallel with any award of orphan drug exclusivity.

We own pending patent applications in the United States, Europe, Japan and Canada directed to methods of using, administering, and adjusting the dosage of drugs, including Ravicti and BUPHENYL, which operate via the active chemical entity PAA. Any patents issuing from these applications would expire in 2029. We also own pending patent applications in the United States and internationally pursuant to the Patent Cooperation Treaty that incorporate fasting ammonia level measurements into methods of treating and determining dosage for UCD patients, which if issued would expire in 2032. If granted, one or more of these pending patent applications could provide an additional layer of market protection to 2029 to 2032. However, there is a significant risk that these applications will not issue, or that they may issue with substantially narrower claims than those that are currently sought.

 

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The orphan drug exclusivity and composition of matter patent for BUPHENYL have expired. Should a patent from the pending patent applications described above be issued, market protection for this drug could extend from 2029 to 2032. However, as discussed above, there is a significant risk that these applications will not issue or will issue with substantially narrower claims than are currently being sought.

We also protect our proprietary technology and processes, in part, by confidentiality and invention assignment agreements with our employees, consultants, scientific advisors and other contractors. These agreements may be breached, and we may not have adequate remedies for any breach. In addition, our trade secrets may otherwise become known or be independently discovered by competitors. To the extent that our employees, consultants, scientific advisors or other contractors use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions.

Regulatory Matters

In the United States, the FDA regulates drugs under the Federal Food, Drug, and Cosmetic Act, or FDCA, and related regulations. 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. These sanctions could include the imposition by the FDA or an Institutional Review Board, or IRB, of a clinical hold on trials, the FDA’s refusal to approve pending applications or supplements, withdrawal of an approval, warning letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, civil penalties or criminal prosecution. Any agency or judicial enforcement action could have a material adverse effect on us.

The FDA and comparable regulatory agencies in state and local jurisdictions and in foreign countries impose substantial requirements upon the clinical development, manufacture and marketing of pharmaceutical products. These agencies and other federal, state and local entities regulate research and development activities and the testing, manufacture, quality control, safety, effectiveness, labeling, storage, distribution, record keeping, approval, advertising and promotion of our products.

The FDA’s policies may change and additional government regulations may be enacted that could prevent or delay regulatory approval of Ravicti or any future product candidates or approval of new disease indications or label changes. We cannot predict the likelihood, nature or extent of adverse governmental regulation that might arise from future legislative or administrative action, either in the United States or abroad.

Marketing Approval

The process required by the FDA before drugs may be marketed in the United States generally involves the following:

 

   

nonclinical laboratory and animal tests;

 

   

submission of an Investigational New Drug, or IND, application which must become effective before clinical trials may begin;

 

   

adequate and well-controlled human clinical trials to establish the safety and efficacy of the proposed drug for its intended use or uses;

 

   

pre-approval inspection of manufacturing facilities and clinical trial sites; and

 

   

FDA approval of an NDA which must occur before a drug can be marketed or sold.

 

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The testing and approval process requires substantial time and financial resources, and we cannot be certain that any new approvals for our product candidates will be granted on a timely basis if at all.

Our planned clinical trials for our product candidates may not begin or be completed on schedule, if at all. Clinical trials can be delayed for a variety of reasons, including delays in:

 

   

obtaining regulatory approval to commence a study;

 

   

reaching agreement with third-party clinical trial sites and their subsequent performance in conducting accurate and reliable studies on a timely basis;

 

   

obtaining institutional review board approval to conduct a study at a prospective site;

 

   

recruiting patients to participate in a study; and

 

   

supply of the drug.

Prior to commencing the first clinical trial, an initial IND application must be submitted to the FDA. The IND application automatically becomes effective 30 days after receipt by the FDA unless the FDA within the 30-day time period raises concerns or questions about the conduct of the clinical trial. In such case, the IND application sponsor must resolve any outstanding concerns with the FDA before the clinical trial may begin. A separate submission to the existing IND application must be made for each successive clinical trial to be conducted during product development. Further, an independent 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. Informed consent must also be obtained from each study subject. Regulatory authorities, 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.

For purposes of NDA approval, human clinical trials are typically conducted in phases that may overlap:

 

   

Phase I — the drug is initially given to healthy human subjects or patients and tested for safety, dosage tolerance, absorption, metabolism, distribution and excretion. These studies may also gain early evidence on effectiveness. During Phase I clinical trials, sufficient information about the investigational drug’s pharmacokinetics and pharmacologic effects may be obtained to permit the design of well-controlled and scientifically valid Phase II clinical trials.

 

   

Phase II — studies are conducted in a limited number of patients in the target population to identify possible adverse effects and safety risks, to determine the efficacy of the product for specific targeted diseases and to determine dosage tolerance and optimal dosage. Multiple Phase II clinical trials may be conducted by the sponsor to obtain information prior to beginning larger and more expensive Phase III clinical trials.

 

   

Phase III — when Phase II evaluations demonstrate that a dosage range of the product appears effective and has an acceptable safety profile, and provide sufficient information for the design of Phase III studies, Phase III 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 study sites. They are performed after preliminary evidence suggesting effectiveness of the drug has been obtained, and are intended to further evaluate dosage, effectiveness and safety, to establish the overall benefit-risk relationship of the investigational drug, and to provide an adequate basis for product approval by the FDA.

 

 

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Phase IV — post-marketing studies, or Phase IV clinical trials, may be conducted after initial marketing approval. These studies may be required by the FDA as a condition of approval and are used to gain additional experience from the treatment of patients in the intended therapeutic indication. The FDA also now has express statutory authority to require post-market clinical studies to address safety issues.

All of these trials must be conducted in accordance with good clinical practice requirements in order for the data to be considered reliable for regulatory purposes.

Typically, if a drug product is intended to treat a chronic disease, as is the case with Ravicti, safety and efficacy data must be gathered over an extended period of time, which can range from six months to three years or more. Government regulation may delay or prevent marketing of product candidates or new drugs for a considerable period of time and impose costly procedures upon our activities. We cannot be certain that the FDA or any other regulatory agency will grant approvals for Ravicti or any future product candidates on a timely basis, if at all. Success in early stage clinical trials does not ensure success in later stage clinical trials. Data obtained from clinical activities is not always conclusive and may be susceptible to varying interpretations, which could delay, limit or prevent regulatory approval.

The NDA Approval Process

In order to obtain approval to market a drug in the United States, a marketing application 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 includes all relevant data available from pertinent nonclinical studies 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. Data can come from company-sponsored clinical trials intended to test the safety and effectiveness of a use of a product, or from a number of alternative sources, including studies initiated by investigators.

The FDA will initially review the NDA for completeness before it accepts it for filing. The FDA has 60 days from its receipt of an NDA to determine whether the application will be accepted for filing based on the agency’s threshold determination that the application is sufficiently complete to permit substantive review. After the NDA submission is accepted for filing, the FDA reviews the NDA to determine, among other things, whether the proposed product is safe and effective for its intended use, and whether the product is being manufactured in accordance with cGMP to assure and preserve the product’s identity, strength, quality and purity. 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 carefully when making decisions.

Based on pivotal Phase III trial results submitted in an NDA, upon the request of an applicant, the FDA may grant a priority review designation to a product, which sets the target date for FDA action on the application at six months, rather than the standard ten months. Priority review is given where preliminary estimates indicate that a product, if approved, has the potential to provide a significant improvement compared to marketed products or offers a therapy where no satisfactory alternative therapy exists. Priority review designation does not change the scientific/medical standard for approval or the quality of evidence necessary to support approval.

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 changes that must be made or additional clinical, nonclinical or manufacturing data that must be received before the application can be approved, with no implication regarding the ultimate approvability of the application.

 

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Before approving an NDA, the FDA 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 good clinical practices (GCPs). If the FDA determines the application, manufacturing process or manufacturing facilities are not acceptable, it typically will outline the deficiencies and often will request additional testing or information. This may significantly delay further review of the application. 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. Additionally, notwithstanding the submission of any requested additional information, the FDA ultimately may decide that the application does not satisfy the regulatory criteria for approval.

The testing and approval process for a drug requires substantial time, effort and financial resources and this process may take several years to complete. Data obtained from clinical activities are not always conclusive and may be susceptible to varying interpretations, which could delay, limit or prevent regulatory approval. The FDA may not grant approval on a timely basis, or at all. We may encounter difficulties or unanticipated costs in our efforts to secure necessary governmental approvals, which could delay or preclude us from marketing our products.

The FDA may require, or companies may pursue, additional clinical trials after a product is approved. These so-called Phase IV studies may be made a condition to be satisfied for continuing drug approval. The results of Phase IV studies can confirm the effectiveness of a product candidate and can provide important safety information. In addition, the FDA now has express statutory authority to require sponsors to conduct post-market studies to specifically address safety issues identified by the agency.

In June 2011, we completed a 24-month carcinogenicity study of Ravicti in rats. The data from this study showed an increased rate of six different tumor types in rats. While we do not have evidence that individuals who have taken the active ingredient in Ravicti have an increased rate of cancer, the FDA may view these data as posing concerns with respect to the long term safety of Ravicti. The FDA may request that we conduct additional nonclinical studies.

We submitted the NDA for Ravicti for UCD in patients aged 6 years and above in December 2011 based primarily on data from already completed clinical trials, including the pivotal Phase III trial in adult patients with UCD. The FDA may determine that these data are not adequate to support approval, or are adequate only to support a limited approval.

In a pre-NDA meeting held on December 7, 2010, the FDA said that pediatric patients constitute an important patient population for Ravicti, and expressed concern that data from our Phase II trial in pediatric patients showed a higher level of PAA than that seen in adult UCD patients receiving Ravicti and that pediatric patients receiving Ravicti had higher PAA levels than pediatric patients receiving BUPHENYL. The FDA indicated that this raises a potential safety concern because PAA has been reported in the scientific and medical literature to be associated with central nervous system toxicity (also referred to as neurotoxicity) in studies evaluating PAA in the treatment of cancer. Because of this concern, the FDA stated that a clinical trial establishing dosing and safety in pediatric patients under the age of 6 years was needed. The FDA also said that approving Ravicti without this pediatric data would raise concerns, because the drug might be used in pediatric patients even if not FDA-approved for such use. The FDA clarified that this issue would not prevent the FDA from accepting the NDA submission for Ravicti for filing, but that during the NDA review, the FDA would likely consider the issue of safety and dosing data for Ravicti in a pediatric population under 6 years of age, and would seek a better understanding of PAA levels in patients aged 6 through 17 years.

Based on our pre-NDA meeting, we accelerated the initiation of a switchover clinical trial evaluating the safety and efficacy of Ravicti in a pediatric population aged 29 days through 5 years. However, as the data from the 12-month safety extension portion of the study will not be available until the second quarter of 2013, we submitted

 

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the NDA for Ravicti for UCD in adult and pediatric patients down to age 6 years without the data from this trial. For patients aged 6 through 17 years, we provided the FDA additional information on PAA levels associated with Ravicti. We believe these data show that Ravicti is safe and effective for patients aged 6 through 17 years.

In April 2012, we submitted data from the switchover portion of our clinical trial in UCD patients aged 29 days through 5 years and a revised draft package insert requesting approval of Ravicti to include this patient population. The FDA may disagree, and limit approval to an adult population, a sub-segment of the pediatric population or not approve the NDA at all. Any approval could be withdrawn if required post-marketing trials or analyses do not meet the FDA requirements, which could materially harm the commercial prospects for Ravicti.

The FDA also has authority to require a REMS from manufacturers to ensure that the benefits of a drug or biological product outweigh its risks. A sponsor may also voluntarily propose a REMS as part of the NDA submission. The need for a REMS is determined as part of the review of the NDA. 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 restrictions on distribution. These elements are negotiated as part of the NDA approval, and in some cases if consensus is not obtained until after the PDUFA review cycle, the approval date may be delayed. Once adopted, REMS are subject to periodic assessment and modification.

For the NDA for Ravicti, which we filed in December 2011, we proposed a REMS program (i) to support informed dosing and treatment decisions between patients and their healthcare providers by educating them on the safe use of Ravicti, and (ii) to limit access to Ravicti only to patients six years of age and over until such time as the Ravicti label is expanded to include UCD patients under the age of six. We believe that a REMS program will assist in the FDA’s benefit to risk assessment regarding off-label use in patients not approved under the final labeling; however, FDA may still have serious concerns that preclude them from approving Ravicti for any age group until additional data are available. Although we believe an appropriate REMS for Ravicti will not be unduly burdensome, there are circumstances in which a REMS can contain restrictions or requirements that negatively affect the commercial viability of a product.

Even if a product candidate receives regulatory approval, the approval may be limited to specific disease states, patient populations and dosages, or might contain significant limitations on use in the form of warnings, precautions or contraindications, or in the form of onerous risk management plans, restrictions on distribution, or post-marketing study requirements. Further, even after regulatory approval is obtained, later discovery of previously unknown problems with a product may result in restrictions on the product or even complete withdrawal of the product from the market. Delay in obtaining, or failure to obtain, regulatory approval for Ravicti, or obtaining approval but for significantly limited use, would harm our business. In addition, we cannot predict what adverse governmental regulations may arise from future U.S. or foreign governmental action.

Fast Track Designation

We have received fast track designation for Ravicti for the treatment of UCD. Fast track status is intended to expedite or facilitate the process for reviewing new drugs and biological products that are intended to treat a serious or life-threatening condition and demonstrate the potential to address unmet medical needs for the condition. Fast track designation, which must be requested by the applicant, provides access to various programs, including more frequent meetings and correspondence with the FDA regarding product development, approval based on a surrogate endpoint, and rolling review, under which completed sections of an application may be submitted for review serially, rather than waiting until the entire application is completed, as is the normal practice. The FDA may revoke a fast track designation if the designation is no longer supported by the emerging data or the development program is no longer being pursued. Fast track status may not provide us with a material commercial advantage.

 

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Companion Diagnostic Review and Approval

Our proposed labeling for Ravicti includes dose adjustment based on levels of urinary phenylacetylglutamine, or PAGN. Our plan is for the urinary PAGN testing to be available only as a Laboratory Developed Test that is commercialized by a laboratory certified under the Clinical Laboratory Improvement Amendments without approval or clearance from the FDA. Approval of all Laboratory Developed Tests is required by the State of New York prior to testing patient samples from that state. A test for urinary PAGN may be considered a companion diagnostic test by the FDA. We have not discussed our PAGN-based dosing adjustment labeling strategy with the FDA and do not know whether the FDA will accept a Laboratory Developed Test or instead will consider the test a companion diagnostic and therefore require a Premarket Approval Application, a filing through the de novo reclassification process, or 510(k) clearance for a urinary PAGN test prior to approving Ravicti. If FDA approval or clearance of a urinary PAGN test is required, any approval and launch of Ravicti could be delayed and additional costs would be required for us to reach agreement with a clinical laboratory or a third-party in vitro diagnostic test manufacturer to seek and obtain premarket approval, de novo reclassification, or premarket clearance from the FDA. The State of New York approval process, and the FDA premarket review process if required, can be lengthy and would require submission of clinical study data.

Hatch-Waxman

Under the Hatch-Waxman Amendments, a portion of a product’s patent term that was lost during clinical development and application review by the FDA may be restored. The Hatch-Waxman Amendments also provide for a statutory protection, known as non-patent exclusivity, against the FDA’s acceptance or approval of certain competitor applications.

Patent term restoration can compensate for time lost during product development and the regulatory review process by returning up to five years of patent life for a patent that covers a new product or its use. This 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. Patent term restorations, however, cannot extend the remaining term of a patent beyond a total of 14 years. The application for patent term extension is subject to approval by the United States Patent and Trademark Office, or PTO, in conjunction with the FDA. It takes at least six months to obtain approval of the application for patent term extension.

A patent term extension is only available when the FDA approves a drug product for the first time. We believe the active ingredient in Ravicti (glycerol phenylbutyrate) is a new active ingredient not previously approved by the FDA. However, we cannot be certain that the PTO and the FDA will agree with our analysis or will grant a patent term extension.

If, as would be the case of Ravicti, NDA approval is received for a new active ingredient and new dosage form, based on the submission to the FDA of new clinical investigations conducted or by or for the NDA sponsor, then the Hatch-Waxman Amendments prohibit the FDA from making effective the approval of an ANDA for a generic version of such drug, or a 505(b)(2) NDA that relies on our approval, for a period of three years from the date of the NDA approval for Ravicti.

FDA Post-Approval Requirements

Any products manufactured or distributed by us pursuant to FDA approvals are subject to continuing regulation by the FDA, including requirements for record-keeping and reporting of adverse experiences with the drug. Drug manufacturers are required to register their facilities with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and certain state agencies for compliance with cGMPs, which impose certain quality processes, manufacturing controls and documentation requirements upon us and our

 

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third-party manufacturers in order to ensure that the product is safe, has the identity and strength, and meets the quality and purity characteristics that it purports to have. Certain states also impose requirements on manufacturers and distributors to establish the pedigree of product in the chain of distribution, including some states that require manufacturers and others to adopt new technology capable of tracking and tracing product as it moves through the distribution chain. We cannot be certain that we or our present or future suppliers will be able to comply with the cGMP and other FDA regulatory requirements. If our present or future suppliers are not able to comply with these requirements, the FDA may halt our clinical trials, fail to approve any NDA or other application, require us to recall a drug from distribution, shut down manufacturing operations or withdraw approval of the NDA for that drug. Noncompliance with cGMP or other requirements can result in issuance of warning letters, civil and criminal penalties, seizures and injunctive action.

Labeling, Marketing and Promotion

The FDA closely regulates the labeling, marketing and promotion of drugs. While doctors are free to prescribe any drug approved by the FDA for any use, a company can only make claims relating to safety and efficacy of a drug that are consistent with FDA approval, and the company is allowed to actively market a drug only for the particular use and treatment approved by the FDA. In addition, any claims we make for our products in advertising or promotion must be appropriately balanced with important safety information and otherwise be adequately substantiated. Failure to comply with these requirements can result in adverse publicity, warning letters, corrective advertising, injunctions and potential civil and criminal penalties. Government regulators recently have increased their scrutiny of the promotion and marketing of drugs.

Orphan Designation

Ravicti received orphan designation for maintenance treatment of patients with deficiencies in enzymes of the urea cycle, and a separate designation for intermittent or chronic management of patients with cirrhosis and episodic HE of any grade. Under the Orphan Drug Act, the FDA may grant orphan designation to drugs intended to treat a rare disease or condition, which is generally a disease or condition that affects fewer than 200,000 individuals in the United States. Orphan designation must be requested before submitting an NDA. Generally, if a drug that receives orphan designation is approved for the orphan indication, it receives orphan drug exclusivity, which for seven years prohibits the FDA approving another product with the same active chemical entity for the same indication. Orphan exclusivity will not bar approval of another product under certain circumstances, including if the new drug is shown to be clinically superior to the approved product on the basis of greater efficacy or safety, or providing a major contribution to patient care. After the FDA grants orphan designation, the identity of the applicant, as well as the name of the therapeutic agent and its designated orphan use, are disclosed publicly by the FDA.

Ravicti shares the same active chemical entity as BUPHENYL, which was previously granted orphan designation and awarded orphan exclusivity that has since expired. Ravicti was granted orphan designation for UCD based upon a potential safety benefit over BUPHENYL because of the absence of sodium. Whether Ravicti will receive orphan exclusivity will be determined upon approval, if any, and will be based on whether the FDA concludes that Ravicti is, in fact, safer than BUPHENYL and comparable in terms of effectiveness. Should the FDA determine that safety of Ravicti is not sufficiently better, despite the removal of sodium, or that the product does not have comparable effectiveness, Ravicti may not be granted orphan exclusivity.

Orphan designation for Ravicti for HE was granted based on data demonstrating that this disease affects fewer than 200,000 patients in the United States. Because orphan designation was granted solely on the basis of the number of patients at the time of designation, we do not believe there would be any basis to deny market exclusivity if and when Ravicti for HE is approved by the FDA.

 

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Orphan designation does not convey any advantage in, or shorten the duration of, the regulatory review and approval process. If a product that has orphan designation is the first such product to receive FDA approval for the disease for which it has such designation, the product is entitled to orphan product exclusivity, which means that subsequent to approval the FDA may not approve any other applications to market a drug with the same active moiety for the same disease, except in limited circumstances, for seven years. During orphan exclusivity, the FDA may only permit additional companies to market a drug with the same active chemical entity for the designated condition if such companies can demonstrate clinical superiority, or if the company with the orphan drug exclusivity is not able to meet market demand. More than one product may also be approved by the FDA for the same orphan indication or disease as long as the products contain different active ingredients. As a result, even though Ravicti has received orphan designation, the FDA can still approve other drugs that have a different active chemical entity for use in treating the same indication or disease covered by Ravicti, which could create a more competitive market for us.

Pediatric Research Equity Act

The Pediatric Research Equity Act, or PREA, amended the FDCA to authorize the FDA to require certain research into drugs used in pediatric patients. The intent of PREA is to compel sponsors whose drugs have pediatric applicability to study those drugs in pediatric populations, rather than ignoring pediatric indications for adult indications that could be more economically desirable. The Secretary of Health and Human Services may defer or waive these requirements under specified circumstances. By its terms, PREA does not apply to any drug for an indication for which orphan designation has been granted, unless the FDA issues regulations saying otherwise. Because the FDA has not issued any such regulations, submission of a pediatric assessment is not required for an application to market a product for an orphan-designated indication.

In its pre-NDA pre-meeting written response to us, the FDA acknowledged that Ravicti, as an orphan designated drug, is exempt from PREA. However, the FDA also stated its view that the evaluation of safety and dosing of Ravicti in pediatric UCD patients was necessary, based on the number of pediatric UCD patients that the FDA expects will be prescribed this drug.

Should the FDA determine during the NDA review period that there is not substantial evidence to support pediatric use, we believe that the FDA is obliged to consider approving Ravicti for use in adults. We believe there is a strong public health need for access to Ravicti for use in adults, as the FDA recognized by designating Ravicti as both an orphan drug and a fast track product. We believe that the FDCA limits the FDA’s ability to deny approval of Ravicti for adults only based on concerns regarding the product’s use in pediatric populations.

In our view, if the FDA withholds approval of Ravicti for use in adults with UCD based on the FDA’s concerns regarding the use of Ravicti in pediatric populations, the agency would be eliminating the orphan drug exception in PREA. In effect, the agency would be mandating pediatric studies for a product for which Congress has explicitly stated that none is required. We believe PREA therefore limits the FDA’s ability to require pediatric data for Ravicti and the agency’s ability to deny approval of Ravicti for use in adults because of a lack of pediatric data. The FDA may not agree with these points, and may insist that greater pediatric data support Ravicti, whether or not PREA applies.

Anti-Kickback and False Claims Laws

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, other divisions of the U.S. Department of Health and Human Services (e.g., the Office of Inspector General), the U.S. Department of Justice, state Attorneys General, and other state and local government agencies. For example, sales, marketing and scientific/educational grant programs must comply with the Medicare-Medicaid Anti-Fraud and Abuse Act, as amended,

 

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(the “Anti-Kickback Statute”), the False Claims Act, as amended, the privacy regulations promulgated under the Health Insurance Portability and Accountability Act, or HIPAA, and similar state laws. Pricing and rebate programs must 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. All of these activities are also potentially subject to federal and state consumer protection and unfair competition laws.

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 Anti-Kickback Statute, the federal False Claims Act, and other state and federal laws and regulations. The 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 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, the absence of guidance in the form of regulations or court decisions, 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 physicians 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 plan to develop 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 payors, 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 prosecuted 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 of between $5,500 and $11,000 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 that require manufacturers to make reports to states on pricing and marketing information. Many of these laws contain ambiguities as to what is required to comply with the laws. In addition, as discussed below, beginning in 2013, a similar federal requirement will require manufacturers to track and report to the federal government certain payments made to physicians 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

 

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respect to these laws and their implementation, our reporting actions could be subject to the penalty provisions of the pertinent state, and soon federal, authorities.

Patient Protection and Affordable Health Care Act

In March 2010, the Patient Protection and Affordable Health Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, or collectively PPACA, was enacted, which includes measures that have or will significantly change the way health care is financed by both governmental and private insurers. Among the provisions of PPACA of greatest importance to the pharmaceutical industry are the following:

 

   

The Medicaid Drug Rebate Program requires pharmaceutical manufacturers to enter into and have in effect a national rebate agreement with the Secretary of the Department of Health and Human Services a condition for states to receive federal matching funds for the manufacturer’s outpatient drugs furnished to Medicaid patients. Effective in 2010, PPACA made several changes to the Medicaid Drug Rebate Program, including increasing pharmaceutical manufacturers’ rebate liability by raising the minimum basic Medicaid rebate on most branded prescription drugs and biologic agents from 15.1% of average manufacturer price, or AMP, to 23.1% of AMP and adding a new rebate calculation for “line extensions” (i.e., new formulations, such as extended release formulations) of solid oral dosage forms of branded products, as well as potentially impacting their rebate liability by modifying the statutory definition of AMP. PPACA also expanded the universe of Medicaid utilization subject to drug rebates by requiring pharmaceutical manufacturers to pay rebates on Medicaid managed care utilization as of 2010 and by expanding the population potentially eligible for Medicaid drug benefits, to be phased-in by 2014. The Centers for Medicare and Medicaid Services, or CMS, have proposed to expand Medicaid rebate liability to the territories of the United States as well. In addition, PPACA provides for the public availability of retail survey prices and certain weighted average AMPs under the Medicaid program. The implementation of this requirement by the CMS may also provide for the public availability of pharmacy acquisition of cost data, which could negatively impact our sales.

 

   

In order for a pharmaceutical product to receive federal reimbursement under the Medicare Part B and Medicaid programs or to be sold directly to U.S. government agencies, the manufacturer must extend discounts to entities eligible to participate in the 340B drug pricing program. The required 340B discount on a given product is calculated based on the AMP and Medicaid rebate amounts reported by the manufacturer. Effective in 2010, PPACA expanded the types of entities eligible to receive discounted 340B pricing, although, under the current state of the law, with the exception of children’s hospitals, these newly eligible entities will not be eligible to receive discounted 340B pricing on orphan drugs when used for the orphan indication. In addition, as 340B drug pricing is determined based on AMP and Medicaid rebate data, the revisions to the Medicaid rebate formula and AMP definition described above could cause the required 340B discount to increase.

 

   

Effective in 2011, PPACA imposed a requirement on manufacturers of branded drugs and biologic agents to provide a 50% discount off the negotiated price of branded drugs dispensed to Medicare Part D patients in the coverage gap (i.e., “donut hole”).

 

   

Effective in 2011, PPACA imposed an annual, nondeductible fee on any entity that manufactures or imports certain branded prescription drugs and biologic agents, apportioned among these entities according to their market share in certain government healthcare programs, although this fee would not apply to sales of certain products approved exclusively for orphan indications.

 

   

Effective in 2012, PPACA will require pharmaceutical manufacturers to track certain financial arrangements with physicians and teaching hospitals, including any “transfer of value” made or distributed to such entities, as well as any investment interests held by physicians and their immediate family members. Manufacturers will be required to report this information beginning in 2013.

 

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As of 2010, a new Patient-Centered Outcomes Research Institute was established pursuant to PPACA to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such research. The research conducted by the Patient-Centered Outcomes Research Institute may affect the market for certain pharmaceutical products.

 

   

PPACA created the Independent Payment Advisory Board which, beginning in 2014, will have authority to recommend certain changes to the Medicare program to reduce expenditures by the program that could result in reduced payments for prescription drugs. Under certain circumstances, these recommendations will become law unless Congress enacts legislation that will achieve the same or greater Medicare cost savings.

 

   

PPACA established the Center for Medicare and Medicaid Innovation within CMS to test innovative payment and service delivery models to lower Medicare and Medicaid spending, potentially including prescription drug spending. Funding has been allocated to support the mission of the Center for Medicare and Medicaid Innovation from 2011 to 2019.

Many of the details regarding the implementation of PPACA are yet to be determined, and at this time, it remains unclear the full effect that PPACA would have on our business.

Antitrust

We are also subject to antitrust review of our planned acquisition of BUPHENYL and potentially AMMONUL, including, if the necessary jurisdictional thresholds are met at that time, review under the HSR Act. Under the HSR Act, and the related rules and regulations that have been issued by the FTC, certain transactions, potentially including those in which those products will be acquired, may not be completed until specified information and documentary material has been furnished for review by the FTC and the Antitrust Division by both us and Ucyclyd and specified waiting periods have been satisfied. If triggered, the HSR Act would provide for an initial 30-calendar day waiting period after both parties submit their filings. If the 30th calendar day of the initial waiting period is not a business day, the initial waiting period is extended until 11:59 PM Eastern of the next business day. If, before expiration or early termination of the initial 30-calendar day waiting period, either the FTC or the Antitrust Division issues a request for additional information and documentary material from the parties, the waiting period will be extended for an additional period of 30-calendar days following the date of both parties’ substantial compliance with that request. Only one extension of the waiting period pursuant to a request for additional information is authorized by the HSR Act. After that time, the waiting period may be extended only by court order or with the parties’ consent. The FTC or Antitrust Division may terminate the additional 30-calendar day waiting period before its expiration. In practice, complying with a request for additional information or documentary material may take a significant period of time. In addition, if the FTC or Antitrust Division were to challenge our purchase and we were unable to resolve the challenge through a consent decree, Ucyclyd could terminate the restated collaboration agreement and we would lose our rights to BUPHENYL and AMMONUL.

Whether or not HSR filings are required, at any time before or after the acquisition of Ravicti, BUPHENYL and potentially AMMONUL, the FTC or the Antitrust Division could take any action under the antitrust laws that it either considers necessary or desirable in the public interest, including seeking to enjoin the acquisition or to seek the divestiture of certain assets or the imposition of certain licensing obligations on us or any of our subsidiaries or affiliates. Private parties as well as State Attorneys General and foreign antitrust regulators may also bring legal actions under the antitrust laws under certain circumstances.

 

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Other Regulations

We are also subject to numerous federal, state and local laws relati