10-Q 1 a13-19715_110q.htm 10-Q

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2013

 

or

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to             

 

Commission File Number: 001-34973

 

Anacor Pharmaceuticals, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware

 

25-1854385

(State or Other Jurisdiction of

 

(I.R.S. Employer

Incorporation or Organization)

 

Identification No.)

 

1020 East Meadow Circle

Palo Alto, California 94303-4230

(Address of Principal Executive Offices) (Zip Code)

 

(650) 543-7500

(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x  No o

 

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.

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x

 

As of October 31, 2013, there were 40,745,566 shares of the registrant’s common stock outstanding.

 

 

 



Table of Contents

 

Table of Contents

 

Anacor Pharmaceuticals, Inc.

Form 10-Q

Index

 

 

 

Page

 

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements (Unaudited)

3

 

Condensed Balance Sheets as of September 30, 2013 and December 31, 2012

3

 

Condensed Statements of Operations for the Three and Nine Months Ended September 30, 2013 and 2012

4

 

Condensed Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 2013 and 2012

5

 

Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2013 and 2012

6

 

Notes to Condensed Financial Statements

7

Item 2.

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

22

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

33

Item 4.

Controls and Procedures

33

 

 

 

PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings

34

Item 1A.

Risk Factors

34

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

59

Item 6.

Exhibits

59

Signatures

60

 

2



Table of Contents

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

Anacor Pharmaceuticals, Inc.

Condensed Balance Sheets

(In Thousands)

 

 

 

September 30,

 

December 31,

 

 

 

2013

 

2012 (1)

 

 

 

(unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

6,075

 

$

10,335

 

Short-term investments

 

28,609

 

35,181

 

Restricted investments

 

1,240

 

 

Contract receivable

 

1,761

 

1,203

 

Prepaid expenses and other current assets

 

1,875

 

2,574

 

Total current assets

 

39,560

 

49,293

 

Property and equipment, net

 

1,217

 

1,516

 

Restricted investments

 

3,412

 

197

 

Other assets

 

692

 

65

 

Total assets

 

$

44,881

 

$

51,071

 

 

 

 

 

 

 

Liabilities, redeemable common stock and stockholders’ equity (deficit)

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

5,109

 

$

3,019

 

Accrued liabilities

 

10,706

 

9,590

 

Notes payable

 

 

9,826

 

Deferred revenue

 

6,776

 

2,886

 

Deferred rent

 

1

 

70

 

Total current liabilities

 

22,592

 

25,391

 

Notes payable, less current portion

 

27,922

 

15,841

 

Deferred revenue, less current portion

 

337

 

4,192

 

Deferred rent, less current portion

 

1,299

 

836

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Redeemable common stock

 

4,952

 

 

 

 

 

 

 

 

Stockholders’ equity (deficit):

 

 

 

 

 

Preferred stock

 

 

 

Common stock

 

40

 

36

 

Additional paid-in capital

 

248,926

 

219,983

 

Accumulated other comprehensive income

 

7

 

3

 

Accumulated deficit

 

(261,194

)

(215,211

)

Total stockholders’ equity (deficit)

 

(12,221

)

4,811

 

Total liabilities, redeemable common stock and stockholders’ equity (deficit)

 

$

44,881

 

$

51,071

 

 


(1) Derived from the audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

 

See accompanying notes.

 

3



Table of Contents

 

Anacor Pharmaceuticals, Inc.

Condensed Statements of Operations

(In Thousands, Except Share and Per Share Data)

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

(unaudited)

 

(unaudited)

 

Revenues:

 

 

 

 

 

 

 

 

 

Contract revenue

 

$

3,611

 

$

2,473

 

$

8,743

 

$

7,452

 

Total revenues

 

3,611

 

2,473

 

8,743

 

7,452

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development

 

12,460

 

13,551

 

33,765

 

40,319

 

General and administrative

 

6,809

 

2,751

 

16,611

 

8,852

 

Total operating expenses

 

19,269

 

16,302

 

50,376

 

49,171

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

(15,658

)

(13,829

)

(41,633

)

(41,719

)

Interest income

 

15

 

13

 

43

 

53

 

Interest expense

 

(1,135

)

(616

)

(2,949

)

(1,908

)

Other expense

 

(31

)

(12

)

(63

)

(37

)

Loss on early extinguishment of debt

 

 

 

(1,381

)

 

Net loss

 

$

(16,809

)

$

(14,444

)

$

(45,983

)

$

(43,611

)

Net loss per common share — basic and diluted

 

$

(0.41

)

$

(0.46

)

$

(1.19

)

$

(1.41

)

Weighted-average number of common shares used in calculating net loss per common share — basic and diluted

 

40,586,376

 

31,551,714

 

38,586,027

 

30,989,986

 

 

See accompanying notes.

 

4



Table of Contents

 

Anacor Pharmaceuticals, Inc.

Condensed Statements of Comprehensive Loss

(In Thousands)

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

(unaudited)

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(16,809

)

$

(14,444

)

$

(45,983

)

$

(43,611

)

Change in unrealized gain (loss) on investments

 

13

 

6

 

4

 

1

 

Comprehensive loss

 

$

(16,796

)

$

(14,438

)

$

(45,979

)

$

(43,610

)

 

See accompanying notes.

 

5



Table of Contents

 

Anacor Pharmaceuticals, Inc.

Condensed Statements of Cash Flows

(In Thousands)

 

 

 

Nine Months Ended September 30,

 

 

 

2013

 

2012

 

 

 

(unaudited)

 

Operating activities

 

 

 

 

 

Net loss

 

$

(45,983

)

$

(43,611

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

Depreciation and amortization

 

400

 

510

 

Amortization of debt discount and debt issuance costs

 

576

 

371

 

Stock-based compensation

 

3,303

 

2,735

 

Amortization of premium on short-term investments

 

286

 

389

 

Accrual of final payment on notes payable

 

318

 

325

 

Noncash loss on early extinguishment of debt

 

1,175

 

 

Changes in assets and liabilities:

 

 

 

 

 

Contract receivable

 

(558

)

(565

)

Prepaid and other current assets

 

776

 

(1,510

)

Other assets

 

(331

)

755

 

Deferred financing costs

 

(129

)

 

Accounts payable

 

2,090

 

280

 

Accrued liabilities

 

1,116

 

(1,100

)

Deferred revenue

 

35

 

(2,090

)

Deferred rent

 

394

 

(13

)

Net cash used in operating activities

 

(36,532

)

(43,524

)

 

 

 

 

 

 

Investing activities

 

 

 

 

 

Transfers to restricted investments, net

 

(4,456

)

 

Purchases of short-term investments

 

(39,025

)

(39,357

)

Maturities of short-term investments

 

45,315

 

52,430

 

Acquisition of property and equipment

 

(101

)

(302

)

Net cash provided by investing activities

 

1,733

 

12,771

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

Proceeds from the sale of redeemable common stock, net of issuance costs

 

4,952

 

 

Proceeds from the sale of common stock, net of issuance costs

 

22,607

 

19,923

 

Proceeds from issuance of notes payable

 

30,000

 

12,000

 

Principal payments on notes payable

 

(25,716

)

(2,205

)

Final payment on notes payable

 

(1,650

)

 

Payment of financing fee, debt issuance costs and loan fees

 

(877

)

(26

)

Proceeds from employee stock plan purchases and the exercise of stock options by employees and nonemployee advisors

 

1,223

 

468

 

Net cash provided by financing activities

 

30,539

 

30,160

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

(4,260

)

(593

)

Cash and cash equivalents at beginning of period

 

10,335

 

15,169

 

Cash and cash equivalents at end of period

 

$

6,075

 

$

14,576

 

 

 

 

 

 

 

Supplemental disclosure of noncash financing activities

 

 

 

 

 

Fair value of warrants to purchase common stock issued in connection with notes payable

 

$

1,815

 

$

395

 

Supplemental disclosure of cash flow information

 

 

 

 

 

Interest paid, including final payment on notes payable

 

$

3,853

 

$

1,203

 

 

See accompanying notes.

 

6



Table of Contents

 

Anacor Pharmaceuticals, Inc.

Notes to Condensed Financial Statements

(unaudited)

 

1. The Company

 

Nature of Operations

 

Anacor Pharmaceuticals, Inc. (the Company) is a biopharmaceutical company focused on discovering, developing and commercializing novel small-molecule therapeutics derived from its boron chemistry platform. The Company has discovered, synthesized and developed eight molecules that are currently in development. Its two lead product candidates are topically administered dermatologic compounds—tavaborole, formerly known as AN2690, an antifungal for the treatment of onychomycosis; and AN2728, an anti-inflammatory for the treatment of atopic dermatitis and psoriasis. In July 2013, the Company submitted its New Drug Application (NDA) for tavaborole to the U.S. Food and Drug Administration (FDA). The NDA was accepted for filing by the FDA in September 2013 and the Prescription Drug User Fee Act (PDUFA) V goal date is July 29, 2014. In addition to its two lead programs, the Company has three other wholly-owned clinical product candidates—AN2718 and AN2898, which are backup compounds to tavaborole and AN2728, respectively, and AN3365 (formerly referred to as GSK2251052, or GSK ‘052), an antibiotic for the treatment of infections caused by Gram-negative bacteria, which previously was licensed to GlaxoSmithKline, LLC (GSK). In October 2012, GSK advised the Company that it had discontinued further development of AN3365 and substantially all rights to this compound reverted to the Company. The Company is considering its options for further development, if any, of AN3365. The Company has discovered three other compounds that it has out-licensed for further development—one is licensed to Eli Lilly and Company (Lilly) for the treatment of animal health indications, the second compound, AN5568, also referred to as SCYX-7158, is licensed to Drugs for Neglected Diseases initiative for the treatment of human African trypanosomiasis (HAT, or sleeping sickness) and the third compound is licensed to GSK for development in tuberculosis (TB). The Company also has a pipeline of other internally discovered topical and systemic boron-based compounds in development.

 

Need to Raise Additional Capital

 

Since inception, the Company has generated an accumulated deficit as of September 30, 2013 of approximately $261.2 million, and will require substantial additional capital to fund research and development activities, including clinical trials for its development programs and preclinical activities for its product candidates. The Company believes that its existing capital resources, including the $142.5 million settlement payment received from Valeant Pharmaceuticals International, Inc. (Valeant) in November 2013 (see Notes 5 and 10) and the funds available under the Company’s expanded debt facility, will be sufficient to meet its anticipated operating requirements for at least the next twelve months. While management believes that the Company currently has sufficient resources, including the $142.5 million settlement payment from Valeant and the available funds under its expanded debt facility, to fund its operations, the Company may also elect to finance its future cash needs through public or private equity offerings, debt financings or a possible license, collaboration or other similar arrangement to complete the development and potential commercialization of tavaborole and fund its other research and development activities.

 

2. Summary of Significant Accounting Policies

 

Interim Financial Information

 

The accompanying condensed financial statements as of September 30, 2013 and for the three and nine months ended September 30, 2013 and 2012 are unaudited. The unaudited interim condensed financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to state fairly the results included in the condensed financial statements for the interim periods presented. The December 31, 2012 condensed balance sheet is derived from the audited financial statements for the year ended December 31, 2012 but does not include all the disclosures necessary for audited financial statements. The financial data and other information disclosed in these notes to the condensed financial statements related to the three and nine month periods are unaudited. The results for the three and nine months ended September 30, 2013 are not necessarily indicative of results to be expected for the year ending December 31, 2013 or for any other interim period or for any future year.

 

The condensed financial statements follow the requirements of the Securities and Exchange Commission (SEC) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. generally accepted accounting principles (GAAP) for annual periods can be condensed or omitted. For more complete financial information, these condensed financial statements, and the notes hereto, should be read in conjunction with the audited financial statements for the year ended December 31, 2012 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 18, 2013.

 

7



Table of Contents

 

The Company’s significant accounting policies are more fully described in Note 2 of the notes to the financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

 

Use of Estimates

 

The preparation of the condensed financial statements in accordance with U.S. GAAP requires the Company to make estimates and judgments in certain circumstances that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. In preparing these condensed financial statements, management has made its best estimates and judgments of certain amounts included in the condensed financial statements, giving due consideration to materiality. On an ongoing basis, the Company evaluates its estimates, including those related to revenue recognition, fair values of financial instruments in which it invests, income taxes, preclinical study and clinical trial accruals, accrued compensation and other contingencies. Management bases its estimates on historical experience or on various other assumptions that it believes to be reasonable under the circumstances. Actual results could differ from these estimates.

 

Cash, Cash Equivalents, Short-Term Investments and Restricted Investments

 

The Company considers all highly liquid investments with a maturity of three months or less at the time of purchase to be cash and cash equivalents. Unless restricted, investments with a maturity date of more than three months, but less than twelve months, from the date of purchase, are considered short-term investments and are classified as current assets. The Company’s short-term investments in marketable securities are classified as available for sale (see Note 3). Securities available for sale are carried at estimated fair value, with unrealized gains and losses reported as part of accumulated other comprehensive income or loss, a separate component of stockholders’ equity. The Company has estimated the fair value amounts by using available market information. The cost of available for sale securities sold is based on the specific-identification method. Restricted investments are classified as a current or noncurrent asset based upon the terms of the relevant contract and, in some cases, management’s estimate of when the restrictions will be eliminated.

 

Fair Value of Financial Instruments

 

The carrying amounts of certain of the Company’s financial instruments, including cash and cash equivalents, short-term investments, restricted investments, contract receivables and accounts payable, approximate their fair value due to their short maturities. Based on the borrowing rates available to the Company for loans with similar terms and average maturities, the carrying value of the Company’s long-term notes payable approximate their fair values at September 30, 2013 and December 31, 2012.

 

Fair value is considered to be the price at which an asset could be exchanged or a liability transferred (an exit price) in an orderly transaction between knowledgeable, willing parties in the principal or most advantageous market for the asset or liability. Where available, fair value is based on or derived from observable market prices or other observable inputs. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity.

 

Concentration of Credit Risk

 

Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash, cash equivalents, short-term investments and restricted investments. Substantially all the Company’s cash, cash equivalents, short-term investments and restricted investments are held by two financial institutions that management believes are of high credit quality. Such deposits may, at times, exceed federally insured limits. At September 30, 2013 and December 31, 2012, approximately 67% and 85%, respectively, of the cash and cash equivalents were held in a money market fund invested in U.S. Treasuries, securities guaranteed as to principal and interest by the U.S. government and repurchase agreements in respect of such securities. The Company’s short-term investments and restricted investments at September 30, 2013 and December 31, 2012 are primarily held in securities guaranteed as to principal and interest by the U.S. government. The Company has not experienced any losses on its deposits of cash, cash equivalents, short-term investments and restricted investments and management believes that its guidelines for investment of its excess cash maintain safety and liquidity through diversification and investment maturity.

 

Customer Concentration

 

The Company’s revenues consist primarily of contract revenues from collaboration agreements with Lilly and GSK and the research agreement with the Bill and Melinda Gates Foundation (Gates Foundation) (See Note 7). Collaborators have accounted for significant revenues in the past and may not provide contract revenues in the future under existing agreements and/or new collaboration agreements, which may have a material effect on the Company’s operating results. For the three and nine months ended September 30, 2012, the Company also recognized contract revenues from its collaboration with Medicis Pharmaceutical Corporation (Medicis), which accounted for 10% or more of its total revenues during those periods.

 

8



Table of Contents

 

Contract revenues from the Gates Foundation, collaborators and research institutions that accounted for 10% or more of total revenues were as follows:

 

 

 

Three Months
Ended September 30,

 

Nine Months
Ended September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

(unaudited)

 

(unaudited)

 

Gates Foundation

 

47%

 

 

34%

 

 

Lilly

 

28%

 

43%

 

35%

 

42%

 

GSK

 

*

 

14%

 

12%

 

15%

 

Research Institution A

 

*

 

17%

 

*

 

17%

 

Medicis

 

 

12%

 

 

12%

 

 


*     less than 10% of total revenue

 

Contract Receivables

 

At September 30, 2013 and December 31, 2012, the contract receivable included $0.8 million in research funding due from Lilly (see Note 7) as of both dates, $0.6 million and $0.3 million due from GSK (see Note 7), respectively, and $0.4 million and $0.1 million due from other agreements, respectively.

 

The Company’s contract receivable is primarily composed of amounts due under collaboration and research agreements and the Company believes that the credit risks associated with these collaborators are not significant. During the three and nine months ended September 30, 2013, the Company has not written-off any contract receivable and, accordingly, does not have an allowance for doubtful accounts as of September 30, 2013.

 

Revenue Recognition

 

The Company’s contract revenues are generated primarily through research and development collaboration agreements, which typically may include non-refundable, non-creditable upfront fees, funding for research and development efforts, payments for achievement of specified development, regulatory and sales goals and royalties on product sales of licensed products.

 

The Company recognizes revenue when persuasive evidence of an arrangement exists; transfer of technology has been completed, services are performed or products have been delivered; the fee is fixed or determinable; and collection is reasonably assured.

 

For arrangements with multiple deliverables, the Company evaluates each deliverable to determine whether it qualifies as a separate unit of accounting. This determination is generally based on whether the deliverable has stand-alone value to the customer. The selling price used for each unit of accounting will be based on vendor-specific objective evidence, if available, third-party evidence if vendor-specific objective evidence is not available or estimated selling price if neither vendor-specific nor third-party evidence is available. Management may be required to exercise considerable judgment in determining whether a deliverable is a separate unit of accounting and in estimating the selling prices of identified units of accounting for new agreements. Where multiple deliverables are combined as a single unit of accounting, revenues are recognized based on the performance requirements of the related agreement.

 

Upfront payments for licensing the Company’s intellectual property are evaluated to determine if the licensee can obtain stand-alone value from the license separate from the value of the research and development services to be provided by the Company. Typically, the Company has determined that the licenses it has granted to collaborators do not have stand-alone value separate from the value of the research and development services provided. As such, upfront payments are recorded as deferred revenue in the condensed balance sheets and are recognized as contract revenue ratably over the contractual or estimated performance period that is consistent with the term of the research and development obligations contained in the research and development collaboration agreement. When stand-alone value is identified, the related consideration is recorded as revenue in the period in which the license or other intellectual property rights are issued.

 

Some arrangements involving the licensing of the Company’s intellectual property, the provision of research and development services or both may also include exclusivity clauses whereby the Company agrees that, for a specified period of time, it will not conduct further research on licensed compounds or on compounds that would compete with licensed compounds or that it will do so only on a limited basis. Such provisions may also restrict the future development or commercialization of such compounds. The Company does not treat such exclusivity clauses as a separate element within an arrangement and any upfront payments received related to the exclusivity clause would be allocated to the identified elements in the arrangement and recognized as described in the preceding paragraph.

 

9



Table of Contents

 

Payments resulting from the Company’s efforts under research and development agreements or government grants are recognized as the activities are performed and are presented on a gross basis. Revenue is recorded gross because the Company acts as a principal, with discretion to choose suppliers, bears credit risk and performs part of the services. The costs associated with these activities are reflected as a component of research and development expense in the condensed statements of operations and the revenues recognized from such activities approximate these costs.

 

For certain contingent payments under research or development arrangements, the Company recognizes revenue using the milestone method. Under the milestone method, a payment that is contingent upon the achievement of a substantive milestone is recognized in its entirety in the period in which the milestone is achieved. A milestone is an event (i) that can be achieved based in whole or in part on either the Company’s performance or on the occurrence of a specific outcome resulting from the Company’s performance, (ii) for which there is substantive uncertainty at the date the arrangement is entered into that the event will be achieved and (iii) that would result in additional payments being due to the Company. The determination that a milestone is substantive is judgmental and is made at the inception of the arrangement. Milestones are considered substantive when the consideration earned from the achievement of the milestone is (i) commensurate with either the Company’s performance to achieve the milestone or the enhancement of value of the item delivered as a result of a specific outcome resulting from the Company’s performance to achieve the milestone, (ii) relates solely to past performance and (iii) is reasonable relative to all deliverables and payment terms in the arrangement. In making the determination as to whether a milestone is substantive or not, management of the Company considers all facts and circumstances relevant to the arrangement, including factors such as the scientific, regulatory, commercial and other risks that must be overcome to achieve the respective milestone, the level of effort and investment required to achieve the respective milestone and whether any portion of the milestone consideration is related to future performance or deliverables.

 

Other contingent payments received for which payment is either contingent solely upon the passage of time or the results of a collaborative partner’s performance (bonus payments) are not accounted for using the milestone method. Such bonus payments will be recognized as revenue when earned and when collectibility is reasonably assured.

 

Royalties based on reported sales of licensed products will be recognized based on contract terms when reported sales are reliably measurable and collectibility is reasonably assured. To date, none of the Company’s products have been approved and therefore the Company has not earned any royalty revenue from product sales.

 

Preclinical Study and Clinical Trial Accruals and Deferred Advance Payments

 

The Company estimates preclinical study and clinical trial expenses based on the services performed pursuant to contracts with research institutions and clinical research organizations that conduct these activities on its behalf. In recording service fees, the Company estimates the time period over which the related services will be performed and compares the level of effort expended through the end of each period to the cumulative expenses recorded and payments made for such services and, as appropriate, accrues additional service fees or defers any non-refundable advance payments until the related services are performed. If the actual timing of the performance of services or the level of effort varies from the estimate, the Company will adjust its accrual or deferred advance payment accordingly. If the Company later determines that it no longer expects the services associated with a deferred non-refundable advance payment to be rendered, the deferred advance payment will be charged to expense in the period that such determination is made.

 

Stock-Based Compensation

 

Employee stock-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the employee’s requisite service period (generally the vesting period). Stock option awards granted to the Company’s nonemployee directors for their board-related services are included in employee stock-based compensation in accordance with current accounting standards. The Company uses the Black-Scholes option-pricing model to estimate the fair value of its stock-based awards and uses the straight-line (single-option) method for expense attribution. The Company estimates forfeitures and recognizes expense only for those shares expected to vest.

 

The Company accounts for equity instruments issued to nonemployees based on their fair values on the measurement dates using the Black-Scholes option-pricing model. The fair values of the options granted to nonemployees are remeasured as they vest. As a result, the noncash charge to operations for nonemployee options that vest in any given reporting period is affected by changes in the fair value of the Company’s common stock during that period.

 

10



Table of Contents

 

Net Loss per Common Share

 

Basic net loss per common share is calculated by dividing the net loss by the weighted-average number of common shares outstanding during the period, without consideration for common stock equivalents. Diluted net loss per share includes the effect of all potential common stock equivalents outstanding for the period, determined using the treasury-stock method. For purposes of this calculation, potentially dilutive securities consisting of stock options and warrants are considered to be common stock equivalents and, for each period presented in these condensed financial statements, are excluded in the calculation of diluted net loss per share because their effect would be antidilutive. The following table presents the calculation of basic and diluted net loss per share of common stock (in thousands, except share and per share data):

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

(unaudited)

 

(unaudited)

 

Net loss per common share:

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

Net loss

 

$

(16,809

)

$

(14,444

)

$

(45,983

)

$

(43,611

)

Denominator:

 

 

 

 

 

 

 

 

 

Weighted-average number of common shares used in calculating net loss per common share—basic and diluted

 

40,586,376

 

31,551,714

 

38,586,027

 

30,989,986

 

Net loss per common share—basic and diluted

 

$

(0.41

)

$

(0.46

)

$

(1.19

)

$

(1.41

)

Outstanding securities at period end not included in the computation of diluted net loss per share as they had an anti-dilutive effect:

 

 

 

 

 

 

 

 

 

Common stock options

 

4,924,864

 

3,924,645

 

4,924,864

 

3,924,645

 

Warrants to purchase common stock

 

919,857

 

451,597

 

919,857

 

451,597

 

 

 

5,844,721

 

4,376,242

 

5,844,721

 

4,376,242

 

 

Recent Accounting Pronouncements

 

In February 2013, a new accounting standard was issued that amended existing guidance to improve the reporting of reclassifications out of accumulated other comprehensive income. The new standard requires the disclosure of significant amounts reclassified from each component of accumulated other comprehensive income and the income statement line items affected by the reclassification. The standard is effective prospectively for interim and annual periods beginning after December 15, 2012. The Company adopted this guidance as of January 1, 2013 and its adoption did not have an effect on the Company’s financial statements.

 

In July 2013, a new accounting standard was issued that requires the netting of unrecognized tax benefits against a deferred tax asset for a net operating loss carryforward or other carryforward that would apply in the settlement of uncertain tax positions. Under the new standard, unrecognized tax benefits will be netted against all available same-jurisdiction net operating loss or other tax carryforwards that would be utilized, rather than only against carryforwards that are created by the unrecognized tax benefits. The new standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The Company is in the process of evaluating the impact of the new standard on the condensed financial statements.

 

3. Marketable Securities and Fair Value Measurements

 

The following tables summarize the estimated fair values of the Company’s financial assets measured on a recurring basis as of the dates indicated below. Such financial assets are comprised solely of available for sale securities with remaining contractual maturities of less than one year.

 

11



Table of Contents

 

The input levels used in the fair value measurements, the amortized cost and fair value of marketable securities, with gross unrealized gains and losses, were as follows (in thousands):

 

September 30, 2013 (unaudited)

 

Input
Level

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair Value

 

Money market fund

 

Level 1

 

$

4,072

 

$

 

$

 

$

4,072

 

Federal agency securities

 

Level 2

 

35,035

 

7

 

 

35,042

 

Total available for sale securities

 

 

 

39,107

 

7

 

 

39,114

 

Less:

 

 

 

 

 

 

 

 

 

 

 

Amounts classified as cash and cash equivalents

 

 

 

6,074

 

 

 

6,074

 

Amounts classified as restricted investments

 

 

 

4,431

 

 

 

4,431

 

Amounts classified as short-term investments

 

 

 

$

28,602

 

$

7

 

$

 

$

28,609

 

 

December 31, 2012

 

Input
Level

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair Value

 

Money market fund

 

Level 1

 

$

8,834

 

$

 

$

 

$

8,834

 

U.S. treasury securities

 

Level 2

 

7,115

 

1

 

 

7,116

 

Federal agency securities

 

Level 2

 

29,564

 

3

 

(1

)

29,566

 

Total available for sale securities

 

 

 

45,513

 

4

 

(1

)

45,516

 

Less: amounts classified as cash and cash equivalents

 

 

 

10,335

 

 

 

10,335

 

Amounts classified as short-term investments

 

 

 

$

35,178

 

$

4

 

$

(1

)

$

35,181

 

 

All marketable securities held at September 30, 2013 and December 31, 2012 had original maturities at the date of purchase of less than one year. Management of the Company does not intend to sell these securities and believes that it will be able to hold these securities to maturity and recover their amortized cost bases. There were no realized gains or losses recognized from the sale of marketable securities for the three and nine months ended September 30, 2013 and 2012.

 

In measuring fair value, the Company evaluates valuation techniques such as the market approach, the income approach and the cost approach. A three-level valuation hierarchy, which prioritizes the inputs to valuation techniques that are used to measure fair value, is based upon whether such inputs are observable or unobservable.

 

Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions made by the reporting entity. The three-level hierarchy for the inputs to valuation techniques is briefly summarized as follows:

 

·                  Level 1—Observable inputs such as quoted prices (unadjusted) for identical instruments in active markets;

 

·                  Level 2—Observable inputs such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, or model-derived valuations whose significant inputs are observable; and

 

·                  Level 3—Unobservable inputs that reflect the reporting entity’s own assumptions.

 

12



Table of Contents

 

During the three and nine months ended September 30, 2013 and the year ended December 31, 2012, there were no transfers between Level 1 and Level 2 financial assets. At September 30, 2013 and December 31, 2012, the Company utilized the market approach to measure fair value for its marketable securities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable instruments. The fair values of the money market fund (Level 1) were based on quoted market prices in an active market. U.S. treasury securities and federal agency securities (Level 2) are valued using third-party pricing sources that apply applicable inputs and other relevant data, such as quoted prices, interest rates and yield curves, into their models to estimate fair value.

 

4. Accrued Liabilities

 

Accrued liabilities consisted of the following (in thousands):

 

 

 

September 30, 2013

 

December 31, 2012

 

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

Accrued compensation

 

$

2,055

 

$

2,155

 

Accrued preclinical study and clinical trial costs

 

3,547

 

5,507

 

Accrued legal expenses

 

3,235

 

400

 

Other

 

1,869

 

1,528

 

Total accrued liabilities

 

$

10,706

 

$

9,590

 

 

5. Commitments and Contingencies

 

Operating Leases

 

On May 15, 2013, the Company amended the original lease agreement for its 36,960 square-foot building consisting of office and laboratory space located in Palo Alto, California, which serves as its corporate headquarters. Under the terms of the lease amendment, the landlord was granted a right to terminate the lease as of a date prior to March 31, 2018 with the following terms:  (i) landlord may exercise its right by written notice (Early Termination Notice) to the Company; (ii) the Early Termination Notice shall specify a lease term expiration date no earlier than twelve (12) months from the delivery of the Early Termination Notice to the Company; and (iii) the Early Termination Notice may be delivered on or after June 30, 2015. The earliest effective date for the expiration of the lease under the terms of the lease amendment is June 30, 2016. As consideration for entering into the lease amendment, the Company received a rent credit of $0.7 million, which was applied to the monthly base rent under the original lease commencing June 1, 2013 and continuing for each successive month thereafter until the full amount of the rent credit has been applied. At any time, the landlord may elect to make a lump sum payment of any remaining balance of the unapplied rent credit, at which time the base rent monthly payments under the original lease will resume. All other terms of the original lease agreement remain unchanged under the lease amendment.

 

In addition to the $0.4 million allowance for tenant improvements provided by the landlord under the original lease, the $0.7 million rent credit related to the lease amendment has been included in deferred rent and is being amortized over the remaining term of the lease, on a straight-line basis, as a reduction to rent expense. As of September 30, 2013, $1.3 million has been included as deferred rent related to this lease in the condensed balance sheet. The Company will continue to provide a security deposit in the amount of $0.1 million in the form of a standing letter of credit and continues to be responsible for certain operating expenses.

 

The Company also leases a 15,300 square foot building consisting of laboratory and office space located in Palo Alto, California. The existing lease agreement would have terminated in December 2013, and contained two (2) one-year options to extend the lease through each of 2014 and 2015. In September 2013, the Company exercised its option to extend the facility lease through December 2014. All other terms of the original lease agreement remain unchanged. The Company may terminate the lease by providing four months’ written notice.

 

Indemnifications

 

The Company, as permitted under Delaware law and in accordance with its bylaws, indemnifies its officers and directors for certain events or occurrences, subject to certain limits, while the officer or director is or was serving at the Company’s request in such capacity. The term of the indemnification period is equal to the officer’s or director’s lifetime.

 

13



Table of Contents

 

The maximum amount of potential future indemnification is unlimited; however, the Company currently holds director and officer liability insurance. This insurance limits the Company’s exposure and may enable it to recover a portion of any future amounts paid. The Company believes that the fair value of these indemnification obligations is minimal. Accordingly, the Company has not recognized any liabilities relating to these obligations for any period presented.

 

The Company has certain agreements with contract research organizations and other parties with which it does business that contain indemnification provisions pursuant to which the Company typically agrees to indemnify the party against certain types of third-party claims. The Company accrues for known indemnification issues when a loss is probable and can be reasonably estimated. The Company would also accrue for estimated incurred but unidentified indemnification issues based on historical activity. There were no accruals for or expenses related to indemnification issues for any period presented.

 

Legal Proceedings

 

On October 24, 2012, the Company provided notice to Valeant, successor in interest to Dow Pharmaceutical Sciences, Inc. (DPS), seeking to commence arbitration before JAMS of a breach of contract dispute under a master services agreement dated March 26, 2004 between the Company and DPS related to certain development services provided by DPS in connection with the Company’s efforts to develop its topical antifungal product candidate for the treatment of onychomycosis. The Company’s assertions included breach of contract, breach of implied covenant of good faith and fair dealing, misappropriation of trade secrets and unfair competition. The Company was seeking injunctive relief and damages of at least $215.0 million. The final hearing was held in September 2013 and, on October 17, 2013, the arbitrator issued an Interim Final Award in favor of the Company for $100.0 million in damages as well as all costs of the arbitration and reasonable attorney’s fees.

 

On November 28, 2012, the Company filed an arbitration demand before JAMS alleging breach of contract by Medicis under the February 9, 2011 research and development agreement between Medicis and the Company (the Medicis Agreement) and seeking damages in the form of payment for the achievement of certain preclinical milestones under that agreement. On December 11, 2012, Medicis filed a complaint for breach of the Medicis Agreement and a motion for preliminary injunction in the Delaware Court of Chancery seeking to enjoin the Company from prosecuting its claims through arbitration and to require the Company to continue to use diligent efforts to conduct research and development under the Medicis Agreement. Medicis was acquired by Valeant in December 2012.

 

On October 27, 2013, the Company entered into a settlement agreement with Valeant and DPS for $142.5 million related to all outstanding arbitration and litigation between the parties, including the arbitration award of October 17, 2013 and the Company’s ongoing arbitration and litigation with Medicis (the Settlement Agreement; also see Note 10). As part of the Settlement Agreement, the Company provided a paid-up, irrevocable, non-exclusive, worldwide license to all patents that contain claims covering efinaconazole, Valeant’s topical antifungal product candidate for the treatment of onychomycosis, and the ongoing arbitration between the Company and Medicis, a wholly-owned subsidiary of Valeant, as well as the related litigation between the parties in the Delaware Court of Chancery, will be dismissed. In addition, pursuant to the Settlement Agreement, the Company and Medicis have agreed to terminate the Medicis Agreement effective October 27, 2013.

 

6. Notes Payable

 

On June 7, 2013, the Company entered into a loan and security agreement (the Loan Agreement) with Hercules Technology Growth Capital, Inc. as collateral agent and a lender and Hercules Technology III, L.P. as a lender (the lenders, or together Hercules) under which the Company may borrow up to $45.0 million in three tranches of $30.0 million, $10.0 million and $5.0 million (the Loan Facility).

 

The first $30.0 million tranche was drawn at the closing of the transaction, at which time the Company repaid $22.6 million in remaining obligations associated with its previous loan. Subject to the terms and conditions of the Loan Agreement, the second tranche of up to $10.0 million is available to the Company at its discretion, and the third tranche is available to the Company upon confirmation of the FDA approval of the tavaborole NDA. The second tranche of $10.0 million will be available for drawdown through December 5, 2013, and the third tranche of $5.0 million will be available for drawdown through the earlier to occur of December 15, 2014 or 30 days after the FDA approval of tavaborole. The interest rate applicable to each tranche is a variable rate based upon the greater of either  (i) 11.65% or (ii) the sum of (a) the Prime Rate (as defined in the Loan Agreement) as reported in The Wall Street Journal minus 5.25%, plus (b) 11.65%; with a maximum interest rate of 14.90%. Payments under the Loan Agreement are interest only until January 1, 2015 (or if the FDA approves tavaborole on or before December 15, 2014, the interest only period is extended to July 1, 2015), followed by equal monthly payments of principal and interest through the scheduled maturity date on July 1, 2017.

 

14



Table of Contents

 

The Company paid Hercules financing fees of $0.5 million and incurred other debt issuance costs, including legal fees, of $0.4 million in connection with the loan. These fees are being accounted for as a debt discount and deferred debt issuance costs, respectively. In addition, if the Company repays all or a portion of the loan prior to maturity, it will pay Hercules a prepayment penalty fee, based on a percentage of the then outstanding principal balance, equal to 3% if the prepayment occurs prior to June 7, 2014, 2% if the prepayment occurs prior to June 7, 2015, or 1% if the prepayment occurs prior to July 1, 2017.

 

The Loan Agreement includes customary affirmative and restrictive covenants, but does not include any covenants to attain or maintain any specific financial metrics, and also includes standard events of default, including payment defaults, breaches of covenants following any applicable cure period, a material impairment in the perfection or priority of Hercules’ security interest or in the value of the collateral and a material impairment of the prospect of repayment of the loans. Upon the occurrence of an event of default and until any such default has been cured, a default interest rate of an additional 5% may be applied to the outstanding loan balances, and Hercules may declare all outstanding obligations immediately due and payable and take such other actions as set forth in the Loan Agreement.

 

The loan is secured by all assets of the Company except intellectual property. Under the loan agreement, the Company also agreed to certain restrictions regarding the pledging or encumbrance of its intellectual property, except that the Company may grant non-exclusive licenses of intellectual property entered into in the ordinary course of business, and licenses approved by the Company’s Board of Directors that may be exclusive in respects other than territory and may be exclusive as to territory as to discrete geographical areas outside of the United States.

 

In connection with the Loan Agreement, the Company issued warrants to Hercules to purchase 528,375 shares of its common stock at an exercise price of $5.11 per share (the Warrants). The Warrants are immediately exercisable and may be exercised on a cashless basis. The Warrants will terminate, if not earlier exercised, on the earlier of June 7, 2018 and the closing of certain merger or consolidation transactions in which the consideration is cash, stock of a publicly traded acquirer or a combination thereof. The fair value of the warrants issued was approximately $1.8 million and was calculated using a Black-Scholes valuation model with the following assumptions: risk-free interest rate of 1.1% based upon observed risk-free interest rates appropriate for the expected term of the warrants; expected volatility of 81% based on the average historical volatilities of a peer group of publicly-traded companies within the Company’s industry; expected term of 5 years, which is the contractual life of the warrants; and a dividend yield of 0%. The Company recorded a debt discount of $1.8 million to additional paid-in capital associated with the issuance of the Warrants.

 

The interest on the loan was calculated using the interest method with the debt issuance costs paid directly to Hercules (financing fees) and the fair value of the warrants issued to Hercules treated as a discount on the debt. The Company’s debt issuance costs for legal fees and other debt-related expenses are included as prepaid expenses and other current assets and as other assets in the accompanying condensed balance sheet. The amortization of the debt discount is recorded as a noncash interest expense and the amortization of the debt issuance costs is recorded as other expense in the condensed statements of operations.

 

In June 2013, the Company recorded a loss of approximately $1.4 million on the early extinguishment of its previous debt. This loss is recorded as a loss on early extinguishment of debt in 2013 in the statements of operations.

 

Future payments as of September 30, 2013 are as follows (in thousands):

 

Year ending December 31,

 

(unaudited)

 

Remainder of 2013

 

$

883

 

2014

 

3,543

 

2015

 

13,890

 

2016

 

13,890

 

2017

 

7,029

 

Total minimum payments

 

39,235

 

Less amount representing interest

 

(9,235

)

Notes payable, gross

 

30,000

 

Unamortized discount on notes payable

 

(2,078

)

 

 

 

 

Less current portion of notes payable, including unamortized discount

 

 

Notes payable, less current portion

 

$

27,922

 

 

The Company recorded interest expense related to all borrowings of $1.1 million and $0.6 million for the three months ended September 30, 2013 and 2012, respectively, and $2.9 million and $1.9 million for the nine months ended September 30, 2013 and 2012, respectively. Included in interest expense for these periods was $0.2 million and $0.1 million for the three months ended September 30, 2013 and 2012, respectively, and $0.5 million and $0.3 million for the nine months ended September 30, 2013 and 2012, respectively, for the amortization of the financing fees and debt discounts. The annual effective interest rate on amounts borrowed under the Loan Agreement, including the amortization of the debt discounts, is 16.4%.

 

15



Table of Contents

 

7. License, Research, Development and Commercialization Agreements

 

Gates Foundation

 

On April 5, 2013, the Company entered into a research agreement with the Gates Foundation to discover drug candidates intended to treat two filarial worm diseases (onchocerciasis, or river blindness, and lymphatic filariasis, commonly known as elephantiasis) and TB (the Research Agreement). Under the Research Agreement, the Gates Foundation will pay the Company up to $17.7 million over a three-year research term (the Research Funding) to conduct research activities directed at discovering potential neglected disease drug candidates in accordance with an agreed upon research plan. As part of the funded research activities, the Company is also responsible for creating, during the first 18 months following execution of the Research Agreement, an expanded library of boron compounds to screen for additional potential drug candidates to treat neglected diseases (the Library). Once the Library is completed, the Company is responsible for storing the Library compounds and making them accessible to the Gates Foundation and other parties to which the Gates Foundation grants access (the Library Access Services) for the subsequent five-year period.

 

Upon signing the Research Agreement, the Company received an advance payment of $1.75 million of Research Funding (the Advance Funds). These Advance Funds will be replenished by the Gates Foundation each quarter following the Company’s submission of a quarterly report of the expenses incurred for the research activities conducted in the prior quarter. In addition, the Gates Foundation paid the Company a total of $0.8 million as reimbursement for the costs of filarial worm research that was included in the agreed upon research plan, which the Company conducted prior to the April 5, 2013 effective date of the Research Agreement (the Pre-Contract Reimbursements). These Pre-Contract Reimbursements are non-refundable, non-creditable payments and are included in the $17.7 million of Research Funding.

 

Under the terms of the agreement, the Gates Foundation will have the exclusive right to commercialize selected drug candidates in specified neglected diseases in specified developing countries. The Company retains the exclusive right to commercialize any selected drug candidate outside of the specified neglected diseases as well as with respect to the specified neglected diseases in specified developed countries and would be obligated to pay the Gates Foundation royalties on specified license revenue received. The Research Agreement will continue in effect until the later of five years from the effective date or the expiration of the Company’s specified obligation to provide access to the expanded library compounds. Either party may terminate the Research Agreement for the other party’s uncured material breach of the Research Agreement.

 

In connection with the Research Agreement, the Company entered into a Common Stock Purchase Agreement (the Purchase Agreement) pursuant to which the Company issued 809,061 shares of potentially redeemable common stock to the Gates Foundation for net proceeds of approximately $5.0 million (the Stock Proceeds)  (see Note 8). In addition, in connection with both the Research Agreement and the Purchase Agreement, the Company and the Gates Foundation entered into a letter agreement (the Letter Agreement) that, among other things, restricts the Company’s use of both the Research Funding and the Stock Proceeds to expenditures, including an allocation of overhead and administrative expenses, that are reasonably attributable to the activities that are required to support the research projects funded by the Gates Foundation. As a result of such restrictions, in its September 30, 2013 condensed balance sheet, the Company classified $3.2 million of the Stock Proceeds as noncurrent restricted investments and $1.1 million of the Stock Proceeds plus the unspent portion of the Advance Funds, approximately $0.1 million, as current restricted investments.

 

The Company evaluated the Research Agreement under the accounting guidance for multiple-element arrangements and identified three deliverables:  the research activities, the 5-year library access and the obligation to participate in the joint steering committee. Although participation in the joint steering committee has stand alone value, it will be delivered as the research activities are performed and has a similar pattern of performance. Accordingly, the Company has combined this deliverable with the research activities deliverable as a single unit of accounting. The Company developed its best estimates of selling prices (BESP) for each deliverable in order to allocate the arrangement consideration to the two units of accounting. The Company determined the BESP for the research activities based on factors such as estimated direct expenses and other costs involved in providing these services, the contractually agreed reimbursement rates for the services and the rates it has charged and the margins it has realized under its other contracts involving the provision of and reimbursement for research services. The Company determined the BESP for the Library Access Services based on the projected costs that would be incurred to have a third party store and distribute the library compounds and the estimated costs that would be incurred to provide the Library Access Services for the required 5-year period, plus a reasonable margin, and concluded that the BESP of such services is insignificant. As a result, the entire arrangement consideration will be allocated to the research activities and joint steering committee combined unit of accounting. The Company will recognize revenue related to this unit of accounting on a proportional performance basis and the revenue that is recognized as future research services are performed will reduce the Advance Funds. The unspent portion of the Advance Funds will be recorded as deferred revenue in the Company’s condensed balance sheets.

 

16



Table of Contents

 

The Company also evaluated the accounting treatment for the $0.8 million of Pre-Contract Reimbursements, noting that the research activities that gave rise to such reimbursements were conducted prior to the signing of the Research Agreement. The Company concluded that activities performed prior to commencing delivery of the contracted services should not be considered in effort-expended measures of performance when revenue is recognized for services using a proportional performance method and, accordingly, the Company will recognize revenue from the Pre-Contract Reimbursements over the three-year research term on a proportional performance basis. Through September 30, 2013, the Company recognized total revenue of $3.0 million under the Research Agreement. As of September 30, 2013, the Company has deferred revenue of $0.1 million related to the unspent Advance Funds and $0.7 million related to the Pre-Contract Reimbursements.

 

Revenues recognized under the Research Agreement were as follows (in thousands):

 

 

 

Three Months Ended
September 30, 2013

 

Nine Months Ended
September 30, 2013

 

 

 

(unaudited)

 

Contract revenue:

 

 

 

 

 

Amortization of Pre-Contract Reimbursements

 

$

73

 

$

128

 

Reimbursement for research costs

 

1,618

 

2,865

 

Total contract revenue

 

$

1,691

 

$

2,993

 

 

GSK

 

In September 2011, the Company amended and expanded its 2007 research and development collaboration with GSK (the Master Amendment) to, among other things, add a new research program for TB using the Company’s boron chemistry platform. In September 2013, GSK selected a compound that resulted from this program for further development in TB. GSK will be responsible for all further development and commercialization of this compound, and the Company may receive contingent payments.

 

The Company evaluated the contingent payments related to the TB program under the agreement with GSK, as amended by the Master Amendment, and determined that the contingent payments do not meet the definition of a milestone under the current accounting standards. Revenue from such contingent payments will be recognized in its entirety in the period when the event that triggers the contingent payment occurs and collectibility is reasonably assured. GSK is further obligated to pay the Company royalties on annual net sales of licensed products that result from the TB program. To date, no products have been approved and therefore no royalties have been earned under this agreement. For the three and nine months ended September 30, 2013 and 2012, the Company did not recognize any revenue from milestone payments under its agreement with GSK.

 

On October 5, 2013, the six-year research period under the agreement with GSK expired and the Company will continue working with GSK through December 31, 2013 to complete the transfer of TB-related technology to GSK. As of September 30, 2013, the Company has deferred revenue of $22,000 associated with the GSK agreement.

 

Revenues recognized under this agreement were as follows (in thousands):

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

(unaudited)

 

(unaudited)

 

Contract revenue:

 

 

 

 

 

 

 

 

 

Reimbursement for research and patent costs

 

$

360

 

$

342

 

$

1,047

 

$

1,121

 

Total contract revenue

 

$

360

 

$

342

 

$

1,047

 

$

1,121

 

 

Lilly

 

In August 2010, the Company entered into a research agreement with Lilly under which the companies will collaborate to discover products for a variety of animal health applications. Lilly will be responsible for worldwide development and commercialization of compounds advancing from these efforts. The Company received an upfront payment of $3.5 million in September 2010, which is being recognized over a four-year research term on a straight-line basis. Through September 30, 2013, the Company has also received $9.3 million in research funding under the agreement with the potential to receive up to $2.7 million more  in such research funding, if neither party cancels the agreement prior to the completion of the research term. In both 2012 and 2011, the Company received milestone payments of $1.0 million each from Lilly for the selection of development compounds and would be eligible to receive additional payments upon the occurrence of specified development and regulatory events. Included in such additional payments are potential payments of up to $2.0 million for the selection of additional development compounds, which the Company has determined are substantive milestones. To date, no products have been approved and therefore no royalties have been earned under this agreement. In September 2013, Lilly notified us that it was ceasing further development of one of the two previously licensed compounds; Lilly has granted the Company a fully paid, sublicenseable, perpetual, irrevocable, exclusive license to the related technology and patents. As of September 30, 2013, the Company has deferred revenue of $0.8 million related to the upfront fee and $0.7 million related to the research funding.

 

17



Table of Contents

 

Revenues recognized under the agreement and for other research services were as follows (in thousands):

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

(unaudited)

 

(unaudited)

 

Contract revenue:

 

 

 

 

 

 

 

 

 

Amortization of upfront fee

 

$

219

 

$

219

 

$

656

 

$

656

 

Research funding

 

810

 

852

 

2,445

 

2,467

 

Total contract revenue

 

$

1,029

 

$

1,071

 

$

3,101

 

$

3,123

 

 

Medicis

 

In February 2011, the Company entered into the Medicis Agreement to discover and develop boron-based small molecule compounds directed against a target for the potential treatment of acne. The Company was primarily responsible during a defined research collaboration term for discovering and conducting early development of product candidates that utilize the Company’s proprietary boron chemistry platform. The Company granted Medicis a non-exclusive, non-royalty bearing license to utilize a relevant portion of the Company’s intellectual property, solely as and to the extent necessary, to enable Medicis to perform additional development work under the agreement. Medicis would also have an option to obtain an exclusive license for products resulting from this collaboration. Upon exercise of this option, Medicis would assume sole responsibility for further development and commercialization of the applicable product candidate on a worldwide basis. On November 28, 2012, the Company filed an arbitration demand alleging breach of contract by Medicis under the Medicis Agreement, and on December 11, 2012, Medicis filed a complaint for breach of the Medicis Agreement and a motion for preliminary injunction. Medicis was acquired by Valeant in December 2012. On October 27, 2013, as part of a settlement agreement related to arbitration on another unrelated matter, Valeant and the Company agreed, among other things, to settle the ongoing arbitration and litigation between the Company and Medicis. As part of the settlement agreement, the Medicis Agreement was terminated effective October 27, 2013 and all rights and intellectual property under the Medicis Agreement revert back to the Company (see Notes 5 and 10).

 

Under the terms of the Medicis Agreement, the Company received a $7.0 million upfront payment from Medicis in February 2011. Through December 31, 2012, the Company recognized revenue from the upfront payment on a straight-line basis over a six-year research term. For the nine months ended September 30, 2013, the Company did not perform any research and development activities under the Medicis Agreement as a result of the legal proceedings discussed above. Accordingly, the Company did not recognize any revenue associated with the Medicis Agreement for this period of time. As of September 30, 2013, the Company has deferred revenue of $4.8 million related to the upfront fee, which has been classified as current deferred revenue (see Note 10).

 

Revenues recognized under this agreement related to the upfront payment were as follows (in thousands):

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

(unaudited)

 

(unaudited)

 

Contract revenue:

 

 

 

 

 

 

 

 

 

Amortization of upfront fee

 

$

 

$

292

 

$

 

$

875

 

Total contract revenue

 

$

 

$

292

 

$

 

$

875

 

 

MMV

 

In March 2011, the Company entered into a three-year development agreement with MMV to collaborate on the development of compounds for the treatment of malaria through human proof-of-concept studies. In March 2013, the Company received an advance payment of $0.3 million for 2013 research funding in connection with the extension of the previous research agreement with MMV through December 2013. The Company has recognized revenue from the advance payments as the research and development activities are performed. As of September 30, 2013, the Company has no deferred revenue associated with its agreements with MMV.

 

18



Table of Contents

 

Revenues recognized under the MMV research and development agreements were as follows (in thousands):

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

(unaudited)

 

(unaudited)

 

Contract revenue:

 

 

 

 

 

 

 

 

 

Research and development funding

 

$

10

 

$

149

 

$

301

 

$

446

 

Total contract revenue

 

$

10

 

$

149

 

$

301

 

$

446

 

 

8. Redeemable Common Stock and Stockholders’ Equity

 

Potentially Redeemable Common Stock

 

In connection with the Research Agreement (see Note 7), the Company entered into a Common Stock Purchase Agreement (the Purchase Agreement) with the Gates Foundation pursuant to which the Company issued 809,061 shares of its unregistered common stock at a purchase price of $6.18 per share. Net proceeds to the Company from this offering were approximately $5.0 million, after deducting offering expenses of $48,000. On June 28, 2013, the Company filed a registration statement on Form S-3 with the SEC, which became effective on July 11, 2013, to register the resale of the 809,061 shares of common stock. In the event of termination of the Research Agreement by the Gates Foundation for certain specified uncured material breaches by the Company (the Triggering Events), the Company will be obligated, among other remedies, to redeem for cash the Company’s common stock purchased in connection with the Research Agreement, facilitate the purchase of such common stock by a third party or elect to register the resale of such common stock into the public markets unless certain specified conditions are satisfied. The redemption price per share would be the fair value per share of the Company’s common stock on the redemption date or, under certain circumstances, the greater of (i) the fair value per share and (ii) the purchase price of $6.18 per share plus interest at 5% compounded annually from April 5, 2013, the stock purchase date. In connection with both the Research Agreement and the Purchase Agreement, the Company and the Gates Foundation also entered into the Letter Agreement that, among other things, places certain restrictions on the use of both the Research Funding and the Stock Proceeds (see Note 7, Gates Foundation).

 

The Company concluded that certain of these Triggering Events are not solely within the control of the Company; and, accordingly, has classified the potentially redeemable securities outside of permanent equity in temporary equity. The 809,061 shares of common stock issued were recorded as potentially redeemable common stock at an initial carrying amount equal to the net proceeds of approximately $5.0 million, which approximates their issuance date fair value.

 

The Company has determined that the 809,061 shares of potentially redeemable common stock are not currently redeemable and that none of the Triggering Events are currently probable. Accordingly, the carrying amount of the potentially redeemable common stock remains at approximately $5.0 million as of September 30, 2013. Only if, and when, a Triggering Event becomes probable will the Company record a change in the carrying amount to adjust it to the redemption value of the potentially redeemable common stock. At the time of such an occurrence, the potentially redeemable common stock will be immediately adjusted, by a credit or charge to other income or expense, to equal the redemption value and will continue to be adjusted to reflect any change in the redemption value as of the end of each reporting period.

 

Shelf Registrations

 

In December 2012, the Company filed a shelf registration statement on Form S-3 with the SEC. The shelf registration was declared effective by the SEC on December 21, 2012 and permits the Company to sell, from time to time, up to $75.0 million of common stock, preferred stock, debt securities and warrants.

 

In August 2013, the Company filed an additional shelf registration statement on Form S-3 with the SEC. The shelf registration was declared effective by the SEC on September 23, 2013 and permits the Company to sell, from time to time, up to $50.0 million of common stock, preferred stock, debt securities and warrants.

 

Common Stock Offerings

 

On January 18, 2013, the Company entered into an equity distribution agreement (the Wedbush Agreement) with Wedbush Securities Inc. (Wedbush) under which the Company may, from time to time, offer and sell its common stock having aggregate sales proceeds of up to $25.0 million through Wedbush, or to Wedbush, for resale. Sales of the Company’s common stock through Wedbush, if any, will be made by means of ordinary brokers’ transactions on The NASDAQ Global Market or otherwise at market prices prevailing at the time of sale, in block transactions, or as otherwise agreed upon by the Company and Wedbush and may be made in sales deemed to be “at-the-market” equity offerings. Wedbush will use commercially reasonable efforts to sell the Company’s

 

19



Table of Contents

 

common stock from time to time, based upon instructions from the Company (including any price, time or size limits or other customary parameters or conditions the Company may impose). The Company will pay Wedbush a commission, or allow a discount, as the case may be, in each case equal to 2.0% of the gross sales proceeds of any common stock sold through Wedbush as agent under the Wedbush Agreement. The Company has also agreed to reimburse Wedbush for certain expenses up to an aggregate of $150,000, of which $45,000 has been incurred through September 30, 2013.

 

Under the terms of the Wedbush Agreement, the Company also may sell its common stock to Wedbush, as principal for its own account, at a price to be agreed upon at the time of sale. Through September 30, 2013, the Company sold 401,500 shares of the Company’s common stock under the Agreement for net proceeds to the Company of approximately $1.3 million, after deducting the underwriting discount and other offering costs, including commissions to Wedbush for such sales of approximately $27,000. For the three months ended September 30, 2013, there were no shares of the Company’s common stock sold under the Wedbush Agreement.

 

On May 1, 2013, the Company issued and sold 3,599,373 shares of the Company’s common stock pursuant to an underwriting agreement (the Underwriting Agreement) with Cowen and Company, LLC as representative of the several underwriters (the Underwriters) for the issuance and sale of up to 3,599,373 shares of the Company’s common stock, including 469,483 shares issued to the Underwriters pursuant to a 30-day overallotment option. The price to the public in this offering was $6.39 per share, and the Underwriters purchased the shares from the Company pursuant to the Underwriting Agreement at a price of $6.0066 per share. The net proceeds to the Company from this offering, including the exercise of the overallotment option by the Underwriters, were approximately $21.3 million, after deducting the underwriting discount of $1.4 million and other offering expenses of $0.3 million.

 

9. Stock-Based Compensation

 

The Company recorded stock-based compensation expense as follows (in thousands):

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

(unaudited)

 

(unaudited)

 

Research and development

 

$

744

 

$

496

 

$

1,910

 

$

1,484

 

General and administrative

 

545

 

381

 

1,393

 

1,251

 

Total

 

$

1,289

 

$

877

 

$

3,303

 

$

2,735

 

 

For the three and nine months ended September 30, 2013, the Company issued 102,727 and 161,492 shares of the Company’s common stock and received approximately $0.7 million and $0.9 million, respectively, in cash from the exercise of stock options. Total stock options granted for the three and nine months ended September 30, 2013 were 4,450 shares, which included no stock option grants to nonemployee advisors and 1,385,770 shares, which included stock option grants for 27,000 shares to nonemployee advisors, respectively. Grants to nonemployee advisors do not include grants made to the Company’s nonemployee directors for their board-related services. The weighted-average fair value per share of options granted to employees and the Company’s nonemployee directors was $3.94 and $4.68 for the three and nine months ended September 30, 2013, respectively.

 

At September 30, 2013, there were outstanding stock options to purchase 4,924,864 shares of the Company’s common stock. At September 30, 2013, the Company had $8.3 million and $0.2 million of unrecognized compensation expense, net of estimated forfeitures, related to outstanding stock options and Employee Stock Purchase Program (ESPP) stock purchase rights, respectively, that will be recognized over a weighted-average period of 2.4 years and 0.6 years, respectively. For the three and nine months ended September 30, 2013, there were 42,934 and 95,373 shares of the Company’s common stock purchased under the ESPP, respectively.

 

10. Subsequent Events

 

Favorable Arbitration Ruling in Valeant Dispute and Subsequent Settlement

 

On October 17, 2013, the arbitrator appointed to resolve the Company’s dispute with Valeant, successor in interest to DPS, issued an Interim Final Award in favor of the Company for $100.0 million in damages as well as all costs of the arbitration and reasonable attorney’s fees. The ruling upheld the Company’s claims asserting that DPS had violated certain terms of a March 26, 2004 agreement between the Company and DPS related to development services provided by DPS in connection with the Company’s efforts to develop its topical antifungal product candidate for the treatment of onychomycosis. The Company’s assertions included breach of contract, breach of implied covenant of good faith and fair dealing, misappropriation of trade secrets and unfair competition.

 

20



Table of Contents

 

On October 27, 2013, the Company, Valeant and DPS entered into a settlement agreement pursuant to which Valeant agreed to pay the Company $142.5 million to settle all existing and future claims, including damages awarded in the October 17, 2013 arbitration ruling, and all other disputes between the Company, Valeant and DPS related to the Company’s intellectual property, confidential information and contractual rights. Under the settlement agreement, the Company agreed to provide Valeant a paid-up, irrevocable, non-exclusive, worldwide license to all patents that contain claims covering efinaconazole. In addition, the settlement agreement provided that both the Company and Valeant would withdraw all claims and complaints relating to arbitration or litigation in connection with the Medicis Agreement, that the Medicis Agreement is terminated effective October 27, 2013 and that all rights and intellectual property under the Medicis Agreement revert back to the Company. Valeant made the $142.5 million payment to the Company on November 7, 2013.

 

Research Agreement with Department of Defense, Defense Threat Reduction Agency

 

On October 16, 2013, the Company entered into a research agreement with the United States Department of Defense, Defense Threat Reduction Agency (DTRA) to design and discover new classes of systemic antibiotics. A drug discovery consortium formed by the Company, Colorado State University and the University of California at Berkeley will conduct the research over a three and a half year period. The work is funded by a $13.5 million award from DTRA’s R&D Innovation and Systems Engineering Office, which was established to search for and execute strategic investments in innovative technologies for combating weapons of mass destruction. Under this award, the Company will apply its boron chemistry to discover rationally designed novel antibiotics that target DTRA-priority pathogens known to exhibit resistance to existing antibiotics. The $13.5 million award is available to fund $2.7 million of research reimbursements for the first eleven month period through September 30, 2014, and an additional $5.0 million and $5.7 million will become available upon DTRA exercising their options to fund the subsequent twelve and nineteen month periods, respectively.

 

21



Table of Contents

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

You should read the following discussion and analysis together with our condensed financial statements and the notes to those statements included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements that involve risks and uncertainties. We use words such as “may,” “will,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” “predict,” “potential,” “believe,” “should” and similar expressions to identify forward-looking statements. These statements appearing throughout this Quarterly Report on Form 10-Q are statements regarding our intent, belief, or current expectations, primarily regarding our operations. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q. As a result of many factors, such as those set forth under “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q, our actual results may differ materially from those anticipated in these forward-looking statements.

 

Overview

 

We are a biopharmaceutical company focused on discovering, developing and commercializing novel small-molecule therapeutics derived from our boron chemistry platform. The productivity of our internal discovery capability has enabled us to generate a pipeline of both topical and systemic boron-based compounds. We have discovered, synthesized and developed eight molecules that are currently in development.

 

Our lead product candidates include two topically administered dermatologic compounds—tavaborole (formerly referred to as AN2690), an antifungal for the treatment of onychomycosis, and AN2728, an anti-inflammatory for the treatment of atopic dermatitis and psoriasis. In addition, we have three other wholly-owned clinical product candidates—AN2718 and AN2898, which are backup compounds to tavaborole and AN2728, respectively, and AN3365 (formerly referred to as GSK2251052, or GSK ‘052), an antibiotic for the treatment of infections caused by Gram-negative bacteria, which was previously licensed to GlaxoSmithKline, LLC, or GSK. In October 2012, GSK advised us that it had discontinued further development of AN3365; substantially all rights to this compound reverted to us. We are considering our options for further development, if any, of this compound. We have also discovered three other compounds that we have out-licensed for further development—one is licensed to Eli Lilly and Company, or Lilly, for the treatment of animal health indications, the second compound, AN5568, also referred to as SCYX-7158, is licensed to Drugs for Neglected Diseases initiative, or DNDi, for human African trypanosomiasis (HAT, or sleeping sickness) and a third compound is licensed to GSK for development in tuberculosis. We also have a pipeline of other internally discovered topical and systemic boron-based compounds in development.

 

Our most advanced product candidate is tavaborole. In the first quarter of 2013, we reported positive results from two Phase 3 trials conducted under a Special Protocol Assessment, or SPA, with the United States Food and Drug Administration, or FDA. Tavaborole achieved a high degree of statistical significance on all primary and secondary endpoints.

 

In the first study (known as Study 301), 6.5% of patients treated with tavaborole met the primary endpoint of ‘‘complete cure’’ vs. 0.5% of patients treated with vehicle (p=0.001) at week 52. ‘‘Complete cure’’ is a composite endpoint that requires both a mycological cure and a completely clear nail and is consistent with the FDA endpoint requirement for Lamisil. Among the secondary endpoints at week 52, 26.1% of patients treated with tavaborole achieved a ‘‘completely clear’’ or ‘‘almost clear’’ (<10% clinical involvement) nail vs. 9.3% in the vehicle-treated arm (p<0.001); 31.1% of patients treated with tavaborole achieved mycologic cure vs. 7.2% in the vehicle-treated arm (p<0.001)); and 15.3% of patients treated with tavaborole achieved ‘‘completely clear’’ or ‘‘almost clear’’ nail with mycological cure vs. 1.5% in the vehicle-treated arm (p<0.001). In addition to the primary and secondary endpoints noted above, 87.0% of patients treated with tavaborole had a negative fungal culture vs. 47.9% in the vehicle-treated arm (p<0.001) at week 52, and 24.6% of patients treated with tavaborole achieved ‘‘completely clear’’ or ‘‘almost clear’’ nail and negative culture vs. 5.7% in the vehicle-treated arm (p<0.001) at week 52.

 

In the second study (known as Study 302), 9.1% of patients treated with tavaborole met the primary endpoint of ‘‘complete cure’’ vs. 1.5% of patients treated with vehicle (p<0.001) at week 52. Among the secondary endpoints at week 52, 27.5% of patients treated with tavaborole achieved a ‘‘completely clear’’ or ‘‘almost clear’’ nail vs. 14.6% in the vehicle-treated arm (p<0.001); 35.9% of patients treated with tavaborole achieved mycologic cure vs. 12.2% in the vehicle-treated arm (p<0.001)); and 17.9% of patients treated with tavaborole achieved ‘‘completely clear’’ or ‘‘almost clear’’ nail with mycological cure vs. 3.9% in the vehicle-treated arm (p<0.001). In addition to the primary and secondary endpoints noted above, 85.4% of patients treated with tavaborole had a negative fungal culture vs. 51.2% in the vehicle-treated arm (p<0.001) at week 52, and 25.3% of patients treated with tavaborole achieved ‘‘completely clear’’ or ‘‘almost clear’’ nail and negative culture vs. 9.3% in the vehicle-treated arm (p<0.001) at week 52.

 

22



Table of Contents

 

In both studies, tavaborole was safe and well-tolerated across study subjects, and there were no serious adverse events related to study drug. We filed a New Drug Application, or NDA, for tavaborole in July 2013. In September 2013, the NDA was accepted for review by the FDA and the Prescription Drug User Fee Act (PDUFA) V goal date is July 29, 2014.

 

For AN2728, we completed a Phase 2 trial in psoriasis in 2010 and both a Phase 1 absorption trial and a Phase 2 trial in psoriasis in 2011. We also completed a Phase 2 trial of AN2728 and AN2898, our second topical anti-inflammatory product candidate, in mild-to-moderate atopic dermatitis in the fourth quarter of 2011. In early 2012, we completed two safety studies of AN2728. Given the positive outcome from our atopic dermatitis trial, the safety profile exhibited by AN2728 and the large unmet need in atopic dermatitis relative to psoriasis, we intend to focus our AN2728 development efforts on atopic dermatitis in the near future and defer the start of the Phase 3 trial for psoriasis. As such, we initiated a Phase 2 safety, pharmacokinetics, or PK, and efficacy trial for mild-to-moderate atopic dermatitis in adolescents in July 2012 and a Phase 2 dose-ranging study in mild-to-moderate atopic dermatitis in adolescents in August 2012. We completed the Phase 2 safety, PK and efficacy trial in December 2012 with positive results. We completed the Phase 2 dose-ranging trial in March 2013, which demonstrated a clear dose response across four dosing regimens and helped identify the 2.0% BID dosing regimen as optimal for our Phase 3 program in mild-to-moderate atopic dermatitis. We initiated a MUSE (maximal use systemic exposure) study in children with atopic dermatitis in July 2013 and a cardiac safety trial for AN2728 in atopic dermatitis in August 2013. In addition to the MUSE study and the cardiac safety trial, we currently anticipate that the remaining clinical studies that will be required for an NDA filing for AN2728 for mild-to-moderate atopic dermatitis include drug-to-drug interaction studies, repeat insult patch tests for cumulative irritation and sensitization, two Phase 3 trials and a long-term safety trial. Subject to the results of the MUSE study and the cardiac safety study and a successful end of Phase 2 meeting with the FDA, we expect to initiate our Phase 3 trials for AN2728 in the first half of 2014.

 

In October 2007, we entered into a research and development collaboration, option and license agreement with GSK for the discovery, development and worldwide commercialization of boron-based systemic anti-infectives. In September 2011, we amended and expanded the GSK agreement to, among other things, add a new research program using our boron chemistry platform for tuberculosis, or TB. In September 2013, GSK selected a compound for further development in TB and will be responsible for all further development and commercialization of this compound.

 

In August 2010, we entered into a research, license and commercialization agreement with Lilly, under which we are collaborating to discover products for a variety of animal health applications. Pursuant to this agreement, Lilly selected the first development compound for an animal health indication in August 2011 and, in December 2012, they selected a second development compound for another animal health indication. In September 2013, Lilly notified us that it was ceasing further development of the first compound; Lilly has granted us a fully paid, sublicenseable, perpetual, irrevocable, exclusive license to the related technology and patents. Lilly will be responsible for all further development and commercialization of the second compound.

 

In February 2011, we entered into a research and development option and license agreement with Medicis Pharmaceutical Corporation, or Medicis, to discover and develop compounds directed against a target for the potential treatment of acne, or the Medicis Agreement. On November 28, 2012, we filed for arbitration for breach of contract by Medicis seeking damages in the form of payment for the achievement of certain preclinical milestones under the collaboration. On December 11, 2012, Medicis filed a complaint for breach of the collaboration and a motion for preliminary injunction seeking to enjoin us from prosecuting our claims through arbitration and to require us to continue to use diligent efforts to conduct research and development under the agreement. Medicis was acquired by Valeant Pharmaceuticals International, Inc., or Valeant, in December 2012. On October 27, 2013, as part of a settlement with Valeant related to arbitration on another unrelated matter, we and Valeant agreed to withdraw all claims and complaints relating to arbitration or litigation in connection with the Medicis Agreement, to terminate the Medicis Agreement effective October 27, 2013 and that all rights and intellectual property under the Medicis Agreement would revert back to us.

 

In April 2013, we entered into a research agreement with the Bill & Melinda Gates Foundation, or the Gates Foundation, to discover drug candidates intended to treat two filarial worm diseases (onchocerciasis, or river blindness, and lymphatic filariasis, commonly known as elephantiasis) and TB. Under the agreement, the Gates Foundation will pay us up to $17.7 million over a three-year research term to conduct research activities directed at discovering potential neglected disease drug candidates in accordance with an agreed upon research plan. As part of the funded research activities, we are responsible for creating an expanded library of boron compounds to screen for additional potential drug candidates to treat neglected diseases, which will be accessible to the Gates Foundation and other third parties. Under the terms of the agreement, the Gates Foundation will have the exclusive right to commercialize selected drug candidates in specified neglected diseases in specified developing countries. We retain the exclusive right to commercialize any selected drug candidate outside of the specified neglected diseases as well as with respect to the specified neglected diseases in specified developed countries and would be obligated to pay the Gates Foundation royalties on specified license revenue received. The agreement will continue in effect until the later of five years from the effective date or the expiration of our specified obligation to provide access to the expanded library compounds.

 

23



Table of Contents

 

In connection with the Gates Foundation agreement, we issued 809,061 shares of unregistered common stock at a purchase price of $6.18 per share for aggregate gross proceeds of $5.0 million. The shares were subsequently registered with the SEC under a Form S-3 filed on June 28, 2013, which became effective on July 11, 2013. In the event of termination of the agreement by the Gates Foundation for certain specified uncured material breaches by us, we will be obligated, among other remedies, to either redeem our common stock purchased in connection with the agreement, facilitate the purchase of such common stock by a third party or elect to register the resale of such common stock into the public markets unless certain specified conditions are satisfied. In addition, the Gates Foundation agreement places certain restrictions on our use of the research funding and the redeemable common stock proceeds we receive from the Gates Foundation.

 

On October 16, 2013, we entered into a research agreement with the United States Department of Defense, Defense Threat Reduction Agency (DTRA) to design and discover new classes of systemic antibiotics. A drug discovery consortium formed by Colorado State University, the University of California at Berkeley and us will conduct the research over a three and a half year period. The work is funded by a $13.5 million award from DTRA’s R&D Innovation and Systems Engineering Office, which was established to search for and execute strategic investments in innovative technologies for combating weapons of mass destruction. Under this award, we will apply our boron chemistry to discover rationally designed novel antibiotics that target DTRA-priority pathogens known to exhibit resistance to existing antibiotics. The $13.5 million award is available to fund $2.7 million of research reimbursements for the first eleven month period through September 30, 2014, and an additional $5.0 million and $5.7 million will become available upon DTRA exercising their options to fund the subsequent twelve and nineteen-month periods, respectively.

 

We also have several collaborations with organizations that fund research leveraging our boron chemistry to discover new treatments for neglected diseases. In addition to potentially developing new therapies for such diseases, these collaborations provide us the potential benefits of expanding the chemical diversity of our boron compounds, understanding new properties of our boron compounds, receiving future incentives, such as the potential grant of a priority review voucher by the FDA, and ultimately, if a drug is approved, potential revenue in some regions. Our collaboration partners include DNDi to develop new therapeutics for HAT, visceral leishmaniasis and Chagas disease, MMV to develop compounds for the treatment of malaria, the Global Alliance for Livestock Veterinary Medicines (GALVMed) for the treatment of African animal trypanosomiasis and the Liverpool School of Tropical Medicine for the treatment of river blindness and lymphatic filariasis. In 2011, DNDi completed pre-clinical studies of AN5568 for HAT and, in March 2012, AN5568 became the first compound from our neglected diseases initiatives to enter human clinical trials.

 

In December 2012, we filed a shelf registration statement on Form S-3 with the SEC. The shelf registration was declared effective by the SEC on December 21, 2012 and permits us to sell, from time to time, up to $75.0 million of common stock, preferred stock, debt securities and warrants.

 

In January 2013, we entered into an equity distribution agreement with Wedbush Securities Inc., or Wedbush, under which we may, from time to time, offer and sell common stock having aggregate sales proceeds of up to $25.0 million through Wedbush, or to Wedbush, for resale. Sales of our common stock through Wedbush will be made by means of ordinary brokers’ transactions on The NASDAQ Global Market or otherwise at market prices prevailing at the time of sale, in block transactions, or as otherwise agreed upon by us and Wedbush and may be made in sales deemed to be “at-the-market” equity offerings. We will pay Wedbush a commission, or allow a discount, as the case may be, in each case equal to 2.0% of the gross sales proceeds of any common stock sold through Wedbush as agent under this agreement. We have also agreed to reimburse Wedbush for certain expenses up to an aggregate of $150,000, of which $45,000 has been incurred through September 30, 2013. Under the terms of this agreement, we also may sell our common stock to Wedbush, as principal for its own account, at a price to be agreed upon at the time of sale. Through September 30, 2013, we have sold 401,500 shares of our common stock under the Agreement. No shares were sold under this agreement during the three months ended September 30, 2013. The net proceeds from these sales were approximately $1.3 million, after deducting the underwriting discount and other offering costs, and we may sell up to an additional $23.6 million in authorized but unsold shares of our common stock under this agreement.

 

In May 2013, we issued and sold 3,599,373 shares of our common stock, including 469,483 shares issuable to the underwriters pursuant to the overallotment option, in connection with an underwriting agreement with Cowen and Company, LLC, as representative of the several underwriters. The price to the public in this offering was $6.39 per share, for gross proceeds of approximately $23.0 million, and the underwriters purchased the shares from us at a price of $6.0066 per share. Our net proceeds from this offering were approximately $21.3 million, after deducting the underwriting discount and other offering costs.

 

In June 2013, we entered into a loan and security agreement with Hercules Technology Growth Capital, Inc. as collateral agent and a lender and Hercules Technology III, L.P. as a lender, or together, Hercules, under which we may borrow up to $45.0 million in three tranches of $30.0 million, $10.0 million and $5.0 million. We borrowed the first tranche upon the closing of the transaction. We used $22.6 million of the proceeds to repay the remaining obligation under our previous loan and security agreement with Oxford Finance Corporation, or Oxford, and Horizon Technology Finance Corporation, or Horizon, and expect to use the remainder of the proceeds from the first tranche to fund development and commercialization activities related to our product candidates.

 

24



Table of Contents

 

In August 2013, we filed an additional shelf registration statement on Form S-3 with the SEC. The shelf registration was declared effective by the SEC on September 23, 2013 and permits us to sell, from time to time, up to $50.0 million of common stock, preferred stock, debt securities and warrants.

 

On October 24, 2012, we provided notice to Valeant, successor in interest to Dow Pharmaceutical Sciences, Inc., or DPS, seeking to commence arbitration before JAMS of a breach of contract dispute under a master services agreement dated March 26, 2004 between DPS and us related to certain development services provided by DPS in connection with our efforts to develop a topical antifungal product candidate for the treatment of onychomycosis. Our assertions included breach of contract, breach of implied covenant of good faith and fair dealing, misappropriation of trade secrets and unfair competition. The final hearing was held in September 2013 and, on October 17, 2013, the arbitrator issued an Interim Final Award in our favor for $100.0 million in damages as well as all costs of the arbitration and reasonable attorney’s fees. On October 27, 2013, we entered into a settlement agreement with Valeant and DPS pursuant to which Valeant agreed to pay us $142.5 million to settle all existing and future claims, including damages awarded in the October 17, 2013 arbitration ruling, and all other disputes between Valeant, DPS and us related to our intellectual property, confidential information and contractual rights. Under the settlement agreement, we provided Valeant with a paid-up, irrevocable, non-exclusive, worldwide license to all patents that contain claims covering efinaconazole, Valeant’s topical antifungal product candidate for the treatment of onychomycosis. In addition, the settlement agreement provided that both we and Valeant would withdraw all claims and complaints relating to arbitration or litigation in connection with the Medicis Agreement, that the Medicis Agreement would be terminated effective October 27, 2013 and that all rights and intellectual property under the Medicis Agreement revert back to us. Valeant made the $142.5 million payment to us on November 7, 2013.

 

We began business operations in March 2002. To date, we have not generated any revenue from product sales and have never been profitable. As of September 30, 2013, we have an accumulated deficit of $261.2 million. We have funded our operations primarily through the sale of equity securities, payments received under our agreements with Schering Corporation, or Schering, GSK, Lilly, Medicis and the Gates Foundation, government contracts and grants, contracts with not-for-profit organizations for neglected diseases and borrowings under debt arrangements. We expect to incur operating losses in future years. The size of our future operating losses will depend, in part, on the rate of growth of our expenses, our ability to enter into additional licensing, research and development agreements and future payments earned under our agreements with GSK, Lilly, the Gates Foundation, DTRA or any such future collaboration partners or research funding providers. Our intent is to enter into additional licensing and development agreements to further develop certain of our product candidates and to fund other areas of our research. If the GSK, Lilly, Gates Foundation or DTRA agreements are terminated or we are unable to enter into other collaboration or research funding agreements, we may incur additional operating losses and our ability to expand and continue our research and development activities and move our product candidates into later stages of development may be limited. Management believes that we currently have sufficient capital resources, including the $142.5 million payment received under our settlement agreement with Valeant and the available funds under our expanded debt facility, to fund our operations for at least the next twelve months.

 

Critical Accounting Policies and Significant Judgments and Estimates

 

Our management’s discussion and analysis of our financial condition and results of operations is based on our condensed financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these condensed financial statements requires us to make estimates and judgments 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 reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments related to revenue recognition, preclinical study and clinical trial accruals, accrued compensation, deferred advance payments and stock-based compensation. We base our estimates on historical experience and on various other factors that we believe to be reasonable under the circumstances and review our estimates on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions.

 

While our significant accounting policies are described in more detail in our Annual Report on Form 10-K, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our condensed financial statements.

 

25



Table of Contents

 

Revenue Recognition

 

Our contract revenues are generated primarily through research and development collaboration agreements, which typically may include non-refundable, non-creditable upfront fees, funding for research and development efforts, payments for achievement of specified development, regulatory and sales goals and royalties on product sales of licensed products.

 

For multiple element arrangements, we evaluate the components of each arrangement as separate elements based on certain criteria. Where multiple deliverables are combined as a single unit of accounting, revenues are recognized based on the performance requirements of the agreements. We recognize revenue when persuasive evidence of an arrangement exists; transfer of technology has been completed, services are performed or products have been delivered; the fee is fixed or determinable; and collection is reasonably assured.

 

For arrangements with multiple deliverables, we evaluate each deliverable to determine whether it qualifies as a separate unit of accounting. This determination is generally based on whether the deliverable has stand-alone value to the customer. The selling price used for each unit of accounting will be based on vendor-specific objective evidence, if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific nor third-party evidence is available. Our management may be required to exercise considerable judgment in determining whether a deliverable is a separate unit of accounting and in estimating the selling prices of identified units of accounting for new agreements.

 

Upfront payments for licensing our intellectual property are evaluated to determine if the licensee can obtain stand-alone value from the license separate from the value of the research and development services to be provided by us. Typically, we have determined that the licenses we have granted to collaborators do not have stand-alone value separate from the value of the research and development services provided. As such, upfront payments are recorded as deferred revenue in the condensed balance sheet and are recognized as contract revenue over the contractual or estimated performance period that is consistent with the term of the research and development obligations contained in the research and development collaboration agreement. When stand-alone value is identified, the related consideration is recorded as revenue in the period in which the license or other intellectual property rights are issued.

 

Some arrangements involving the licensing of our intellectual property, the provision of research and development services or both may also include exclusivity clauses whereby we agree that, for a specified period of time, we will not conduct further research on licensed compounds or on compounds that would compete with licensed compounds or that we will do so only on a limited basis. Such provisions may also restrict the future development or commercialization of such compounds. We do not treat such exclusivity clauses as a separate element within an arrangement and any upfront payments received related to the exclusivity clause would be allocated to the identified elements in the arrangement and recognized as described in the preceding paragraph.

 

Payments resulting from our efforts under research and development agreements or government grants are recognized as the activities are performed and are presented on a gross basis. Revenue is recorded gross because we act as a principal, with discretion to choose suppliers, bear credit risk and perform part of the services. The costs associated with these activities are reflected as a component of research and development expense in our condensed statements of operations and approximate the revenues recognized from such activities.

 

For certain contingent payments under research and development arrangements, we recognize revenue using the milestone method. Under the milestone method, a payment that is contingent upon the achievement of a substantive milestone is recognized in its entirety in the period in which the milestone is achieved. A milestone is an event (i) that can be achieved based in whole or in part on either our performance or on the occurrence of a specific outcome resulting from our performance, (ii) for which there is substantive uncertainty at the date the arrangement is entered into that the event will be achieved and (iii) that would result in additional payments being due to us. The determination that a milestone is substantive is judgmental and is made at the inception of the arrangement. Milestones are considered substantive when the consideration earned from the achievement of the milestone is (i) commensurate with either our performance to achieve the milestone or the enhancement of value of the item delivered as a result of a specific outcome resulting from our performance to achieve the milestone, (ii) relates solely to past performance and (iii) is reasonable relative to all deliverables and payment terms in the arrangement. In making the determination as to whether a milestone is substantive or not, we consider all facts and circumstances relevant to the arrangement, including factors such as the scientific, regulatory, commercial and other risks that must be overcome to achieve the respective milestone, the level of effort and investment required to achieve the respective milestone and whether any portion of the milestone consideration is related to future performance or deliverables.

 

Other contingent payments received for which payment is either contingent solely upon the passage of time or the results of a collaboration partner’s performance (bonus payments) are not accounted for using the milestone method. Such bonus payments will be recognized as revenue when earned and when collectibility is reasonably assured.

 

26



Table of Contents

 

Royalties based on reported sales of licensed products will be recognized based on contract terms when reported sales are reliably measurable and collectibility is reasonably assured. To date, none of our products have been approved and therefore we have not earned any royalty revenue from product sales.

 

Preclinical Study and Clinical Trial Accruals and Deferred Advance Payments

 

We estimate preclinical study and clinical trial expenses based on the services performed pursuant to contracts with research institutions and clinical research organizations that conduct these activities on our behalf. In recording service fees, we estimate the time period over which the related services will be performed and compare the level of effort expended through the end of each period to the cumulative expenses recorded and payments made for such services and, as appropriate, accrue additional service fees or defer any non-refundable advance payments until the related services are performed. If the actual timing of the performance of services or the level of effort varies from our estimate, we will adjust our accrual or deferred advance payment accordingly. If we underestimate or overestimate the level of services performed or the costs of these services, our actual expenses could differ from our estimates. To date, we have not experienced significant changes in our estimates of preclinical study and clinical trial accruals.

 

Stock-Based Compensation

 

Employee stock-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the employee’s requisite service period (generally the vesting period). Stock option awards granted to our nonemployee directors for their board-related services are included in employee stock-based compensation in accordance with current accounting standards. We use the Black-Scholes option-pricing model to estimate the fair value of our stock-based awards and use the straight-line (single-option) method for expense attribution. We estimate forfeitures and recognize expense only for those shares expected to vest.

 

We account for equity instruments issued to nonemployees based on their fair values on the measurement dates using the Black-Scholes option-pricing model. The fair values of the options granted to nonemployees are remeasured as they vest. As a result, the noncash charge to operations for nonemployee options with vesting is affected each reporting period by changes in the fair value of our common stock.

 

We recorded noncash stock-based compensation for employee and nonemployee stock option grants and ESPP stock purchase rights of $1.3 million and $0.9 million for the three months ended September 30, 2013 and 2012, respectively and $3.3 million and $2.7 million for the nine months ended September 30, 2013 and 2012, respectively. As of September 30, 2013, we had outstanding options to purchase 4,924,864 shares of our common stock and had $8.3 million of unrecognized stock-based compensation expense, net of estimated forfeitures, related to outstanding stock options and $0.2 million related to ESPP stock purchase rights that will be recognized over weighted-average periods of 2.4 and 0.6 years, respectively. There were 42,934 and 95,373 common shares purchased under the ESPP for the three and nine months ended September 30, 2013, respectively. We expect to continue to grant stock options and ESPP stock purchase rights in the future, which will increase our stock-based compensation expense in future periods. If any of the assumptions used in the Black-Scholes model change significantly, stock-based compensation expense may differ materially in the future from that recorded in the current period.

 

Recent Accounting Pronouncements

 

In February 2013, a new accounting standard was issued that amended existing guidance to improve the reporting of reclassifications out of accumulated other comprehensive income. The new standard requires the disclosure of significant amounts reclassified from each component of accumulated other comprehensive income and the income statement line items affected by the reclassification. The standard is effective prospectively for interim and annual periods beginning after December 15, 2012. We adopted this guidance as of January 1, 2013 and its adoption did not have an effect on our financial statements.

 

In July 2013, a new accounting standard was issued that requires the netting of unrecognized tax benefits against a deferred tax asset for a net operating loss or other carryforward that would apply in the settlement of uncertain tax positions. Under the new standard, unrecognized tax benefits will be netted against all available same-jurisdiction net operating loss or other tax carryforwards that would be utilized, rather than only against carryforwards that are created by the unrecognized tax benefits. The new standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. We are in the process of evaluating the impact of the new standard on the condensed financial statements.

 

27



Table of Contents

 

Results of Operations

 

Comparison of the Three and Nine Months Ended September 30, 2013 and 2012

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2013

 

2012

 

Increase/
(decrease)

 

2013

 

2012

 

Increase/
(decrease)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract revenue

 

$

3,611

 

$

2,473

 

$

1,138

 

$

8,743

 

$

7,452

 

$

1,291

 

Research and development expenses(1)

 

12,460

 

13,551

 

(1,091

)

33,765

 

40,319

 

(6,554

)

General and administrative expenses(1)

 

6,809

 

2,751

 

4,058

 

16,611

 

8,852

 

7,759

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

15

 

13

 

2

 

43

 

53

 

(10

)

Interest expense

 

1,135

 

616

 

519

 

2,949

 

1,908

 

1,041

 

Loss on early extinguishment of debt

 

 

 

 

1,381

 

 

1,381

 

Other expense

 

31

 

12

 

19

 

63

 

37

 

26

 

 


(1)                     Includes the following stock-based compensation expenses:

 

Research and development expenses

 

$

744

 

$

496

 

$

248

 

$

1,910

 

$

1,484

 

$

426

 

General and administrative expenses

 

545

 

381

 

164

 

1,393

 

1,251

 

142

 

 

Comparison of the Three Months Ended September 30, 2013 and 2012

 

Contract revenue. For the three months ended September 30, 2013, we recognized $1.7 million for research services performed under the Gates Foundation agreement, $0.1 million of which related to an aggregate of $0.8 million of reimbursements for services performed prior to the effective date of the agreement. We also recognized $0.8 million for research funding and $0.2 million of the $3.5 million upfront fee received under our collaboration with Lilly, $0.4 million for research funding under our collaboration agreement with GSK and $0.5 million for research work performed under our agreements with not-for-profit organizations for neglected diseases. For the three months ended September 30, 2012, we recognized $0.9 million for research funding and $0.2 million of the $3.5 million upfront fee received under our collaboration agreement with Lilly, $0.3 million of the $7.0 million upfront fee received under the Medicis Agreement and $0.3 million for research funding under our collaboration agreement with GSK. We also recognized $0.8 million for research work performed under other research and development agreements, including our agreements with not-for-profit organizations for neglected diseases. We expect to recognize the remaining $4.8 million of the $7.0 million upfront fee received under the Medicis Agreement in the fourth quarter of 2013 as a consequence of the termination of that agreement.

 

Research and development expenses. Research and development expenses consist primarily of costs associated with research activities, as well as costs associated with our product development efforts, including preclinical studies and clinical trials. Research and development expenses, including those paid to third parties, are recognized as incurred. Research and development expenses include:

 

·                  external research and development expenses incurred pursuant to agreements with third-party manufacturing organizations, contract research organizations and investigational sites;

 

·                  employee and consultant-related expenses, which include salaries, benefits, stock-based compensation and consulting fees;

 

·                  third-party supplier expenses; and

 

·                  facilities, depreciation and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities, amortization or depreciation of leasehold improvements and equipment, laboratory supplies and other expenses.

 

Research and development expenses decreased by $1.1 million for the three months ended September 30, 2013 as compared to the same period in the prior year. Although expenses for our tavaborole program decreased by $4.5 million, this decrease was partially offset by increases of $2.7 million and $1.6 million, respectively, in our AN2728 program and under our new research agreement with the Gates Foundation. As our tavaborole Phase 3 and cardiac safety clinical trials were completed in 2013, our third quarter 2013 costs for this program were lower than they were for the same period in 2012 when we were actively conducting two fully-enrolled Phase 3 trials, the cardiac safety trial and the repeat insult patch test (RIPT) study. Our NDA for tavaborole was filed in

 

28



Table of Contents

 

July 2013 and our consulting costs and internal efforts were lower in the third quarter of 2013 as compared to the third quarter of 2012, when we were actively involved in preparation for this filing. In addition, in the third quarter of 2012, we were developing the processes to manufacture this product in commercial quantities and preparing registration batches, whereas our manufacturing activities have been more limited in the third quarter of 2013. Our total expenses for AN2728 were higher for the third quarter of 2013 compared to the same period in 2012, primarily from increases in costs related to clinical trials, consulting and internal efforts for the current period, partially offset by lower costs for manufacturing activities and preclinical studies. In the third quarter of 2013, we were actively enrolling patients in our Phase 1 absorption trial and cardiac safety trial, performing initial manufacturing and regulatory activities in preparation for our Phase 3 clinical trials and performing long-term preclinical studies. During the third quarter of 2012, our AN2728-related activities were less extensive and included initiation of two less costly Phase 2 trials in adolescents, manufacturing and labeling of supplies for both the Phase 2 trials and our preclinical studies and conducting long-term preclinical studies.

 

Due to our disputes and related legal proceedings with Medicis, we suspended our research and development efforts for this collaboration in 2013 and, as a result, we had no Medicis-related research expenses in the third quarter of 2013 compared to $0.2 million in the same period in 2012. For the third quarter of 2013, there was a $0.7 million decrease in our research and development spending for our Lilly collaboration and for other research activities, including our neglected diseases programs, when compared to the same period in 2012. Our Lilly collaboration spending declined versus the same quarter in 2012 as decreases in expenses for domestic animal indications outweighed our increased spending on food animal indications. Expenses for other research activities, including neglected diseases programs, decreased mainly due to lower expenses for filarial worm, malaria and early-stage research than were incurred in the same quarter last year.

 

We expect our quarterly research and development expenses for the remainder of 2013 to be comparable to those for the third quarter of 2013, as the decline in clinical trial costs due to the completion of our Phase 3 trials for tavaborole is expected to be offset by increased development and clinical costs for AN2728, increased spending under our new research agreements with the Gates Foundation and DTRA and continued spending for our Lilly collaboration and our neglected diseases initiatives. We expect no further Medicis-related research expenditures as a consequence of the termination of that agreement.

 

General and administrative expenses. General and administrative expenses consist primarily of salaries and related costs, including stock-based compensation and travel expenses, for personnel in our executive, finance, business development and other administrative functions and professional fees for legal services, including patent-related services, and auditing and tax services. Other general and administrative expenses include facility-related costs not otherwise included in research and development expenses and consulting fees associated with financial, business development and marketing-related services.

 

The increase in general and administrative expenses of $4.1million in the third quarter of 2013 compared to the same period in 2012 was primarily due to an increase in legal fees, which resulted from the legal proceedings for our disputes with Valeant and Medicis, and marketing activities for tavaborole.

 

We expect that general and administrative expenses will decrease in the future due to reduced legal fees related to our disputes with Valeant and Medicis. However, depending on the decisions we make regarding the manner in which tavaborole is to be commercialized, these decreases may be outweighed by increased expenses for sales and marketing activities and the hiring of additional staff to support our commercialization efforts.

 

Interest income. Interest income for the third quarter of 2013 was comparable to the same period in 2012.

 

Interest expense. Interest expense increased for the three months ending September 30, 2013 compared to the same period in 2012 due to the higher outstanding balance of our debt.

 

Other expense. The increase in other expense in the third quarter of 2013 compared to the same period in 2012 was a result of higher deferred financing fees amortization related to our expanded debt facility.

 

Comparison of the Nine Months Ended September 30, 2013 and 2012

 

Contract revenue. For the nine months ended September 30, 2013, we recognized $3.0 million for research services performed under our research agreement with the Gates Foundation, $0.1 million of which related to an aggregate of $0.8 million of reimbursements for services performed prior to the effective date of the agreement, and $1.0 million under our collaboration agreement with GSK, primarily for research funding. We also recognized $1.6 million for research work performed under research and development agreements with not-for-profit organizations for neglected diseases. During the nine months ended September 30, 2013, we recognized $2.4 million for research funding under our Lilly agreement, compared to $2.5 million for the same period in 2012, and in both periods we recognized $0.7 million of the $3.5 million upfront fee received under the Lilly agreement. For the nine

 

29



Table of Contents

 

months ended September 30, 2012, we recognized $1.1 million under our collaboration agreement with GSK, primarily for research funding, and $2.3 million for research work performed under research and development agreements, including our agreements with not-for-profit organizations for neglected diseases. Our legal disputes with Medicis resulted in us suspending our research work under the Medicis Agreement in 2013 and recognizing no revenues from this contract during the nine months ended September 30, 2013, compared to the same period in 2012 when we recognized $0.9 million of the $7.0 million upfront fee received under the Medicis Agreement. We expect to recognize the remaining $4.8 million of the $7.0 million upfront fee received under the Medicis Agreement in the fourth quarter of 2013 as a consequence of the termination of that agreement.

 

Research and development expenses. Research and development expenses decreased by $6.6 million for the nine months ended September 30, 2013 as compared with the same period in the prior year, primarily due to decreases in costs for our tavaborole program of $8.0 million, partially offset by a $1.6 million increase in our AN2728 program expenses. As our tavaborole Phase 3 clinical trials were completed in early 2013, our costs for the nine months ending September 30, 2013 were lower than in the comparable period in 2012 when we were actively conducting our Phase 3 clinical trials and a cardiac safety trial. Partially offsetting the decrease in clinical trial costs were increased costs for consulting and internal efforts as we prepared for our tavaborole NDA filing in July 2013. The $1.6 million increase in AN2728 costs occurred mainly due to our increased clinical trial activity in the first nine months of 2013, partially offset by less extensive drug development activities for this product candidate as compared to the same period in 2012. In the first nine months of 2013, we were actively conducting and completing our Phase 2 dose-ranging trial, completing our Phase 2 safety trial and enrolling subjects in our Phase 1 MUSE and cardiac safety trials while, during the same period in 2012, our AN2728 clinical activities were limited to planning for, and enrolling patients in, our less costly Phase 2 clinical trials. In the first nine months of 2013, our AN2728 drug development efforts were limited to continuation of some preclinical studies initiated in the prior year and initial manufacturing activities in preparation for our Phase 3 trial and certain regulatory requirements, whereas in the same period in 2012, we were conducting multiple preclinical safety studies for AN2728 as well as manufacturing drug supplies for both our preclinical studies and our planned clinical trials.

 

During the first nine months of 2013 as compared to the same period in 2012, our research and development expenses increased by $3.6 million as a result of new research activities under our April 2013 research agreement with the Gates Foundation. These increases were offset by a $2.0 million decrease in expenses due to the suspension of our research and development activities relating to our Medicis collaboration, a combined $0.3 million decrease in research expenses under our collaborations with GSK and Lilly and a $1.5 million decrease in our spending on other research activities, including our neglected diseases programs.

 

General and administrative expenses. The increase in general and administrative expenses of $7.8 million in the first nine months of 2013 compared to the same period in 2012 was primarily due to increases in legal fees resulting from our legal proceedings with Valeant and Medicis and increased marketing activities for tavaborole.

 

Interest income. The decrease in interest income for the nine months ended September 30, 2013 compared to the same period in 2012 was due to a reduction in average investment balances.

 

Interest expense and loss on early extinguishment of debt. Interest expense increased for the first nine months of 2013 compared to the same period in 2012 due to the higher outstanding balance of our debt. Upon the early extinguishment of our debt with Oxford and Horizon in June 2013, we incurred a loss of $1.4 million, which consisted of the unaccrued balance of the final payment, the unamortized balances of the debt discount and deferred issuance costs and a prepayment penalty

 

Other expense. Amortization of deferred financing fees  increased for the nine months ended September 30, 2013 compared to the same period in 2012 due to our expanded debt facility.

 

Liquidity and Capital Resources

 

Since our inception, we have financed our operations primarily through our initial public offering, or IPO, in November 2010, common stock offerings, private placements of equity securities, funding from our agreements with Schering, GSK, Lilly, Medicis, the Gates Foundation and organizations that fund neglected diseases research, government contract and grant funding and debt arrangements. We have also earned interest on our cash, cash equivalents and short-term investments. At September 30, 2013, we had cash, cash equivalents, short-term investments and restricted investments of $39.3 million, including $4.7 million of restricted investments.

 

30



Table of Contents

 

The following table sets forth the primary sources and uses of cash for each of the periods presented below (in thousands):

 

 

 

Nine Months Ended Sept 30,

 

 

 

2013

 

2012

 

Net cash used in operating activities

 

$

(36,532

)

$

(43,524

)

Net cash provided by investing activities

 

1,733

 

12,771

 

Net cash provided by financing activities

 

30,539

 

30,160

 

Net decrease in cash and cash equivalents

 

$

(4,260

)

$

(593

)

 

Net cash used in operating activities was $36.5 million and $43.5 million for the nine months ended September 30, 2013 and 2012, respectively. The net cash used in operating activities for the nine months ended September 30, 2013 primarily reflected our net loss adjusted for noncash items, partially offset by changes in operating assets and liabilities. For the same period in 2012, the net cash used in operating activities resulted from our net loss adjusted for noncash items plus cash used in connection with changes in operating assets and liabilities.

 

Net cash provided by investing activities was $1.7 million for the nine months ended September 30, 2013 compared to $12.8 million during the nine months ended September 30, 2012. The activities for both periods were primarily related to the purchases of investments and property and equipment, net of the proceeds from the maturities of investments. In addition, for the nine months ended September 30, 2013, our net transfers of short-term investments to restricted investments, primarily as a result of restrictions placed on our use of the redeemable common stock proceeds and the research funding received from the Gates Foundation under our Gates Foundation agreement, were $4.5 million.

 

Net cash provided by financing activities was $30.5 million for the nine months ended September 30, 2013 compared with $30.2 million for the same period in the prior year. The net cash provided by financing activities for the first nine months of 2013 was primarily due to the net proceeds of $21.3 million from the sale of our common stock in May 2013 and the net proceeds of $1.3 million from the sale of common stock related to our “at-the-market” common stock offering in the first quarter of 2013. In addition, cash was provided from the $30.0 million drawdown of the first tranche under our new debt facility with Hercules, offset by the $28.2 million paid for the regularly scheduled principal payments and remaining obligations under the Oxford and Horizon debt facility and for the financing fees, debt issuance costs and loan fees associated with the new Hercules debt. In connection with the research agreement with the Gates Foundation, we also issued shares of redeemable common stock for net proceeds of $5.0 million. Stock option exercises and employee stock plan purchases also contributed $1.2 million to the net cash provided by financing activities for the first nine months of 2013. The cash provided by financing activities in the first nine months of 2012 was primarily due to net proceeds of $19.9 million from the sale of our common stock in February 2012, $12.0 million in proceeds from the drawdown of the third tranche under our loan facility with Oxford and Horizon in September 2012, partially offset by $2.2 million in scheduled principal payments related to the loan, and $0.5 million in proceeds from stock option exercises and employee stock plan purchases.

 

Our independent registered public accounting firm has included in their audit opinion for the year ended December 31, 2012 a statement with respect to our ability to continue as a going concern. However, our financial statements have been prepared assuming we will continue to operate as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.

 

We believe that our existing capital resources, including the $142.5 million settlement payment received from Valeant in November 2013 and the remaining $15.0 million of borrowing capacity under our expanded debt facility with Hercules, will be sufficient to meet our anticipated operating requirements for at least the next twelve months. Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially.

 

Our future capital requirements are difficult to forecast and will depend on many factors, including:

 

·                  the initiation, progress, timing, costs and results of preclinical studies and clinical trials for our product candidates and potential product candidates, including our ongoing and/or planned trials for AN2728;

 

·                  the success of our efforts under our contracts with GSK, Lilly, the Gates Foundation and DTRA and the attainment of contingent event-based payments and royalties, if any, under those agreements;

 

·                  the number and characteristics of product candidates that we pursue;

 

·                  the terms and timing of any future collaboration, licensing or other arrangements that we may establish;

 

31



Table of Contents

 

·                  the outcome, timing and cost of regulatory approvals, including the tavaborole NDA approval;

 

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

 

·                  the effect of competing technological and market developments;

 

·                  the cost and timing of completion of commercial-scale outsourced manufacturing activities;

 

·                  the cost of establishing sales, marketing and distribution capabilities for any product candidates for which we may receive regulatory approval; and

 

·                  the extent to which we acquire or invest in businesses, products or technologies.

 

If, over the next several years, adequate funds are not available, we may be required to delay, reduce the scope of or eliminate some, or all, of the above activities.

 

Although we believe that our existing capital resources, including the $142.5 million settlement payment received from Valeant in November 2013 and the remaining borrowing capacity under our expanded debt facility will be adequate to fund operations for at least the next twelve months, we may elect to finance certain future cash needs through public or private equity offerings, debt financings or a possible license, collaboration or other similar arrangement with respect to commercialization rights to tavaborole or any of our other product candidates, or a combination of the above.

 

Contractual Obligations

 

Our contractual obligations consist primarily of obligations under lease agreements and our notes payable obligations. The following table summarizes our contractual obligations at September 30, 2013 and the effect such obligations are expected to have on our liquidity and cash flow in future years.

 

 

 

Payments due by period (in thousands)

 

 

 

Total

 

Remainder of
2013

 

1 - 3 years

 

3 - 5 years

 

Thereafter

 

Contractual obligations:

 

 

 

 

 

 

 

 

 

 

 

Operating leases

 

$

7,412

 

$

194

 

$

3,430

 

$

3,358

 

$

430

 

Notes payable

 

39,235

 

883

 

17,433

 

20,919

 

 

Total contractual obligations

 

$

46,647

 

$

1,077

 

$

20,863

 

$

24,277

 

$

430

 

 

Operating Leases

 

In May 2013, we amended the lease for our 36,960 square-foot building consisting of office and laboratory space in Palo Alto, California, which serves as our corporate headquarters. Under the amendment, the landlord was granted a right to terminate the lease as early as June 2016, with a twelve month written notice. The original expiration date of the lease was March 2018. As consideration for entering into the amendment, we received a rent credit of $0.7 million, which will be applied to the monthly base rent under the original lease commencing June 1, 2013 for six months. In September 2013, we extended our lease for our 15,300 square-foot building for twelve months through December 2014. The future payments under the lease amendment are included in the table of contractual obligations above. See Note 5 to the condensed financial statements.

 

Notes Payable

 

On June 7, 2013, we entered into a loan and security agreement with Hercules to provide up to $45.0 million, available in three tranches of $30.0 million, $10.0 million and $5.0 million each (see Note 6 to the condensed financial statements). The first $30.0 million tranche was drawn on June 7, 2013, at which time we repaid $22.6 million of the remaining obligations under our previous debt facility with Oxford and Horizon. The future payments under the new debt facility are included as notes payable in the table of contractual obligations above.

 

32



Table of Contents

 

Contracts

 

We enter into contracts in the normal course of business with clinical research organizations for clinical trials and clinical supply manufacturing and with vendors for preclinical research studies, research supplies and other services and products for operating purposes. These contracts generally provide for termination on notice, and therefore we believe that our non-cancelable obligations under these agreements are not material.

 

Off-Balance Sheet Arrangements

 

We currently have no off-balance sheet arrangements, such as structured finance, special purpose entities or variable interest entities.

 

Interest Rate Risk

 

The primary objective of our investment activities is to preserve our capital for the purpose of funding operations while at the same time maximizing the income we receive from our investments without significantly increasing risk. To achieve these objectives, our investment policy allows us to maintain a portfolio of cash equivalents and short-term investments in a variety of high credit quality securities, including U.S. government instruments, commercial paper, money market funds and corporate debt securities. Our investment policy prohibits us from holding auction rate securities or derivative financial instruments. To the extent that the investment portfolios of companies whose commercial paper is included in our investment portfolio may be subject to interest rate risks, which could be negatively impacted by reduced liquidity in auction rate securities or derivative financial instruments they hold, we may also be subject to these risks. However, our investment portfolio as of  September 30, 2013 is comprised of a money market fund and federal agency securities with minimum ratings of AAA or AA+ and the remaining average maturity of the entire portfolio is 121 days. Due to the short-term nature of our investments, we believe that there is no material exposure to interest rate risk and we are not aware of any material exposure to market risk.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

A discussion of our exposure to, and management of, market risk appears in Part I, Item 2 of this Quarterly Report on Form 10-Q under the heading “Interest Rate Risk.”

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of disclosure controls and procedures

 

Based on the evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934, as amended (the Exchange Act)) required by Rules 13a-15(b) or 15d-15(b) of the Exchange Act, our Chief Executive Officer and Chief Financial Officer have concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective.

 

Changes in internal controls

 

There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

33



Table of Contents

 

PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

On October 24, 2012, we provided notice to Valeant Pharmaceuticals International, Inc. ((Valeant), successor in interest to Dow Pharmaceutical Sciences, Inc. (DPS)) seeking to commence arbitration before JAMS of a breach of contract dispute under a master services agreement dated March 26, 2004 between DPS and us related to certain development services provided by DPS in connection with our efforts to develop our topical antifungal product candidate for the treatment of onychomycosis. Our assertions included breach of contract, breach of implied covenant of good faith and fair dealing, misappropriation of trade secrets and unfair competition. We were seeking injunctive relief and damages of at least $215.0 million. The final hearing was held in September 2013 and, on October 17, 2013, the arbitrator issued an Interim Final Award in our favor for $100.0 million in damages as well as all costs of the arbitration and reasonable attorney’s fees.

 

On November 28, 2012, we filed an arbitration demand before JAMS alleging breach of contract by Medicis Pharmaceutical Corporation (Medicis) under the February 9, 2011 research and development option and license agreement between Medicis and us (the Medicis Agreement) and seeking damages in the form of payment for the achievement of certain preclinical milestones under that agreement. On December 11, 2012, Medicis filed a complaint for breach of the Medicis Agreement and a motion for preliminary injunction in the Delaware Court of Chancery seeking to enjoin us from prosecuting our claims through arbitration and to require us to continue to use diligent efforts to conduct research and development under the Medicis Agreement. Medicis was acquired by Valeant in December 2012. On January 16, 2013, we filed a motion requesting that the Delaware Court of Chancery dismiss the Medicis suit and send the dispute back to arbitration. On February 15, 2013, Medicis filed a brief in opposition to our motion to dismiss in favor of arbitration. On March 4, 2013, we filed a reply brief in support of our motion to dismiss. On August 12, 2013, following completion of the oral arguments on the motion to dismiss, we received a ruling on the motion to dismiss that the matter should not be limited to arbitration as the proceeding for resolution of the dispute. On October 11, 2013, the parties filed a stipulation with the Delaware Court of Chancery which permitted Medicis to file an amended complaint.

 

On October 27, 2013, we entered into a settlement agreement with Valeant and DPS pursuant to which Valeant agreed to pay us $142.5 million to settle all existing and future claims, including damages awarded in the October 17, 2013 arbitration ruling, and all other disputes between Valeant, DPS and us related to our intellectual property, confidential information and contractual rights. Under the settlement agreement, we agreed to provide Valeant a paid-up, irrevocable, non-exclusive, worldwide license to all patents that contain claims covering efinaconazole. In addition, the settlement agreement provided that both we and Valeant would withdraw all claims and complaints relating to arbitration or litigation in connection with the Medicis Agreement, that the Medicis Agreement would be terminated effective October 27, 2013 and that all rights and intellectual property under the Medicis Agreement would revert back to us. Valeant made the $142.5 million payment to us on November 7, 2013.

 

ITEM 1A. RISK FACTORS

 

Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors, as well as the other information in this Quarterly Report on Form 10-Q, before deciding whether to invest in shares of our common stock. The occurrence of any of the following adverse developments described in the following risk factors could harm our business, financial condition, results of operations or prospects. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.

 

We have marked with an asterisk (*) those risk factors that reflect material changes from the risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2012 filed with the Securities and Exchange Commission on March 18, 2013.

 

Risks Relating to Our Financial Position and Need for Additional Capital

 

We have never been profitable. Currently, we have no products approved for commercial sale, and to date we have not generated any revenue from product sales. As a result, our ability to curtail our losses and reach profitability is unproven, and we may never achieve or sustain profitability.*

 

We are not profitable and do not expect to be profitable in the foreseeable future. We have a net loss for the nine months ended September 30, 2013 and 2012 of $46.0 million and $43.6 million, respectively, and have incurred net losses in each year since our inception, including net losses of approximately $56.1 million, $47.9 million and $10.1 million for 2012, 2011 and 2010, respectively, and as of September 30, 2013, we had an accumulated deficit of approximately $261.2 million. We have devoted most of

 

34



Table of Contents

 

our financial resources to research and development, including our preclinical development activities and clinical trials. We have not completed development of any product candidate and we have therefore not generated any revenues from product sales. We expect that research and development expenses will remain comparable in the future as we progress our product candidates through clinical development, conduct our research and development activities under our various current and potential collaborations, including those related to our neglected diseases initiatives, advance our discovery research projects into the preclinical stage and continue our early-stage research. As a result of the foregoing, we expect to continue to experience net losses and negative cash flows for the foreseeable future. These losses and negative cash flows have had, and will continue to have, an adverse effect on our stockholders’ equity and working capital.

 

Because of the numerous risks and uncertainties associated with pharmaceutical product development, we are unable to accurately predict the timing or amount of our expenses or when, or if, we will be able to achieve or maintain profitability. In addition, our expenses could increase if we are required by the United States Food and Drug Administration, or FDA, to perform studies in addition to, or that are larger than, those that we currently expect. To date, we have financed our operations primarily through the sale of equity securities, debt arrangements, government contracts and grants and payments under our agreements with GlaxoSmithKline LLC, or GSK, Schering Corporation, or Schering, Eli Lilly and Company, or Lilly, Medicis Pharmaceutical Corporation, or Medicis, and the Bill and Melinda Gates Foundation, or the Gates Foundation. The size of our future net losses will depend, in part, on our future expenses and our ability to generate revenues. While we will no longer receive revenues from our collaboration with GSK from the development of AN3365 (formerly known as GSK ‘052), GSK selected a compound for further development in tuberculosis and will be responsible for all further development and commercialization of this compound. Future milestones and revenues under our agreement with GSK may not be achieved as the other molecules under the collaboration are at a much earlier stage of development such that GSK may not exercise its option to license additional product candidates that may be identified pursuant to our agreement, these product candidates may not receive regulatory approval or, if they are approved, such product candidates may not be accepted in the market. Revenues from our collaborations with GSK and Lilly are uncertain because milestones or other contingent payments under our agreements with them may not be achieved or received. In addition, we may not be able to enter into other collaborations that will generate significant cash. If we are unable to develop and commercialize one or more of our product candidates, or if revenues from any product candidate that receives marketing approval are insufficient, we will not achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability.

 

Our independent registered public accounting firm has indicated that our financial condition raises substantial doubt as to our ability to continue as a going concern.*

 

Our independent registered public accounting firm has included in their audit opinion for the year ended December 31, 2012 a statement with respect to our ability to continue as a going concern. However, our financial statements have been prepared assuming we will continue to operate as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.

 

If we become unable to continue as a going concern, we may have to liquidate our assets and the values we receive for our assets in liquidation or dissolution could be significantly lower than the values reflected in our financial statements. The reaction of investors to the inclusion of a going concern statement by our auditors, our current lack of cash resources and our potential inability to continue as a going concern may materially adversely affect our share price and our ability to raise new capital, enter into strategic alliances and/or make our scheduled debt payments on a timely basis or at all.

 

We believe that our existing capital resources, including the $142.5 million settlement payment received from Valeant Pharmaceuticals International, Inc. (Valeant) in November 2013 and the funds available under our expanded debt facility will be sufficient to meet our anticipated operating requirements for at least the next twelve months, which extends beyond the anticipated FDA approval of tavaborole. While we believe that we currently have sufficient resources to fund our operations for at least the next twelve months, we will need to obtain additional capital to complete the development and potential commercialization of tavaborole, fund our other research and development activities and meet our operating requirements beyond the next twelve months. Furthermore, any delays in, or unanticipated costs for, our development and regulatory efforts could significantly increase the amount of additional capital required for us to conduct these research, development and commercialization activities and meet our operating requirements beyond the next twelve months.

 

We have a limited operating history and we expect a number of factors to cause our operating results to fluctuate on a quarterly and annual basis, which may make it difficult to predict our future performance.*

 

Our operations to date have been primarily limited to developing our technology and undertaking preclinical studies and clinical trials of our product candidates and we are reliant on collaborators for certain of our other products. We have not yet obtained regulatory approvals for any of our product candidates. Consequently, any predictions you make about our future success or viability may not be as accurate as they could be if we had a longer operating history and/or approved products on the market. Our financial

 

35



Table of Contents

 

condition and operating results have varied significantly in the past and will continue to fluctuate from quarter-to-quarter or year-to-year due to a variety of factors, many of which are beyond our control. Factors relating to our business that may contribute to these fluctuations include the following risk factors, as well as other factors described elsewhere in this Quarterly Report on Form 10-Q:

 

·                  our ability to obtain additional funding to develop our product candidates;

 

·                  the need to obtain and maintain regulatory approval for tavaborole, for which we filed an NDA in July 2013, and which was accepted for filing by the FDA in September 2013 with a Prescription Drug User Fee Act (PDUFA) V goal date of July 29, 2014, AN2728, or any of our other product candidates;

 

·                  delays in the approval of the tavaborole NDA as well as commencement, enrollment and the timing of clinical testing for our product candidates;

 

·                  the success of our clinical trials through all phases of clinical development, including our recently-completed Phase 3 clinical trials of tavaborole and planned trials of AN2728;

 

·                  any delays in regulatory review and approval of product candidates in clinical development;

 

·                  potential side effects of our product candidates that could delay or prevent commercialization or cause an approved drug to be taken off the market;

 

·                  our ability to develop systemic product candidates;

 

·                  market acceptance of our product candidates;

 

·                  our ability to establish an effective sales and marketing infrastructure;

 

·                  competition from existing products or new products that may emerge;

 

·                  the ability of patients or healthcare providers to obtain coverage of or sufficient reimbursement for our products;

 

·                  our ability to receive approval and commercialize our product candidates outside of the United States;

 

·                  our dependency on third-party manufacturers to supply or manufacture our products;

 

·                  our ability to establish or maintain collaborations, licensing or other arrangements;

 

·                  our ability and third parties’ abilities to protect intellectual property rights;

 

·                  costs related to and outcomes of current and potential litigation;

 

·                  our ability to adequately support future growth;

 

·                  our ability to attract and retain key personnel to manage our business effectively;

 

·                  our ability to maintain our accounting systems and controls;

 

·                  potential product liability claims;

 

·                  potential liabilities associated with hazardous materials; and

 

·                  our ability to maintain adequate insurance policies.

 

Due to the various factors mentioned above, and others, the results of any quarterly or annual periods should not be relied upon as indications of future operating performance.

 

36



Table of Contents

 

We may continue to require substantial additional capital and if we are unable to raise capital when needed, we would be forced to delay, reduce or eliminate our product development programs.*

 

Developing and obtaining approval for pharmaceutical products, including conducting preclinical studies and clinical trials and obtaining sufficient data for regulatory approval, is expensive. If the FDA requires that we perform additional studies beyond those that we currently expect, our expenses could increase beyond what we currently anticipate and the timing of any potential product approval may be delayed. We raised $21.5 million, $24.0 million and $23.0 million in February 2012, October 2012 and May 2013, respectively, through public offerings of our common stock. The net proceeds from these offerings were approximately $19.9 million, $22.6 million and $21.3 million, respectively, after deducting the underwriting discounts and other offering costs. Under our January 2013 “at-the-market” stock offering, through September 30, 2013, we sold shares of our common stock for net proceeds of approximately $1.3 million and we currently have approximately $23.6 million potentially remaining available for sale under this offering. In April 2013, we sold shares of our common stock for net proceeds of approximately $5.0 million. Beyond the $15.0 million of additional debt drawdowns under our new debt facility with Hercules Technology Growth Capital, Inc. and Hercules Technology III, L.P., or together, Hercules, $5.0 million of which is available upon the FDA approval of tavaborole, we have no other commitments or arrangements for any additional financing to fund our research and development programs other than through research funding under our collaboration with Lilly, and though the research agreement with the U.S. Department of Defense, Defense Threat Reduction Agency (DTRA); reimbursements from our various collaborations related to our neglected diseases initiatives, including from our Gates Foundation collaboration; and contingent milestone or royalty payments from GSK or Lilly, which we may not receive. In October 2013, we signed a settlement agreement with Valeant and DPS whereby we received $142.5 million from Valeant in November 2013. We believe that our existing capital resources will be sufficient to meet our anticipated operating requirements for at least the next twelve months. While we believe that we currently have sufficient resources to fund our operations for at least the next twelve months, we will need to raise additional capital to complete the development and potential commercialization of tavaborole, fund our other research and development activities and meet our operating requirements beyond the next twelve months. Furthermore, any delays in, or unanticipated costs for, our development and regulatory efforts could significantly increase the amount of additional capital required for us to conduct these research, development and commercialization activities and meet our operating requirements beyond the next twelve months. However, our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results, including the costs to maintain our currently planned operations, could vary materially.

 

Until we can generate a sufficient amount of revenue from our products, if ever, we expect to finance future cash needs through public or private equity offerings, debt financings or corporate collaborations and licensing arrangements. 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, reduce the scope of or eliminate some of our research or development programs or our commercialization efforts and may not be able to make scheduled debt payments on a timely basis or at all. To the extent that we raise additional funds by issuing equity securities, our stockholders may experience additional dilution, and debt financing, if available, may involve restrictive covenants. To the extent that we raise additional funds through collaborations and licensing arrangements, it may be necessary to relinquish some rights to our technologies or our product candidates or grant licenses on terms that may not be favorable to us. 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.

 

Our forecasts regarding the period of time that our existing capital resources will be sufficient to meet our operating requirements, the timing of  our future capital resource requirements, both near and long-term, will depend on many factors, including, but not limited to:

 

·                  the initiation, progress, timing, costs and results of preclinical studies and clinical trials for our product candidates and potential product candidates, including the recently-completed Phase 3 clinical trials for tavaborole and additional clinical trials for AN2728;

 

·                  the success of our collaborations with GSK, Lilly, the Gates Foundation and DTRA and the attainment of milestones and royalty payments, if any, under those agreements;

 

·                  the number and characteristics of product candidates that we pursue;

 

·                  the terms and timing of any future collaboration, licensing or other arrangements that we may establish;

 

·                  the outcome, timing and cost of regulatory approvals, including the tavaborole NDA that we filed in July 2013, which was accepted for filing by the FDA in September 2013 with a PDUFA V goal date of July 29, 2014;

 

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

 

37



Table of Contents

 

·                  the effects of competing technological and market developments;

 

·                  the cost and timing of completion of commercial-scale outsourced manufacturing activities;

 

·                  the cost of establishing sales, marketing and distribution capabilities for any product candidates for which we may receive regulatory approval; and

 

·                  the extent to which we acquire or invest in businesses, products or technologies.

 

Raising funds through lending arrangements may restrict our operations or produce other adverse results.

 

Our current loan and security agreement with Hercules, which we entered into in June 2013, contains a variety of affirmative and negative covenants, including required financial reporting, limitations on certain dispositions of assets, limitations on the incurrence of additional debt and other requirements. To secure our performance of our obligations under this loan and security agreement, we granted a security interest in substantially all of our assets, other than intellectual property assets, to the lenders. Our failure to comply with the covenants in the loan and security agreement, the occurrence of a material impairment in our prospect of repayment or in the perfection or priority of the lenders’ lien on our assets, as determined by the lenders, or the occurrence of certain other specified events could result in an event of default that, if not cured or waived, could result in the acceleration of all or a substantial portion of our debt, potential foreclosure on our assets and other adverse results.

 

Risks Relating to the Development, Regulatory Approval and Commercialization of Our Product Candidates

 

We cannot be certain that tavaborole, AN2728 or any of our other wholly-owned or partnered product candidates will receive regulatory approval, and without regulatory approval our product candidates will not be able to be marketed.*

 

We have invested a significant portion of our efforts and financial resources in the development of our most advanced product candidates, especially tavaborole. Our ability to generate significant revenue related to product sales will depend on the successful development and regulatory approval of our product candidates.

 

In August 2010, we filed a Special Protocol Assessment request with the FDA and reached agreement on what we believe are the major parameters associated with the design and conduct of the Phase 3 trials for tavaborole. We commenced Phase 3 clinical trials of tavaborole in the fourth quarter of 2010, and completed enrollment in December 2011. In the first quarter of 2013, we announced the results from two clinical trials in which tavaborole met all primary and secondary endpoints with a high degree of statistical significance. We filed an NDA for tavaborole in July 2013, which was accepted for filing by the FDA in September 2013 with a PDUFA goal date of July 29, 2014. We may conduct lengthy and expensive Phase 3 clinical trials of AN2728 only to learn that this drug candidate is not a safe or effective treatment, in which case these clinical trials may not lead to regulatory approval. Similarly, Lilly’s development program for our partnered animal health product candidate may be subject to delays in development and not lead to regulatory approval from the FDA and similar foreign regulatory agencies. Such failure to timely develop and obtain regulatory approvals would prevent our product candidates from being marketed and would have a material and adverse effect on our business.

 

We currently have no products approved for sale and we cannot guarantee that we will ever have marketable products. The development of a product candidate, including preclinical and clinical testing, manufacturing, quality systems, labeling, approval, record-keeping, selling, promotion, marketing and distribution of products, is subject to extensive regulation by the FDA in the United States and regulatory authorities in other countries, with regulations differing from country to country. We are not permitted to market our product candidates in the United States until we receive approval of an NDA from the FDA. Obtaining approval of an NDA is a lengthy, expensive and uncertain process. An NDA must include extensive preclinical and clinical data and supporting information to establish the product candidate’s safety and effectiveness for each indication. The approval application must also include significant information regarding the chemistry, manufacturing and controls for the product. The regulatory development and review process typically takes years to complete and approval is never guaranteed. If a product is approved, the FDA may limit the indications for which the product may be used, include extensive warnings on the product labeling or require costly ongoing requirements for post-marketing clinical studies and surveillance or other risk management measures to monitor the safety or efficacy of the product candidate. Markets outside of the United States also have requirements for approval of drug candidates with which we must comply prior to marketing. Obtaining regulatory approval for marketing of a product candidate in one country does not ensure we will be able to obtain regulatory approval in other countries but a failure or delay in obtaining regulatory approval in one country may have a negative effect on the regulatory process in other countries. Any regulatory approval of any of our products or product candidates, once obtained, also may be withdrawn. If tavaborole, AN2728 or any of our other wholly-owned or partnered product candidates do not receive regulatory approval, we may not be able to generate sufficient revenue to become profitable or to continue our operations. Moreover, the filing of our NDA or the receipt of regulatory approval does not assure commercial success of any approved product.

 

38



Table of Contents

 

Delays in the commencement, enrollment and completion of clinical trials could result in increased costs to us and delay or limit our ability to obtain regulatory approval for our product candidates.*

 

Delays in the commencement, enrollment and completion of clinical trials could increase our product development costs or limit the regulatory approval of our product candidates. We do not know whether clinical trials of AN2728 or other product candidates will begin on time or, if commenced, will be completed on schedule or at all. The commencement, enrollment and completion of clinical trials can be delayed for a variety of reasons, including:

 

·                  inability to reach agreements on acceptable terms with prospective clinical research organizations, or CROs, and trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;

 

·                  regulatory objections to commencing a clinical trial;

 

·                  inability to identify and maintain a sufficient number of trial sites, many of which may already be engaged in other clinical trial programs, including some that may be for the same indication as our product candidates;

 

·                  withdrawal of clinical trial sites from our clinical trials as a result of changing standards of care or the ineligibility of a site to participate in our clinical trials;

 

·                  inability to obtain institutional review board, or IRB, approval to conduct a clinical trial at prospective sites;

 

·                  difficulty recruiting and enrolling patients to participate in clinical trials for a variety of reasons, including meeting the enrollment criteria for our study and competition from other clinical trial programs for the same indication as our product candidates; and

 

·                  inability to retain patients in clinical trials due to the treatment protocol, personal issues, side effects from the therapy or lack of efficacy, particularly for those patients receiving either a vehicle without the active ingredient or a placebo.

 

In addition, a clinical trial may be suspended or terminated by us, our current or any future partners, the FDA or other regulatory authorities due to a number of factors, including:

 

·                  failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols;

 

·                  failed inspection of the clinical trial operations or trial sites by the FDA or other regulatory authorities;

 

·                  unforeseen safety or efficacy issues or any determination that a clinical trial presents unacceptable health risks; or

 

·                  lack of adequate funding to continue the clinical trial due to unforeseen costs resulting from enrollment delays, requirements to conduct additional trials and studies, increased expenses associated with the services of our CROs and other third parties or other reasons.

 

If we are required to conduct additional clinical trials or other testing of our product candidates beyond those currently contemplated, we may be delayed in obtaining, or may not be able to obtain, marketing approval for these product candidates.

 

In addition, if our current or any future partners assume development of our product candidates, they may suspend or terminate their development and commercialization efforts, including clinical trials for our product candidates, at any time. For example, in September 2013, Lilly notified us that it was ceasing further development of the development compound licensed in August 2011for an animal health indication and  has granted us a fully paid, sublicenseable, perpetual, irrevocable, exclusive license to the related technology and patents. Similarly, GSK discontinued clinical development of AN3365 in October 2012 and substantially all rights to AN3365 have reverted to us. We have not yet determined if we will proceed with any further development of these molecules.

 

Changes in regulatory requirements and guidance may occur and we or any partners may be required by appropriate regulatory authorities to amend clinical trial protocols to reflect these changes. Amendments may require us or any partners to resubmit clinical trial protocols to IRBs for re-examination, which may impact the costs, timing or successful completion of a clinical

 

39



Table of Contents

 

trial. If we or any of our partners experience delays in the completion of, or if we or our partners terminate clinical trials, the commercial prospects for our product candidates will be harmed, and our ability to generate revenue from sales of our products will be prevented or delayed. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials ultimately also may lead to the denial of regulatory approval of a product candidate.

 

Clinical failure can occur at any stage of clinical development. Because the results of earlier clinical trials are not necessarily predictive of future results, any product candidate we, GSK, Drugs for Neglected Diseases initiative, or DNDi, the Gates Foundation or our potential future partners advance through clinical trials may not have favorable results in later clinical trials or receive regulatory approval.

 

Clinical failure can occur at any stage of our clinical development. Clinical trials may produce negative or inconclusive results, and we or our partners may decide, or regulators may require us, to conduct additional clinical or preclinical testing. In addition, data obtained from tests are susceptible to varying interpretations, and regulators may not interpret our data as favorably as we do, which may delay, limit or prevent regulatory approval. Success in preclinical testing and early clinical trials does not ensure that later clinical trials will generate the same results or otherwise provide adequate data to demonstrate the efficacy and safety of a product candidate. Frequently, product candidates that have shown promising results in early clinical trials have subsequently suffered significant setbacks in later clinical trials. In addition, the design of a clinical trial can determine whether its results will support approval of a product and flaws in the design of a clinical trial may not become apparent until the clinical trial is well advanced. We have limited experience in designing clinical trials and may be unable to design and execute a clinical trial to support regulatory approval. Further, clinical trials of potential products often reveal that it is not practical or feasible to continue development efforts. If tavaborole, AN2728, AN5568, also referred to as SCYX-7158 for human African trypanosomiasis (HAT, or sleeping sickness), or our other product candidates are found to be unsafe or lack efficacy, we or our collaborators will not be able to obtain regulatory approval for them and our business would be harmed. For example, if the results of planned Phase 3 clinical trials of AN2728 do not achieve the primary efficacy endpoints and demonstrate an acceptable safety level, the prospects for approval of AN2728 would be materially and adversely affected. A number of companies in the pharmaceutical industry, including those with greater resources and experience than us, have suffered significant setbacks in Phase 3 clinical trials, even after seeing promising results in earlier clinical trials.

 

In some instances, there can be significant variability in safety and/or efficacy results between different trials of the same product candidate due to numerous factors, including changes in trial protocols, differences in size and type of the patient populations, adherence to the dosing regimen, particularly for self-administered topical drugs, and the rate of dropout among clinical trial participants. We do not know whether any Phase 2, Phase 3 or other clinical trials we or any partners may conduct will demonstrate consistent and/or adequate efficacy and safety to obtain regulatory approval to market our product candidates.

 

We have limited experience in conducting Phase 3 clinical trials and while our first NDA for tavaborole was accepted for filing in September 2013, we may be unable to do so for AN2728 and other product candidates we are developing.*

 

We have recently completed our first Phase 3 clinical trials of tavaborole and are planning to conduct Phase 3 clinical trials of AN2728 in atopic dermatitis. The conduct of successful Phase 3 clinical trials is essential in obtaining regulatory approval and the submission of a successful NDA is a complicated process. We have limited experience in preparing, submitting and prosecuting regulatory filings and have submitted our first NDA for tavaborole in July 2013, which was accepted for filing by the FDA in September 2013 with a PDUFA goal date of July 29, 2014. Consequently, we may be unable to obtain timely approval of our NDA or successfully and efficiently execute and complete additional planned clinical trials in a way that leads to an NDA submission, acceptance and approval of AN2728 or other product candidates we are developing. We may require more time and incur greater costs than our competitors and may not succeed in obtaining regulatory approvals of products that we develop. In addition, failure to commence or complete, or delays in, our planned clinical trials would prevent us from or delay us in commercializing AN2728 and other product candidates we are developing.

 

Our product candidates may have undesirable side effects that may delay or prevent marketing approval, or, if approval is received, require them to be taken off the market or otherwise limit their sales.

 

Unforeseen side effects from any of our product candidates could arise either during clinical development or, if approved, after the approved product has been marketed. For example, a small number of patients who received tavaborole treatment experienced some skin irritation around their toenails during clinical trials of tavaborole for onychomycosis. In addition, a small number of patients who received AN2728 treatment experienced some skin irritation during clinical trials of AN2728. The range and potential severity of possible side effects from systemic therapies is greater than for topically administered drugs. The results of future clinical trials may show that our product candidates cause undesirable or unacceptable side effects, which could interrupt, delay or halt clinical trials, resulting in delay of, or failure to obtain, marketing approval from the FDA and other regulatory authorities.

 

40



Table of Contents

 

If any of our product candidates receives marketing approval and we or others later identify undesirable or unacceptable side effects caused by such products:

 

·                  regulatory authorities may require the addition of labeling statements, specific warnings, a contraindication or field alerts to physicians and pharmacies;

 

·                  we may be required to change the way the product is administered, conduct additional clinical trials or change the labeling of the product;

 

·                  we may have limitations on how we promote the product;

 

·                  sales of the product may decrease significantly;

 

·                  regulatory authorities may require us to take our approved product off the market;

 

·                  we may be subject to litigation or product liability claims; and

 

·                  our reputation may suffer.

 

Any of these events could prevent us, GSK, Lilly, the Gates Foundation or our potential future partners from achieving or maintaining market acceptance of the affected product or could substantially increase commercialization costs and expenses, which in turn could delay or prevent us from generating significant revenues from the sale of our products.

 

All of our product candidates require regulatory review and approval prior to commercialization. Any delay in the regulatory review or approval of any of our product candidates will harm our business.*

 

All of our product candidates require regulatory review and approval prior to commercialization. Any delays in the regulatory review or approval of our product candidates would delay market launch, increase our cash requirements and result in additional operating losses. In July 2013, we filed an NDA for tavaborole, which was accepted for filing by the FDA in September 2013 with a PDUFA goal date of July 29, 2014, and our financial plans currently relate to timely approval of such NDA. Any delay in approval of our NDA may place tavaborole at a competitive disadvantage and may increase our need for additional resources, which may result in increased difficulty for us to raise necessary capital to support future operations.

 

The process of obtaining FDA and other required regulatory approvals, including foreign approvals, often takes many years and can vary substantially based upon the type, complexity and novelty of the products involved. Furthermore, this approval process is extremely complex, expensive and uncertain. We submitted our first NDA for tavaborole in July 2013, which was accepted for filing by the FDA in September 2013 with a PDUFA goal date of July 29, 2014. We, GSK, Lilly, the Gates Foundation or our potential future partners may be unable to submit additional NDAs in the United States or any marketing approval application or other foreign applications for any of our products. Upon submitting an NDA, including any amended NDA or supplemental NDA, to the FDA seeking marketing approval for any of our product candidates, the FDA must decide whether to either accept or reject the submission for filing. We cannot be certain that these submissions will be accepted for filing and review by the FDA, or that the marketing approval application submissions to any other regulatory authorities will be accepted for filing and review by those authorities. We cannot be certain that we or our partners will be able to respond to any regulatory requests during the review period in a timely manner without delaying potential regulatory action. We also cannot be certain that any of our product candidates will receive favorable recommendations from any FDA advisory committee or foreign regulatory bodies or be approved for marketing by the FDA or foreign regulatory authorities. In addition, delays in approvals or rejections of marketing applications may be based upon many factors, including regulatory requests for additional analyses, reports, data and studies, regulatory questions regarding data and results, changes in regulatory policy during the period of product development and the emergence of new information regarding our product candidates or other products.

 

Data obtained from preclinical studies and clinical trials are subject to different interpretations, which could delay, limit or prevent regulatory review or approval of any of our product candidates. In addition, as a routine part of the evaluation of any potential drug, clinical trials are generally conducted to assess the potential for drug-to-drug interactions that could impact potential product safety. To date, we have not been requested to perform drug-to-drug interaction (“DDI”) studies on our topical product candidates, but should we commence such studies, it may delay any potential product approval and may increase the expenses associated with clinical programs. We are planning a DDI study with AN2728 in 2014 to provide information for future marketing purposes, which is not anticipated to affect FDA approval timelines. Furthermore, regulatory attitudes towards the data and results required to demonstrate safety and efficacy can change over time and can be affected by many factors, such as the emergence of new information, including on other products, policy changes and agency funding, staffing and leadership. We do not know whether future changes to the regulatory environment will be favorable or unfavorable to our business prospects.

 

41



Table of Contents

 

In addition, the environment in which our regulatory submissions may be reviewed changes over time. For example, average review times at the FDA for NDAs have fluctuated over the last ten years, and we cannot predict the review time for any of our submissions with any regulatory authorities. Review times can be affected by a variety of factors, including budget and funding levels and statutory, regulatory and policy changes. Moreover, in light of widely publicized events concerning the safety risk of certain drug products, regulatory authorities, members of Congress, the Government Accounting Office, medical professionals and the general public have raised concerns about potential drug safety issues. These events have resulted in the withdrawal of drug products, revisions to drug labeling that further limit use of the drug products and establishment of risk evaluation and mitigation strategies, or REMS, that may, for instance, restrict distribution of drug products. The increased attention to drug safety issues may result in a more cautious approach by the FDA to clinical trials. Data from clinical trials may receive greater scrutiny with respect to safety, which may make the FDA or other regulatory authorities more likely to terminate clinical trials before completion, or require longer or additional clinical trials that may result in substantial additional expense, a delay or failure in obtaining approval or approval for a more limited indication than originally sought.

 

Our use of boron chemistry to develop pharmaceutical product candidates is novel and may not prove successful in producing approved products. Undesirable side effects of any of our product candidates, or of boron-based drugs developed by others, may extend the time period required to obtain regulatory approval or harm market acceptance of our product candidates, if approved.

 

All of our product development activities are centered on compounds containing boron. The use of boron chemistry to develop new drugs is largely unproven. If boron-based compounds developed by us or others have significant adverse side effects, regulatory authorities could require additional studies of our boron-based compounds, which could delay the timing of and increase the cost for regulatory approvals of our product candidates. Additionally, adverse side effects for other boron-based compounds could affect the willingness of third-party payors and medical providers to provide reimbursement for or use our boron-based drugs and could impact market acceptance of our products.

 

Additionally, there can be no assurance that boron-based products will be free of significant adverse side effects. During clinical trials, a small number of our patients who received tavaborole experienced some skin irritation around their toenails and a few patients who received AN2728 experienced some skin irritation in the treated areas. If boron-based drug treatments result in significant adverse side effects, they may not be useful as therapeutic agents. If we are unable to develop products that are safe and effective using our boron chemistry platform, our business will be materially and adversely affected.

 

If any of our product candidates for which we receive regulatory approval do not achieve broad market acceptance, the revenues that are generated from their sales will be limited.*

 

The commercial success of tavaborole, AN2728, or our other product candidates will depend upon the acceptance of these products among physicians, patients and the medical community. The degree of market acceptance of our product candidates will depend on a number of factors, including:

 

·                  limitations or warnings contained in the FDA-approved labeling for our products;

 

·                  changes in the standard of care for the targeted indications for any of our product candidates;

 

·                  limitations in the approved indications for our product candidates;

 

·                  lower demonstrated clinical safety or efficacy compared to other products;

 

·                  occurrence of significant adverse side effects;

 

·                  ineffective sales, marketing and distribution support;

 

·                  lack of availability of reimbursement from managed care plans and other third-party payors;

 

·                  timing of market introduction and perceived effectiveness of competitive products, including information provided in competitor products’ package inserts;

 

·                  lack of cost-effectiveness;

 

·                  availability of alternative therapies with potentially advantageous results, or other products with similar results at similar or lower cost, including generics and over-the-counter products;

 

42



Table of Contents

 

·                  adverse publicity about our product candidates or favorable publicity about competitive products;

 

·                  lack of convenience and ease of administration of our products; and

 

·                  potential product liability claims.

 

If our product candidates for human use are approved, but do not achieve an adequate level of acceptance by physicians, healthcare payors and patients, sufficient revenue may not be generated from these products, and we may not become or remain profitable. In addition, efforts to educate the medical community and third-party payors on the benefits of our product candidates may require significant resources and may never be successful. For example, Valeant, filed its NDA for efinaconazole, its topical product candidate for the treatment of onychomycosis, in July 2012, and stated that efinaconazole has a PDUFA V date of May 24, 2013, the target date for FDA action on the efinaconazole NDA. On May 28, 2013, Valeant received a Complete Response Letter from the FDA related to its NDA for efinaconazole and has estimated that it could receive approval from the FDA in mid-2014. On October 2, 2013, Valeant received one regulatory approval for efinaconazole, under the brand name Jublia, from Health Canada. If approved by the FDA, efinaconazole may be the first to market in the United States with data that may be competitive with our data from tavaborole’s Phase 3 studies. If efinaconazole reaches the U.S. market prior to tavaborole, the competitive position of tavaborole may be harmed significantly and the diminished value of tavaborole in such event could have a significant adverse effect on our business. Additionally, our product candidates intended for use against neglected diseases, such as AN5568 for sleeping sickness and our product candidate for tuberculosis, are not expected to generate significant revenues, if any.

 

We have never marketed a drug before, and if we are unable to establish an effective sales force and marketing infrastructure or enter into acceptable third-party sales and marketing or licensing arrangements, we may not be able to commercialize our product candidates successfully.

 

We may develop a sales and marketing infrastructure to market and sell our products in certain U.S. specialty markets. We currently do not have any sales, distribution and marketing capabilities, the development of which will require substantial resources and will be time consuming. We are currently evaluating the establishment of these capabilities, either internally or through a third-party contract sales organization, and these costs are expected to be incurred in advance of any approval of our product candidates. In addition, we may not be able to hire a sales force in the United States that is sufficient in size or has adequate expertise in the medical markets that we intend to target. If we are unable to establish our sales force and marketing capability, our operating results may be adversely affected. In addition, we plan to enter into sales and marketing or licensing arrangements with third parties for non-specialty markets in the United States and for international sales of any approved products. If we are unable to enter into any such arrangements on acceptable terms, or at all, we may be unable to market and sell our products in these markets.

 

We expect that our existing and future product candidates will face competition and most of our competitors have significantly greater resources than we do.

 

The pharmaceutical industry is highly competitive, with a number of established, large pharmaceutical companies, as well as many smaller companies. Most of these companies have significant financial resources, marketing capabilities and experience in obtaining regulatory approvals for product candidates. There are many pharmaceutical companies, biotechnology companies, public and private universities, government agencies and research organizations actively engaged in research and development of products that may target the same markets as our product candidates. We expect any future products we develop to compete on the basis of, among other things, product efficacy, price, lack of significant adverse side effects and convenience and ease of treatment. For example, tavaborole faces potential competition from Valeant’s efinaconazole, which is not only ahead of tavaborole in the regulatory approval process, but also would be marketed by a pharmaceutical company with significantly greater resources and commercial experience than we currently possess.

 

Compared to us, many of our potential competitors have substantially greater:

 

·                  resources, including capital, personnel and technology;

 

·                  research and development capability;

 

·                  clinical trial expertise;

 

·                  regulatory expertise;

 

43



Table of Contents

 

·                  intellectual property portfolios;

 

·                  expertise in prosecution of intellectual property rights;

 

·                  manufacturing and distribution expertise; and

 

·                  sales and marketing expertise.

 

As a result of these factors, our competitors may obtain regulatory approval of their products more rapidly than we are able to or may obtain patent protection or other intellectual property rights that limit our ability to develop or commercialize our product candidates. Our competitors also may develop drugs that are more effective, more widely used and less costly than ours and also may be more successful than us in manufacturing and marketing their products.

 

The dermatology and podiatry markets are competitive, which may adversely affect our ability to commercialize our dermatological product candidates.*

 

If tavaborole is approved for the treatment of onychomycosis, we anticipate that it would compete with other marketed nail fungal therapeutics including Lamisil, Sporanox, Onmel, Penlac and generic versions of those compounds. Tavaborole will also compete with lasers, which have received clearance from the FDA for the temporary increase of clear nail in patients with   onychomycosis and with over-the-counter products and possibly various other devices under development for onychomycosis. If approved for the treatment of atopic dermatitis and/or psoriasis, AN2728 will compete against a number of approved topical treatments. For atopic dermatitis, competing treatments would include: combinations of antibiotics, antihistamines, topical corticosteroids and topical immunomodulators, such as Elidel (pimecrolimus) and Protopic (tacrolimus); and, for psoriasis, Taclonex (a combination of calcipotriene and the high potency corticosteroid, betamethasone dipropionate), Dovonex (calcipotriene), Tazorac (tazarotene) and generic versions, where available. AN2728 also would compete against systemic treatments for psoriasis, which include oral products such as Soriatane (acitretin), methotrexate and cyclosporine and injected biologic products such as Enbrel (etanercept), Remicade (infliximab), Stelara (ustekinumab), Simponi (golimumab), Amevive (alefacept) and Humira (adalimumab). A number of other treatments are used for psoriasis, including light-based treatments and non-prescription topical treatments.

 

There are also several pharmaceutical product candidates under development that could potentially be used to treat onychomycosis and compete with tavaborole. The latest-stage development candidate is efinaconazole, a novel topical triazole that completed Phase 3 development in December 2011 and was developed by DPS, a wholly-owned subsidiary of Valeant. DPS licensed the triazole (also known as KP-103) from Kaken Pharmaceuticals in 2006. Valeant reported the results of its Phase 3 studies in November 2012. In its first study, 17.8% of patients treated with efinaconazole reached the endpoint of “complete cure,” compared to 3.3% of patients treated with vehicle. In the second study, 15.2% of patients treated with efinaconazole reached the endpoint of “complete cure,” compared to 5.5% of patients treated with vehicle. Valeant filed an NDA with the FDA in July 2012 and had a PDUFA date of May 24, 2013. On May 28, 2013, Valeant received a Complete Response Letter from the FDA related to its NDA for efinaconazole, its topical product candidate for the treatment of onychomycosis and has estimated that it could receive approval from FDA in mid-2014. On October 2, 2013, Valeant received one regulatory approval for efinaconazole, under the brand name Jublia, from Health Canada.

 

Other late-stage development candidates that might compete with tavaborole include an undisclosed topical product candidate in Phase 3 development by Promius Pharma, LLC, a wholly-owned subsidiary of Dr. Reddy’s Laboratories, and a topical reformulation of terbinafine in Phase 3 development by Celtic Pharma Management L.P. There are also several companies pursuing various devices for onychomycosis, including laser technology. For example, at least four lasers have received FDA clearance for the treatment of onychomycosis. In addition, there are a number of earlier stage therapeutics and devices in various stages of development for the treatment of onychomycosis. For example, in July 2012, Topica Pharmaceuticals began enrolling a 300-patient Phase 2b/3 safety and efficacy study with topical luliconazole, which completed enrollment in June 2013.

 

44



Table of Contents

 

Even if a generic product or an over-the-counter product is less effective than our product candidates, a less effective generic or over-the-counter product may be more quickly adopted by health insurers and patients than our competing product candidates based upon cost or convenience. In addition, each of our product candidates may compete against product candidates currently under development by other companies.

 

Reimbursement decisions by third-party payors may have an adverse effect on pricing and market acceptance. If there is not sufficient reimbursement for our products, it is less likely that our products will be widely used.

 

Successful commercialization of pharmaceutical products usually depends on the availability of adequate coverage and reimbursement from third-party payors. Patients or healthcare providers who purchase drugs generally rely on third-party payors to reimburse all or part of the costs associated with such products. Adequate coverage and reimbursement from governmental payors, such as Medicare and Medicaid, and commercial payors, such as HMOs and insurance companies, can be essential to new product acceptance.

 

Current treatments for onychomycosis are often not reimbursed by third-party payors. We do not know the extent to which tavaborole will be reimbursed if it is approved. Reimbursement decisions by third-party payors may have an effect on pricing and market acceptance. Our other product candidates, such as AN2728, also will be subject to uncertain reimbursement decisions by third-party payors. Our products are less likely to be used if they do not receive adequate reimbursement.

 

The market for our product candidates may depend on access to third-party payors’ drug formularies, or lists of medications for which third-party payors provide coverage and reimbursement. Industry competition to be included in such formularies results in downward pricing pressures on pharmaceutical companies. Third-party payors may refuse to include a particular branded drug in their formularies when a competing generic product is available.

 

All third-party payors, whether governmental or commercial, are developing increasingly sophisticated methods of controlling healthcare costs. In addition, in the United States, no uniform policy of coverage and reimbursement for medicines exists among all these payors. Therefore, coverage of and reimbursement for drugs can differ significantly from payor to payor and can be difficult and costly to obtain.

 

Virtually all countries regulate or set the prices of pharmaceutical products, which is a separate determination from whether a particular product will be subject to reimbursement under that government’s health plans. There are systems for reimbursement and pricing approval in each country and moving a product through those systems is time consuming and expensive.

 

Healthcare policy changes, including the Healthcare Reform Act, may have a material adverse effect on us.

 

Healthcare costs have risen significantly over the past decade. The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, or collectively, the Healthcare Reform Act, substantially changes the way healthcare is financed by both governmental and private insurers and significantly impacts the pharmaceutical industry. The Healthcare Reform Act contains a number of provisions, including those governing enrollment in federal healthcare programs, reimbursement changes and fraud and abuse, which will impact existing government healthcare programs and will result in the development of new programs, including Medicare payment for performance initiatives and improvements to the physician quality reporting system and feedback program. We anticipate that if we obtain approval for our products, some of our revenue may be derived from U.S. government healthcare programs, including Medicare. In addition, the Healthcare Reform Act imposes a non-deductible excise tax on pharmaceutical manufacturers or importers who sell “branded prescription drugs,” which includes innovator drugs and biologics (excluding orphan drugs or generics) to U.S. government programs. We expect that the Healthcare Reform Act and other healthcare reform measures that may be adopted in the future could have a material adverse effect on our industry generally and our ability to successfully commercialize our products or could limit or eliminate our spending on development projects.

 

In addition to the Healthcare Reform Act, there will continue to be proposals by legislators at both the federal and state levels, regulators and third-party payors to keep these costs down while expanding individual healthcare benefits. Certain of these changes could impose limitations on the prices we will be able to charge for any products that are approved or the amounts of reimbursement available for these products from governmental agencies or third-party payors or may increase the tax requirements for life sciences companies such as ours. While it is too early to predict what effect the recently enacted Healthcare Reform Act or any future legislation or regulation will have on us, such laws could have a material adverse effect on our business, financial position and results of operations.

 

45



Table of Contents

 

We expect that a portion of the market for our products will be outside the United States. Our product candidates may never receive approval or be commercialized outside of the United States.

 

We plan to enter into sales and marketing arrangements with third parties for international sales of any approved products. To market and commercialize any product candidates outside of the United States, we or any third parties that are marketing or selling our products must establish and comply with numerous and varying regulatory requirements of other countries regarding safety and efficacy. Approval procedures vary among countries and can involve additional product testing and additional administrative review periods. The regulatory approval process in other countries may include all of the risks detailed above regarding failure to obtain FDA approval in the United States as well as other risks such as pricing of the product, which will likely require negotiations with foreign governments or agencies of such governments prior to commercialization in these other countries. Regulatory approval in one country does not ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval in one country may have a negative effect on the regulatory process in others. Failure to obtain regulatory approval in other countries or any delay or setback in obtaining such approval could have the same adverse effects detailed above regarding FDA approval in the United States. As described above, such effects include the risks that our product candidates may not be approved for all indications requested, or at all, which could limit the uses of our product candidates and have an adverse effect on product sales and potential royalties, and that such approval may be subject to limitations on the indicated uses for which the product may be marketed or require costly post-marketing follow-up studies.

 

Even if our product candidates receive regulatory approval, we may still face future development and regulatory difficulties.

 

Even if regulatory approval is obtained for any of our product candidates, regulatory authorities may still impose significant restrictions on a product’s indicated uses or marketing or impose ongoing requirements for potentially costly post-approval studies. Given the number of high profile adverse safety events with certain drug products, regulatory authorities may require, as a condition of approval, costly risk evaluation and mitigation strategies, which may include safety surveillance, restricted distribution and use, patient education, enhanced labeling, expedited reporting of certain adverse events, pre-approval of promotional materials and restrictions on direct-to-consumer advertising. For example, any labeling approved for any of our product candidates may include a restriction on the term of its use, or it may not include one or more of our intended indications. Furthermore, any new legislation addressing drug safety issues could result in delays or increased costs during the period of product development, clinical trials and regulatory review and approval, as well as increased costs to assure compliance with any new post-approval regulatory requirements. Any of these restrictions or requirements could force us or our partners to conduct costly studies.

 

Our product candidates also will be subject to ongoing regulatory requirements for the labeling, packaging, storage, advertising, promotion, record-keeping and submission of safety and other post-market information on the drug. In addition, approved products, 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 also will be required to report certain adverse reactions and production problems, if any, to the FDA and to comply with certain 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 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 our product candidates fail to comply with applicable regulatory requirements, a regulatory agency may:

 

·                  issue warning letters;

 

·                  mandate modifications to promotional materials or require us to provide corrective information to healthcare practitioners;

 

·                  require us or our partners to enter into a consent decree, which can include imposition of various fines, reimbursements for inspection costs, required due dates for specific actions and penalties for noncompliance;

 

·                  impose other civil or criminal penalties;

 

·                  suspend regulatory approval;

 

·                  suspend any ongoing clinical trials;

 

46



Table of Contents

 

·                  refuse to approve pending applications or supplements to approved applications filed by us, our partners or our potential future partners;

 

·                  impose restrictions on operations, including costly new manufacturing requirements; or

 

·                  seize or detain products or require a product recall.

 

Guidelines and recommendations published by various organizations may affect the use of our products.

 

Government agencies may issue regulations and guidelines directly applicable to us, our partners or our potential future partners and our product candidates. In addition, professional societies, practice management groups, private health/science foundations and organizations involved in various diseases from time to time publish guidelines or recommendations to the healthcare and patient communities. These various sorts of recommendations may relate to such matters as product usage, dosage, route of administration and use of related or competing therapies. Changes to these recommendations or other guidelines advocating alternative therapies could result in decreased use of our products, which may adversely affect our results of operations.

 

Risks Related to Our Dependence on Third Parties

 

We are dependent on our existing third party collaborations and research agreements to fund additional development opportunities and expect to continue to expend resources in our current collaborations and/or research agreements with Lilly, the Gates Foundation and DTRA. These research collaborations may fail to successfully identify product candidates, may result in disputes or our partners may elect not to license, develop or commercialize any of the resulting compounds, including, in the case of GSK, the tuberculosis (TB) compounds which GSK licensed from us in September 2013. In the event our collaborator does not elect to exercise its option or elects not to develop or commercialize our collaboration product candidates, our operating results and financial condition could be materially and adversely affected. *

 

Currently, we have three significant ongoing collaboration and research agreements: an August 2010 collaborative research, license and commercialization agreement with Lilly for the discovery, development, and worldwide commercialization of animal health products for specific applications; an April 2013 research collaboration with the Gates Foundation to discover drug candidates intended to treat two filarial worm diseases (onchocerciasis, or river blindness, and lymphatic filariasis, commonly known as elephantiasis) and TB and an October 2013 research agreement with DTRA to design and discover new classes of systemic antibiotics. Under the Gates Foundation research agreement, the Gates Foundation will pay us up to $17.7 million over a three-year research term to conduct research activities directed at discovering potential neglected disease drug candidates and to create an expanded library of boron compounds to screen for additional potential drug candidates to treat neglected diseases, which will be accessible to the Gates Foundation and other third parties. In connection with the research agreement, the Gates Foundation purchased shares of our common stock for net proceeds of approximately $5.0 million. Under the research agreement with DTRA, we will work with a drug discovery consortium formed by Colorado State University, the University of California at Berkeley and us to design and discover new classes of systemic antibiotics. The research will be conducted over a three and a half year period. The work is funded by a $13.5 million award from DTRA’s R&D Innovation and Systems Engineering Office, which was established to search for and execute strategic investments in innovative technologies for combating weapons of mass destruction. Under this award, we will apply our boron chemistry to discover rationally designed novel antibiotics that target DTRA-priority pathogens known to exhibit resistance to existing antibiotics. While the research period under our collaboration agreement with GSK expired in October 2013, GSK selected a compound for further development in TB in September 2013 and will be responsible for all further development and commercialization of this compound under our October 2007 research and development collaboration, option and license agreement with GSK, as amended.

 

47



Table of Contents

 

During the research terms of the collaborations, we and, in some cases, our partner are committed to use our diligent efforts to discover and develop compounds and to provide specified resources, on a project-by-project basis. We are either reimbursed for our research costs, or each party is responsible for its own research costs, but in all cases we expect to continue to expend resources on the collaborations. If we fail to successfully identify product candidates or, in some cases, demonstrate proof-of-concept for those product candidates we identify, our operating results and financial condition could be materially and adversely affected. In the case of the DTRA collaboration, after the initial term of eleven months, DTRA has the sole option to renew the collaboration for two one-year periods based on our achievement of established developmental milestones for each year. In addition, we may mutually agree with our collaboration partner not to pursue all of the research activities contemplated under the applicable agreement. Our collaboration partners have the option, but are not required, to exclusively license or select for further development certain product candidates under the agreement once the product candidate meets specified criteria, subject to continuing obligations to make milestone payments and royalty payments on commercial sales, if any, of such licensed compounds. Typically, the collaboration partner is obligated to make payments to us upon the achievement of certain initial discovery and developmental milestones, but further, more significant milestone payments are payable only on compounds that the partner chooses to license or develop. If we devote significant resources to a research project and our collaboration partner elects not to exercise its option with respect to any resulting product candidates or elects not to develop such candidates, our financial condition could be materially and adversely affected. In certain cases, if our partner does not exercise a given option or terminates development, we may request a license to develop and commercialize products containing the relevant compounds. If we make such a request, we will be obligated to make certain milestone and royalty payments to the partner upon development and commercialization of such products.

 

If our collaboration partner elects to license or develop a compound, like GSK and Lilly have, the partner assumes sole responsibility for further development, regulatory approval and commercialization of such compound. Thus, with respect to compounds that our partner chooses to develop, the timing of development and future payments to us, including milestone and royalty payments, will depend on the extent to which such licensed compounds advance through development, regulatory approval and commercialization by our partner. Additionally, our partner can choose to terminate the agreement with a specified notice period or its license to any compounds at any time with no further obligation to develop and commercialize such compounds. In such event, we would not be eligible to receive further payments for the affected compounds. We would retain rights to develop and market any such product candidates. However, we would be required to fund further development and commercialization ourselves or with other partners if we continue to pursue these product candidates and, in some cases, would owe our previous partner royalties if we succeeded in commercializing any such product candidates. For example, in September 2013, Lilly notified us that it was ceasing further development of the development compound licensed in August 2011for an animal health indication, and has granted us a fully paid, sublicenseable, perpetual, irrevocable, exclusive license to the related technology and patents. Similarly, in October 2012, GSK discontinued clinical development of AN3365. Substantially all rights to AN3365 have reverted to us and, if we elect to further develop this compound, we would be solely responsible for all development and commercialization efforts and would owe GSK royalties if we succeeded in commercializing this product candidate.

 

If our partner does not devote sufficient resources to the research, development and commercialization of compounds identified through our research collaboration, or is ineffective in doing so, our operating results could be materially and adversely affected. In particular, if our partner independently develops products that compete with our compounds, it could elect to advance such products and not develop or commercialize our product candidates, even while complying with applicable exclusivity provisions. We cannot assure you that our collaboration partners will fulfill their obligations under the agreements or develop and commercialize compounds identified by the research collaborations. If our partners fail to fulfill their obligations under the agreements or terminate the agreements, we would need to obtain the capital necessary to fund the development and commercialization of the returned compounds, enter into alternative arrangements with a third party or halt our development efforts in these areas. We also could become involved in disputes with our partners, which could lead to delays in or termination of the research collaborations or the development and commercialization of identified product candidates and time-consuming and expensive litigation or arbitration. If our partners terminate or breach their agreements with us or otherwise do not advance the compounds identified by our research collaborations, our chances of successfully developing or commercializing such compounds could be materially and adversely affected. For example, on November 28, 2012, we filed an arbitration demand alleging breach of contract by Medicis under the Medicis Agreement and seeking damages related to payment for the achievement of certain preclinical milestones under that agreement. On December 11, 2012, Medicis filed a complaint for breach of the Medicis Agreement and a motion for preliminary injunction in the Delaware Court of Chancery seeking to enjoin us from prosecuting our claims through arbitration and to require us to continue to use diligent efforts to conduct research and development under the Medicis Agreement. On October 27, 2013, we, Valeant, parent of Medicis and DPS, entered into a $142.5 million settlement agreement, which, among other effects, terminated the Medicis Agreement and all rights and intellectual property revert back to us.

 

48



Table of Contents

 

We may not be successful in establishing and maintaining development and commercialization collaborations, which could adversely affect our ability to develop certain of our product candidates and our financial condition and operating results.

 

Developing pharmaceutical products, conducting clinical trials, obtaining regulatory approval, establishing manufacturing capabilities and marketing approved products is expensive. Consequently, we plan to establish collaborations for development and commercialization of product candidates and research programs. For example, if tavaborole, AN2728 or any of our other product candidates receives marketing approval, we intend to enter into sales and marketing arrangements with third parties for non-specialty markets in the United States and for international sales, and to develop our own sales force targeting podiatrists, dermatologists and other specialty markets in the United States. If we are unable to enter into any such arrangements on acceptable terms, or at all, we may be unable to market and sell our products in these markets. We expect to face competition in seeking appropriate collaborators. Moreover, collaboration arrangements are complex and time consuming to negotiate, document and implement and they may require substantial resources to maintain. We may not be successful in our efforts to establish and implement collaborations or other alternative arrangements for the development of our product candidates. When we partner with a third party for development and commercialization of a product candidate, we can expect to relinquish to the third party some or all of the control over the future success of that product candidate. Our collaboration partner may not devote sufficient resources to the commercialization of our product candidates or may otherwise fail in their commercialization. The terms of any collaboration or other arrangement that we establish may not be favorable to us. In addition, any collaboration that we enter into may be unsuccessful in the development and commercialization of our product candidates. In some cases, we may be responsible for continuing preclinical and initial clinical development of a partnered product candidate or research program, and the payment we receive from our collaboration partner may be insufficient to cover the cost of this development. If we are unable to reach agreements with suitable collaborators for our product candidates, we could face increased costs, we may be forced to limit the number of our product candidates we can commercially develop or the territories in which we commercialize them and we might fail to commercialize products or programs for which a suitable collaborator cannot be found. If we fail to achieve successful collaborations, our operating results and financial condition will be materially and adversely affected.

 

We depend on third-party contractors for a substantial portion of our operations and may not be able to control their work as effectively as if we performed these functions ourselves.

 

We outsource substantial portions of our operations to third-party service providers, including chemical synthesis, biological screening and manufacturing and the conduct of our clinical trials and various preclinical studies. Our agreements with third-party service providers and clinical research organizations are on a study-by-study basis and are typically short-term. In all cases, we may terminate the agreements with notice and are responsible for the supplier’s previously incurred costs.

 

Because we have relied on third parties, our internal capacity to perform these functions is limited. Outsourcing these functions involves risk that third parties may not perform to our standards, may not produce results in a timely manner, may become troubled financially or may fail to perform at all. In addition, the use of third-party service providers requires us to disclose our proprietary information to these parties, which could increase the risk that this information will be misappropriated. There are a limited number of third-party service providers that have the expertise required to achieve our business objectives. Identifying, qualifying and managing performance of third-party service providers can be difficult and time consuming and could cause delays in our development programs. We currently have a small number of employees, which limits the internal resources we have available to identify and monitor our third-party providers. To the extent we are unable to identify, retain and successfully manage the performance of third-party service providers in the future, our business may be adversely affected.

 

We have limited experience manufacturing our active pharmaceutical ingredients and product candidates on a large clinical or commercial scale, and have no manufacturing facility. As a result, we are dependent on third parties for the manufacture of our product candidates and our supply chain, and if we experience problems with any of these suppliers, the manufacturing of our product candidates or products could be delayed.

 

We do not own or operate facilities for the manufacture of our product candidates. We have a small number of personnel with experience in drug product manufacturing. We currently outsource all manufacturing and packaging of our preclinical and clinical product candidates to third parties and intend to continue to do so. If tavaborole is approved, the inability to manufacture sufficient supplies of the active drug ingredient or drug product could adversely affect product commercialization. We also outsource to third parties the active ingredient and drug product manufacturing for AN2728 and our other product candidates. We currently do not have any agreements with third-party manufacturers for the long-term commercial supply of our product candidates, including tavaborole. We may be unable to enter into agreements for commercial supply with third party manufacturers, or may be unable to do so on acceptable terms. We may not be able to establish additional sources of supply for our products. Such suppliers are subject to regulatory requirements, covering manufacturing, testing, quality control and record keeping relating to our product candidates, as well as for product candidates owned by other companies. These suppliers are also subject to ongoing inspections by the regulatory agencies. Failure by any of our suppliers to comply with applicable regulations may result in long delays and interruptions to our product candidate supply while we seek to secure another supplier that meets all regulatory requirements.

 

49



Table of Contents

 

Reliance on third-party manufacturers entails risks to which we would not be subject if we manufactured the product candidates ourselves, including:

 

·                  the possible breach of the manufacturing agreements by the third parties because of factors beyond our control; and

 

·                  the possibility of termination or nonrenewal of the agreements by the third parties because of our breach of the manufacturing agreement or based on their own business priorities.

 

Any of these factors could result in delays or higher costs in connection with our clinical trials, regulatory submissions, required approvals or commercialization of our products.

 

If we lose our relationships with contract research organizations, our drug development efforts could be delayed.

 

We are substantially dependent on third-party vendors and contract research organizations for preclinical studies and clinical trials related to our drug discovery and development efforts. If we lose our relationship with any one or more of these providers, we could experience a significant delay in both identifying another comparable provider and then contracting for its services, which could adversely affect our development efforts. We may be unable to retain an alternative provider on reasonable terms, or at all. Even if we locate an alternative provider, it is likely that this provider will need additional time to respond to our needs and may not provide the same type or level of services as the original provider. In addition, any contract research organization that we retain will be subject to the FDA’s regulatory requirements and similar foreign standards and we do not have control over compliance with these regulations by these providers. Consequently, if these practices and standards are not adhered to by these providers, the development and commercialization of our product candidates could be delayed, which could severely harm our business and financial condition.

 

Risks Relating to Our Intellectual Property

 

It is difficult and costly to protect our proprietary rights, and we may not be able to ensure their protection.*

 

Our commercial success will depend in part on obtaining and maintaining patent protection and trade secret protection of our current and future product candidates and the methods used to manufacture them, as well as successfully defending these patents against third-party challenges. Our ability to stop third parties from making, using, selling, offering to sell or importing our products is dependent upon the extent to which we have rights under valid and enforceable patents or trade secrets that cover these activities.

 

The patent positions of pharmaceutical companies can be highly uncertain and involve complex legal and factual questions for which important legal principles remain unresolved. No consistent policy regarding the breadth of claims allowed in pharmaceutical patents has emerged to date in the United States or in many foreign jurisdictions. Changes in either the patent laws or in interpretations of patent laws in the United States and foreign jurisdictions may diminish the value of our intellectual property. Accordingly, we cannot predict the breadth of claims that may be enforced in the patents that we currently own or that may be issued from the applications we have filed or may file in the future or that we may license from third parties. Further, if any patents we obtain or license are deemed invalid and unenforceable, it could impact our ability to commercialize or license our technology.

 

The degree of future protection for our proprietary rights is uncertain because legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep our competitive advantage. For example:

 

·                  others may be able to make compounds that are similar to our product candidates but that are not covered by the claims of our patents;

 

·                  we might not have been the first to make the inventions covered by our pending patent applications;

 

·                  we might not have been the first to file patent applications for these inventions;

 

·                  others may independently develop similar or alternative technologies or duplicate any of our technologies;

 

·                  any patents that we obtain may not provide us with any competitive advantages;

 

·                  we may not develop additional proprietary technologies that are patentable; or

 

·                  the patents of others may have an adverse effect on our business.

 

50



Table of Contents

 

As of September 30, 2013, we are an owner of record, either solely or with a collaborator, of 21 issued U.S. patents and 29 non-U.S. patents with claims to boron-containing compounds, methods of making these compounds or methods of using these compounds in various indications. We are actively pursuing, either solely or with a collaborator, 26 U.S. patent applications (5 provisional and 21 non-provisional), 3 international (PCT) patent applications and 135 non-U.S. patent applications in at least 29 jurisdictions. Of these actively pursued applications, 1 non-provisional U.S. patent application and 16 non-U.S. patent applications are solely owned by a collaborator.

 

Due to the patent laws of a country, or the decisions of a patent examiner in a country, or our own filing strategies, we may not obtain patent coverage for all of the product candidates or methods involving these candidates in the parent patent application. We plan to pursue divisional patent applications and/or continuation patent applications in the United States and many other countries to obtain claim coverage for inventions that were disclosed but not claimed in the parent patent application.

 

There have been numerous changes to the patent laws and proposed changes to the rules of the U.S. Patent and Trademark Office, or USPTO, which may have a significant impact on our ability to protect our technology and enforce our intellectual property rights. For example, in September 2011, President Obama signed the America Invents Act that codifies several significant changes to the U.S. patent laws, including, among other things, changing from a “first to invent” to a “first inventor to file” system, limiting where a patent holder may file a patent suit, requiring the apportionment of patent damages, replacing interference proceedings with derivation actions and creating a post-grant opposition process to challenge patents after they have been issued. The effects of these changes are currently unclear as the USPTO must still implement various regulations, the courts have yet to address any of these provisions and the applicability of the act and new regulations on specific patents discussed herein have not been determined and would need to be reviewed.

 

We also may rely on trade secrets to protect our technology, especially where we do not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to protect. Although we use reasonable efforts to protect our trade secrets, our employees, consultants, contractors, outside scientific collaborators and other advisors may unintentionally or willfully disclose our information to competitors. Enforcing a claim that a third party illegally obtained and is using any of our trade secrets is expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the United States are sometimes less willing to protect trade secrets. Moreover, our competitors may independently develop equivalent knowledge, methods and know-how. Our patent applications would not prevent others from taking advantage of the chemical properties of boron to discover and develop new therapies, including therapies for the indications we are targeting. If others seek to develop boron-based therapies, their research and development efforts may inhibit our ability to conduct research in certain areas and to expand our intellectual property portfolio.

 

We may incur substantial costs as a result of litigation or other proceedings relating to patent and other intellectual property rights and we may be unable to enforce or protect our rights to, or use, our technology.*

 

If we choose to go to court to stop another party from using the inventions claimed in any patents we obtain, that individual or company has the right to ask the court to rule that such patents are invalid or should not be enforced against that third party. These lawsuits are expensive and would consume time and resources and divert the attention of managerial and scientific personnel even if we were successful in stopping the infringement of such patents. In addition, there is a risk that the court will decide that such patents are not valid and that we do not have the right to stop the other party from using the inventions. There is also the risk that, even if the validity of such patents is upheld, the court will refuse to stop the other party on the grounds that such other party’s activities do not infringe our rights to such patents. In addition, the U.S. Supreme Court has recently modified some tests used by the USPTO in granting patents over the past 20 years, which may decrease the likelihood that we will be able to obtain patents and increase the likelihood of challenge of any patents we obtain or license.

 

Furthermore, a third party may claim that we or our manufacturing or commercialization partners are using inventions covered by the third party’s patent rights and may go to court to stop us from engaging in our normal operations and activities, including making or selling our product candidates. These lawsuits are costly and could affect our results of operations and divert the attention of managerial and scientific personnel. There is a risk that a court would decide that we or our commercialization partners are infringing the third party’s patents and would order us or our partners to stop the activities covered by the patents. In that event, we or our commercialization partners may not have a viable way around the patent and may need to halt commercialization of the relevant product. In addition, there is a risk that a court will order us or our partners to pay the other party damages for having violated the other party’s patents. In the future, we may agree to indemnify our commercial partners against certain intellectual property infringement claims brought by third parties.

 

51



Table of Contents

 

The pharmaceutical and biotechnology industries have produced a proliferation of patents, and it is not always clear to industry participants, including us, which patents cover various types of products or methods of use. The coverage of patents is subject to interpretation by the courts, and the interpretation is not always uniform. If we are sued for patent infringement, we would need to demonstrate that our products or methods either do not infringe the patent claims of the relevant patent or that the patent claims are invalid, and we may not be able to do this. Proving invalidity is difficult. For example, in the United States, proving invalidity requires a showing of clear and convincing evidence to overcome the presumption of validity enjoyed by issued patents.

 

Because some patent applications in the United States may be maintained in secrecy until the patents are issued, because patent applications in the United States and many foreign jurisdictions are typically not published until eighteen months after filing and because publications in the scientific literature often lag behind actual discoveries, we cannot be certain that others have not filed patent applications for technology covered by our pending applications, or that we were the first to invent the technology. Our competitors may have filed, and may in the future file, patent applications covering technology similar to ours. Any such patent application may have priority over our patent applications, which could further require us to obtain rights to issued patents covering such technologies. If another party has filed a U.S. patent application on inventions similar to ours, we may have to participate in an interference proceeding declared by the USPTO to determine priority of invention in the United States. The costs of these proceedings could be substantial, and it is possible that such efforts would be unsuccessful if, unbeknownst to us, the other party had independently arrived at the same or similar invention prior to our own invention, resulting in a loss of our U.S. patent position with respect to such inventions.

 

Patents covering the composition of matter of tavaborole and AN2718 that were owned by others have expired. Our patent applications and patents include or support claims on other aspects of tavaborole or AN2718, such as pharmaceutical formulations containing tavaborole or AN2718, methods of using tavaborole or AN2718 to treat disease and methods of manufacturing tavaborole or AN2718. Without patent protection on the composition of matter of tavaborole or AN2718, our ability to assert our patents to stop others from using or selling tavaborole or AN2718 in a non-pharmaceutically acceptable formulation may be limited.

 

Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. In addition, any uncertainties resulting from the initiation and continuation of any litigation could have a material adverse effect on our ability to raise the funds necessary to continue our operations. For example, in our legal proceedings with Valeant regarding efinaconazole, we spent considerable resources, including management time, in the proceedings. The final hearing was held in September 2013 and, on October 17, 2013, the arbitrator issued an Interim Final Award in our favor for $100.0 million in damages as well as all costs of the arbitration and reasonable attorney’s fees. On October 27, 2013, we, Valeant and DPS entered into a settlement agreement and Valeant agreed to pay us $142.5 million to settle all existing and future claims, including the damages awarded in the October 17, 2013 arbitration ruling, and, among other things, all other disputes between Valeant, DPS and us related to our intellectual property, confidential information and contractual rights. We agreed to provide Valeant a paid-up, irrevocable, non-exclusive, worldwide license to all patents that contain claims covering efinaconazole.

 

We do not have exclusive rights to intellectual property we developed under U.S. federally funded research grants and contracts in connection with certain of our neglected diseases initiatives, including our recent collaborations with the Gates Foundation and DTRA, and, in the case of those funded research activities, we could ultimately lose the rights we do have under certain circumstances.*

 

Some of our intellectual property rights related to compounds that are not in clinical development as of September 30, 2013 were initially developed in the course of research funded by the U.S. government. As a result, the U.S. government may have certain rights to intellectual property embodied in our current or future products pursuant to the Bayh-Dole Act of 1980. Government rights in certain inventions developed under a government-funded program include a non-exclusive, non-transferable, irrevocable worldwide license to use inventions for any governmental purpose. In addition, the U.S. government has the right to require us to grant exclusive licenses to any of these inventions to a third party if they determine that: (i) adequate steps have not been taken to commercialize the invention; (ii) government action is necessary to meet public health or safety needs; or (iii) government action is necessary to meet requirements for public use under federal regulations. The U.S. government also has the right to take title to these inventions if we fail to disclose the invention to the government and fail to file an application to register the intellectual property within specified time limits. In addition, the U.S. government may acquire title in any country in which a patent application is not filed within specified time limits.

 

Some of our intellectual property rights related to boron-containing compounds that are in clinical development as of September 30, 2013 were developed through collaborations. We accept research funding from DNDi. We have a co-exclusive, royalty-free, sublicensable license with DNDi to make, use, import and manufacture products for treatment of human African trypanosomiasis, Chagas disease and cutaneous and visceral leishmaniasis in humans in all countries of the world, specifically excluding Japan, Australia, New Zealand, Russia, China and all countries of North America and Europe, or DNDi Territory. We also grant to DNDi an exclusive, royalty-free, sublicensable license to distribute, including uses by, or on behalf of, a public sector agency,

 

52



Table of Contents

 

products containing molecules synthesized under the research plan for treatment of human African trypanosomiasis, Chagas disease and cutaneous and visceral leishmaniasis in humans in the DNDi Territory. As a result, we may not be able to realize any revenue in the DNDi Territory for any human therapeutics that we discover for these diseases. In March 2012, DNDi initiated a Phase 1 clinical trial for AN5568 in France. AN5568 is being developed for the treatment of sleeping sickness, or HAT. As of September 30, 2013, the boron-containing compounds being studied in this collaboration are structurally distinct from our other clinical product candidates. As of September 30, 2013, none of our other clinical product candidates are being considered for use in the DNDi collaboration. Some of our intellectual property rights related to boron-containing compounds that are not in clinical development as of September 30, 2013 were developed through a collaboration with Medicines for Malaria Venture, or MMV. We accept research and development funding from MMV, and we provide MMV with a worldwide, royalty-free non-exclusive license (without the right to sublicense, except with our prior written approval) to intellectual property rights arising under the collaboration to develop human therapeutics for the treatment of malaria under our research and development agreements with MMV. As of September 30, 2013, the boron-containing compounds under development in this collaboration are structurally distinct from our clinical product candidates. As of September 30, 2013, none of our clinical product candidates are being considered for use in the MMV collaboration.

 

Under our Gates Foundation collaboration, our research efforts with respect to project compounds in neglected diseases and Gates Foundation priority areas in identified developing countries are subject to co-ownership or exclusive exploitation rights of the Gates Foundation. While we have a first right to develop and commercialize those project compounds, we are required to implement a global access program for such compounds and we may not be able to further develop or exploit project compounds identified in the collaboration.

 

Under our DTRA collaboration, we will design and discover new classes of systemic antibiotics under a drug discovery consortium formed by us, Colorado State University (CSU) and the University of California at Berkeley (UCB), and will conduct the research over a three and a half year period. The total $13.5 million award is available to the consortium to fund $2.7 million of research reimbursement for the first eleven month period through September 30, 2014, and $5.0 million and $5.7 million is available upon DTRA exercising their option to fund the subsequent twelve and nineteen-month periods, respectively. The funds will support our internal research as well as research conducted in the labs of CSU and UCB. Our research efforts are subject to co-ownership rights with the U.S. Government.

 

We do not have exclusive rights to certain intellectual property as our rights to certain patents and molecules in our collaborations are jointly owned with our collaborators.*

 

As of September 30, 2013, we jointly own 1 U.S. patent, 1 provisional U.S. patent application and 1 international (PCT) patent application with a collaborator, and have a license under 1 non-provisional U.S. patent application and 16 non-U.S. patent applications solely owned by the collaborator. Under a separate collaboration, we jointly own 1 provisional U.S. patent application, 2 non-provisional U.S. patent applications, 2 international (PCT) patent applications and 16 non-U.S. patent applications. The rights of our collaborators to these and other compounds under the collaborations may in the future restrict our ability to further develop or generate revenues from those compounds except through the collaborations.

 

Risks Related to Employee Matters and Managing Growth

 

We may need to expand certain of our operations and increase the size of our company, and we may experience difficulties in managing growth.

 

As we increase the number of product development programs we have underway and advance our product candidates through preclinical studies, clinical trials and commercialization, we will need to increase our product development, scientific, marketing, sales and administrative headcount to manage these efforts. Our management, personnel and systems currently in place may not be adequate to support this future growth. Our need to effectively manage our operations, growth and various projects requires that we:

 

·                  successfully attract and recruit new employees with the expertise and experience we will require;

 

·                  manage our clinical programs effectively, which we anticipate being conducted at numerous clinical sites;

 

·                  develop a marketing and sales infrastructure; and

 

·                  continue to develop our operational, financial and management controls, reporting systems and procedures.

 

If we are unable to successfully manage this growth, our business may be adversely affected.

 

53



Table of Contents

 

We may not be able to manage our business effectively if we are unable to attract and retain key personnel.

 

We may not be able to attract or retain qualified management, finance, scientific and clinical personnel in the future due to the intense competition for qualified personnel among biotechnology, pharmaceutical and other businesses, particularly in Northern California. If we are not able to attract and retain necessary personnel to accomplish our business objectives, we may experience constraints that will significantly impede the achievement of our development objectives, our ability to raise additional capital and our ability to implement our business strategy.

 

Our industry has experienced a high rate of turnover of management personnel in recent years. We are highly dependent on the development, regulatory, commercialization and business development expertise of our executive officers and key employees. If we lose one or more of our executive officers or key employees, our ability to implement our business strategy successfully could be seriously harmed. We have entered into change of control and severance agreements with each of our officers as part of our retention efforts. Replacing executive officers and key employees may be difficult and may take an extended period of time because of the limited number of individuals in our industry with the breadth of skills and experience required to develop, gain regulatory approval of and commercialize products successfully. Competition to hire from this limited pool is intense, and we may be unable to hire, train, motivate or retain these additional key personnel. Our failure to retain key personnel could materially harm our business.

 

If we fail to maintain proper and effective internal controls, our ability to produce accurate financial statements on a timely basis could be impaired, which would adversely affect our business and our stock price.

 

We operate in an increasingly demanding regulatory environment, which requires us to comply with the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and the related rules and regulations of the Securities and Exchange Commission, expanded disclosure requirements, accelerated reporting requirements and more complex accounting rules. Company responsibilities required by the Sarbanes-Oxley Act include establishing 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. The growth of our operations and our initial public offering created a need for additional resources within the accounting and finance functions in order to produce timely financial information and to create the level of segregation of duties customary for a U.S. public company.

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Our management does not expect that our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within our company will have been detected.

 

We were required to comply with Section 404 of the Sarbanes-Oxley Act, or Section 404, in connection with the Annual Report on Form 10-K for the year ending December 31, 2012. We have expended significant resources to develop the necessary documentation and testing procedures required by Section 404. We cannot be certain that the actions we have taken to improve our internal control over financial reporting will be sufficient, and if we are unable to produce accurate financial statements on a timely basis, investors could lose confidence in the reliability of our financial statements, which could cause the market price of our common stock to decline and make it more difficult for us to finance our operations and growth.

 

Other Risks Relating to Our Business

 

We face potential product liability exposure, and if successful claims are brought against us, we may incur substantial liability for a product candidate and may have to limit its commercialization.

 

The use of our product candidates in clinical trials and the sale of any products for which we may obtain marketing approval expose us to the risk of product liability claims. Product liability claims may be brought against us or our partners by participants enrolled in our clinical trials, patients, healthcare providers or others using, administering or selling our products. If we cannot successfully defend ourselves against any such claims, we would incur substantial liabilities. Regardless of merit or eventual outcome, product liability claims may result in:

 

·                  withdrawal of clinical trial participants;

 

·                  termination of clinical trial sites or entire trial programs;

 

·                  costs of related litigation;

 

54



Table of Contents

 

·                  substantial monetary awards to patients or other claimants;

 

·                  decreased demand for our product candidates and loss of revenues;

 

·                  impairment of our business reputation;

 

·                  diversion of management and scientific resources from our business operations; and

 

·                  the inability to commercialize our product candidates.

 

We have obtained limited product liability insurance coverage for our clinical trials domestically and in selected foreign countries where we are conducting clinical trials. Our coverage is currently limited to $5.0 million per occurrence and $5.0 million in the aggregate per year, as well as additional local country product liability coverage for trials conducted outside of the U.S. as required by the local country regulations. As such, our insurance coverage may not reimburse us or may not be sufficient to reimburse us for any expenses or losses we may suffer. Moreover, insurance coverage is becoming increasingly expensive, and, in the future, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to product liability. We intend to expand our insurance coverage for products to include the sale of commercial products if we obtain marketing approval for our product candidates in development, but we may be unable to obtain commercially reasonable product liability insurance for any products approved for marketing. Large judgments have been awarded in class action lawsuits based on drugs that had unanticipated side effects. A successful product liability claim or series of claims brought against us, particularly if judgments exceed our insurance coverage, could decrease our cash and adversely affect our business.

 

Our operations involve hazardous materials, which could subject us to significant liabilities.

 

Our research and development processes involve the controlled use of hazardous materials, including chemicals. Our operations produce hazardous waste products. We cannot eliminate the risk of accidental contamination or discharge or injury from these materials. Federal, state and local laws and regulations govern the use, manufacture, storage, handling and disposal of these materials. We could be subject to civil damages in the event of exposure of individuals to hazardous materials. In addition, claimants may sue us for injury or contamination that results from our use of these materials and our liability may exceed our total assets. We have general liability insurance coverage of up to $5.0 million per occurrence, with an annual aggregate limit of $6.0 million, which excludes pollution liability. This coverage may not be adequate to cover all claims related to our biological or hazardous materials. Furthermore, if we were to be held liable for a claim involving our biological or hazardous materials, this liability could exceed our insurance coverage, if any, and our other financial resources. Compliance with environmental and other laws and regulations may be expensive and current or future regulations may impair our research, development or production efforts.

 

In addition, we may incur substantial costs in order to comply with current or future environmental, health and safety laws and regulations. These current or future laws and regulations may impair our research, development or production efforts. Failure to comply with these laws and regulations also may result in substantial fines, penalties or other sanctions.

 

Our insurance policies are expensive and protect us only from some business risks, which will leave us exposed to significant uninsured liabilities.

 

We do not carry insurance for all categories of risk that our business may encounter. For example, we do not carry earthquake insurance. In the event of a major earthquake in our region, our business could suffer significant and uninsured damage and loss. Some of the policies we currently maintain include general liability, employment practices liability, property, auto, workers’ compensation, products liability and directors’ and officers’ insurance. We do not know, however, if we will be able to maintain existing insurance with adequate levels of coverage. Any significant uninsured liability may require us to pay substantial amounts, which would adversely affect our cash position and results of operations.

 

Risks Relating to Owning Our Common Stock

 

Ownership in our common stock is highly concentrated. Our executive officers, directors and principal stockholders have the ability to significantly influence all matters submitted to our stockholders for approval.*

 

As of October 31, 2013, our executive officers, directors and stockholders who own more than 5% of our outstanding common stock, together beneficially own shares representing approximately 48% of our common stock based on reports filed with the SEC. While this does not represent a majority of our outstanding common stock, if these stockholders were to choose to act together, they would be able to significantly influence all matters submitted to our stockholders for approval, as well as our management and affairs. For example, these persons, if

 

55



Table of Contents

 

they choose to act together, will significantly influence the election of directors and approval of any merger, consolidation, sale of all or substantially all of our assets or other business combination or reorganization. This concentration of voting power could delay or prevent an acquisition of us on terms that other stockholders may desire. The interests of this group of stockholders may not always coincide with your interests or the interests of other stockholders and they may act in a manner that advances their best interests and not necessarily those of other stockholders, including seeking a premium value for their common stock, and might affect the prevailing market price for our common stock.

 

If we raise additional capital by issuing securities in the future, such as under our existing equity distribution agreement, it will cause dilution to existing stockholders and may cause our share price to decline.

 

We may raise additional funds through the issuance and sale of additional shares of our common stock or other securities convertible into or exchangeable for our common stock. For example, in January 2013, we entered into an equity distribution agreement with Wedbush Securities Inc., or Wedbush, pursuant to which we may issue and sell shares of our common stock having an aggregate offering price up to $25.0 million, from time to time. The number of shares ultimately offered for sale by Wedbush is dependent upon the number of shares that we elect to sell through Wedbush under the agreement. Depending upon market liquidity at the time, sales of shares of our common stock through Wedbush under the agreement may cause the trading price of our common stock to decline.

 

Additionally, and separate from our equity securities agreement with Wedbush, in April 2013 and May 2013, we sold shares of our common stock for net proceeds of approximately $5.0 million and $21.3 million, respectively. To the extent that we raise additional capital by issuing equity securities under the agreement with Wedbush or otherwise, our stockholders will experience additional dilution, and any such issuances may result in downward pressure on the price of our common stock.

 

Sales of our common stock in the “at-the-market” offering, or the perception that such sales may occur, could cause the market price of our common stock to fall.

 

We may issue shares of our common stock with aggregate sales proceeds of up to $25.0 million from time to time in connection with the “at-the-market” offering. Through October 31, 2013, we sold shares of our common stock for net proceeds of approximately $1.3 million and currently have approximately $23.6 million potentially remaining available for sale under our “at-the-market” offering and the issuance from time to time of these new shares of common stock, or our ability to issue these new shares of common stock in this offering, could have the effect of depressing the market price for our common stock.

 

We do not anticipate paying cash dividends, and accordingly, stockholders must rely on stock appreciation for any return on their investment.

 

We do not anticipate paying cash dividends in the future. As a result, only appreciation of the price of our common stock, which may never occur, will provide a return to stockholders. Investors seeking cash dividends should not invest in our common stock. In addition, our ability to pay cash dividends is currently prohibited by the terms of our loan and security agreement with Hercules.

 

Our share price may be volatile and could decline significantly.

 

The market price of shares of our common stock could be subject to wide fluctuations in response to many risk factors listed in this section, and others beyond our control, including:

 

·                  results of our clinical trials;