F-1/A 1 d517182df1a.htm AMENDMENT NO. 4 TO FORM F-1 Amendment No. 4 to Form F-1
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Registration No. 333-189428

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 4

To

FORM F-1

REGISTRATION STATEMENT

UNDER THE SECURITIES ACT OF 1933

 

 

Iroko Pharmaceuticals Inc.

(Exact name of registrant as specified in its charter)

 

British Virgin Islands   2834   Not Applicable

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

Iroko Pharmaceuticals Inc.

One Kew Place, 150 Rouse Boulevard, Philadelphia, PA 19112

(267) 546-3003

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

Moji James

General Counsel

Iroko Pharmaceuticals Inc.

One Kew Place, 150 Rouse Boulevard, Philadelphia, PA 19112

(267) 546-3003

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

 

 

Copies to:

 

Carmelo M. Gordian

Ted A. Gilman

Andrews Kurth LLP

111 Congress, Suite 1700

Austin, TX 78701

(512) 320-9200

 

Richard D. Truesdell, Jr.

Davis Polk & Wardwell LLP

450 Lexington Avenue

New York, NY 10017

(212) 450-4000

 

 

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

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

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

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

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

 

 

CALCULATION OF REGISTRATION FEE

 

 

TITLE OF EACH CLASS OF
SECURITIES TO BE REGISTERED
 

PROPOSED MAXIMUM
AGGREGATE

OFFERING PRICE (1)

  AMOUNT OF
REGISTRATION
FEE 

Ordinary shares, par value $0.01

  $128,750,000   $17,562

 

 

 

(1)   

Estimated solely for the purpose of computing the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended. Includes the offering price of shares that the underwriters have the option to purchase to cover over-allotments, if any.

 

 

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

 

 


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

 

SUBJECT TO COMPLETION DATED JULY 18, 2013

 

Preliminary Prospectus

6,500,000 Shares

 

LOGO

Iroko Pharmaceuticals Inc. is offering 6,500,000 ordinary shares. This is our initial public offering and no public market currently exists for our shares. We expect that the initial public offering price will be between $14.00 and $17.00 per share.

We have applied to list our ordinary shares on the NASDAQ Global Select Market under the symbol “IRKO”.

Cordial Investments Inc., our controlling shareholder, has indicated an interest in purchasing up to $5.0 million in ordinary shares in this offering at the initial public offering price. However, because indications of interest are not binding agreements or commitments to purchase, the underwriters could determine to sell more, less or no shares to such shareholder and such shareholder could determine to purchase more, less or no shares in this offering.

We are an “emerging growth company” under applicable federal securities laws and will be subject to reduced public company reporting requirements. Investing in our ordinary shares involves risks. See “Risk Factors” beginning on page 15 to read about risks you should consider before buying your ordinary shares.

$         Per Ordinary Share

 

 

 

     PER SHARE      TOTAL  

Price to the public

   $                    $                

Underwriting discounts and commissions (1)

   $                    $                

Proceeds to us (before expenses)

   $                    $                

 

 

(1)   

See the section of this prospectus entitled “Underwriting.”

To the extent that the underwriters sell more than 6,500,000 ordinary shares, the underwriters have a 30-day option to purchase up to an additional 975,000 ordinary shares from us on the same terms as set forth above. See the section of this prospectus entitled “Underwriting.”

The Securities and Exchange Commission and state securities commissions have not approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the ordinary shares to purchasers on                     , 2013.

 

Jefferies     William Blair
  Canaccord Genuity  
  Oppenheimer & Co.  

The date of this prospectus is                     , 2013


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LOGO

 

 

 

 


Table of Contents

TABLE OF CONTENTS

 

 

 

     PAGE  

Prospectus Summary

     1   

Summary Of The Offering

     7   

Summary Consolidated Financial Data

     9   

Corporate Formation And Reorganization

     11   

Risk Factors

     15   

Special Note Regarding Forward-Looking Statements

     47   

Industry And Market Data

     48   

Use Of Proceeds

     49   

Dividend Policy

     50   

Capitalization

     51   

Dilution

     53   

Pricing Sensitivity Analysis

     55   

Selected Consolidated Financial Data

     56   

Management’s Discussion And Analysis Of Financial Condition And Results Of Operations

     58   

Changes In And Disagreements With Accountants On Accounting And Financial Disclosure

     86   

Business

     87   

Management

     120   

Executive Compensation

     128   

Certain Relationships And Related Person Transactions

     135   

Principal Shareholders

     139   

Description Of Share Capital

     142   

Shares Eligible For Future Sale

     154   

Tax Considerations

     156   

Underwriting

     160   

Expenses Related To This Offering

     165   

Service Of Process And Enforcement Of Liabilities

     166   

Legal Matters

     167   

Experts

     168   

Where You Can Find More Information

     169   

Index To Financial Statements

     F-1   

 

 


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We have not authorized anyone to provide you with information other than that contained in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we have referred you. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give to you. This document may only be used where it is legal to sell these securities. The information in this document may only be accurate on the date of this document.

 

 

Dealer Prospectus Delivery Obligation

Until                 , 2013 (25 days after the commencement of the offering), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions.

 

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IMPORTANT INTRODUCTORY INFORMATION

As described under “Corporate Formation and Reorganization,” we have effected a number of transactions, which we refer to as the Reorganization Transactions, which resulted in our issuance of convertible preference shares and the redesignation of any ordinary shares we previously issued into class 1 ordinary shares. See “Corporate Formation and Reorganization” for a complete description of the Reorganization Transactions. The conversion ratio of our convertible preference shares and class 1 ordinary shares issued in connection with the Reorganization Transactions into ordinary shares is dependent on the actual per-share initial public offering price in this offering and the timing of the offering. Accordingly, the number of our ordinary shares that will be outstanding as of the consummation of this offering cannot be determined at this time. Where information in this prospectus gives effect to the Reorganization Transactions, such information is presented assuming an initial public offering price of $15.50 per share, the midpoint of the price range set forth on the cover page of this prospectus, and a closing date of July 31, 2013. For an analysis of how such information would change if the initial public offering price is not equal to the midpoint of the price range, see “Pricing Sensitivity Analysis.”

In addition, our ordinary shares were recently redesignated as class 1 ordinary shares solely to effect a restructuring of our share capital in connection with this offering, which we refer to as the Restructuring. As part of the Restructuring, prior to the consummation of this offering, all class 1 ordinary shares will be converted into approximately 0.8359 ordinary shares (assuming (i) an initial offering price of $15.50, the midpoint of the price range set forth on the cover page of this prospectus and (ii) a closing date of July 31, 2013) and, at such time, all class 1 ordinary shares will cease to be outstanding. All historical references to ordinary shares in the financial statements contained in this prospectus are therefore technically references to class 1 ordinary shares, but have not been so reflected given the expected short duration of such designation. See “Corporate Formation and Reorganization” for further information regarding the Restructuring.

Unless the context otherwise requires, references in this prospectus to “Iroko,” “we,” “our,” “us,” and the “company” refer to Iroko Pharmaceuticals Inc. together with its subsidiaries and, in the case of historical information, its predecessor entities. References in this prospectus to “iCeutica” refer to iCeutica Holdings Inc. and its subsidiaries. iCeutica is a company that is also controlled by our parent company.

 

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PROSPECTUS SUMMARY

This summary highlights the information contained elsewhere in this prospectus and is a brief overview of the key aspects of the offering. Because this is only a summary, it does not contain all of the information that may be important to you. Before investing in our ordinary shares, you should read this entire prospectus, including the information set forth under the headings “Risk Factors,” “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and our consolidated financial statements and related notes thereto. Some of the statements in this prospectus constitute forward-looking statements. Please read “Special Note Regarding Forward-Looking Statements” for more information.

Overview

We are a global, specialty pharmaceutical company focused on the development and commercialization of novel nonsteroidal anti-inflammatory drug, or NSAID, therapeutics for patients with mild to moderate acute and chronic pain. Our pipeline includes six submicron NSAID product candidates, two of which have been submitted to the U.S. Food and Drug Administration or FDA for marketing approval. We use the iCeutica proprietary SoluMatrix™ technology platform, which we have exclusively licensed, or have the option to exclusively license, for all NSAIDs, to create submicron, lower dose formulations of established NSAIDs. NSAIDs are one of the largest classes of pain-relieving medications and have been a mainstay of treatment for a variety of pain related conditions notwithstanding their potential adverse side effects. The proprietary technology platform we use has been shown, at a statistically significant level in clinical studies, to fundamentally change the absorption profile of our late-stage NSAID product candidates so that they are quickly dissolved and absorbed to allow for rapid onset of pain relief at lower doses and lower systemic exposures, as measured by plasma levels of a drug over time, than the comparable commercially available NSAID, which are diclofenac, indomethacin, and naproxen. We are applying this proprietary technology platform to additional NSAID molecules in preclinical development and expect to experience similar results. We believe that our product candidates offer promising, efficacious pain treatment options for patients with the potential for an improved safety profile.

The NSAID market is one of the largest therapeutic classes in the United States with approximately 106 million prescriptions written representing approximately 7 billion units in 2011. While NSAIDs are generally considered to be safe and effective, they have also been associated with dose-related serious, adverse events in some patients, including gastrointestinal, renal and cardiovascular events. The recognized correlation between systemic exposure to NSAIDs and these adverse events led the U.S. Food and Drug Administration, or FDA, to issue its 2005 public health advisory recommending that NSAIDs should be used at their lowest effective dose for the shortest duration of time. We believe that our lower dose submicron NSAIDs address the FDA’s 2005 public health advisory by offering lower overall systemic exposure and thereby potentially reducing the occurrence of adverse events.

Our late-stage product candidates are submicron diclofenac (Zorvolex), submicron indomethacin (Tiforbex), submicron meloxicam and submicron naproxen and are being developed for both acute pain (Zorvolex, Tiforbex) and osteoarthritis pain (Zorvolex, submicron meloxicam, submicron naproxen) indications in adult patients. We have completed Phase 3 clinical trials for Zorvolex and Tiforbex for acute pain in adult patients. We received an Agreement Letter for our Special Protocol Assessment, or SPA, from the FDA for Zorvolex and in December 2012 submitted a new drug application, or NDA, with the FDA for the treatment of acute pain in adult patients, which was accepted for filing in February 2013. We also intend to submit a supplemental NDA, or sNDA, with the FDA for Zorvolex for treatment of osteoarthritis pain in adult patients in late 2013. We submitted an NDA with the FDA for Tiforbex for the treatment of acute pain in adult patients in April 2013, which was accepted for filing in July 2013. Phase 3 clinical trials commenced for the treatment of osteoarthritis pain in adult patients for submicron meloxicam in March 2013 and are planned to begin for submicron naproxen in 2014. The two product candidates in preclinical development are submicron celecoxib and submicron ibuprofen. We intend to continue advancing these and potentially other product candidates as we build our pipeline.

 

 

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In addition to our submicron NSAID product pipeline, our two approved products, Indocin® (indomethacin) and Aldomet® (methyldopa), are marketed in 48 countries. The approved indications for Indocin® (indomethacin) include moderate to severe rheumatoid arthritis, including acute flares of chronic disease, moderate to severe ankylosing spondylitis, moderate to severe osteoarthritis, acute painful shoulder (bursitis and/or tendinitis) and acute gouty arthritis. The approved indication for Aldomet® (methyldopa) includes the treatment of hypertension. These products generated approximately $20.0 million in net sales globally in 2012, including $13.3 million in sales by our licensee, Aspen Pharmacare Holdings Limited and its subsidiaries, or Aspen. We sell these products in the U.S. and seven European countries (Austria, Belgium, France, Italy, Portugal, Spain and Switzerland), which generated $6.7 million of net sales in 2012. In addition, we received $3.2 million in royalties from rest of world net sales generated by Aspen in 2012. The operations and capabilities established to support these products have demonstrated our ability to manage the manufacture, distribution and sale of drug therapeutic products globally.

NSAID Market Background

The NSAID market is one of the largest therapeutic classes in the U.S. with approximately 106 million prescriptions written representing approximately 7 billion units in 2011. The prescribing of NSAIDs has increased by approximately 12% from 2007 to 2011 primarily driven by an aging population, improvements in recognition and treatment of pain and increasing concerns with the use of other alternatives such as acetaminophen and opioids, including hydrocodone-NSAID combinations, oxycodone-NSAID combinations, hydrocodone-acetaminophen combinations and oxycodone-acetaminophen combinations. This market is largely composed of off-patent products. The largest remaining on-patent branded NSAID, Celebrex® (celecoxib), generated approximately 10 million prescriptions, resulting in U.S. sales of approximately $1.9 billion in 2011. If all 106 million NSAID prescriptions were sold at pricing levels comparable to Celebrex®, we believe that the aggregate U.S. NSAID market value would be approximately $20 billion annually.

NSAIDs are used to treat a variety of painful conditions including acute pain, back pain, gout, osteoarthritis, rheumatoid arthritis and ankylosing spondylitis. NSAIDs provide relief from symptoms of many of these conditions including pain and inflammation. While NSAIDs are generally considered to be safe and effective, they have also been associated with serious adverse events in some patients. These serious adverse events include gastrointestinal events such as bleeding and ulcers, cardiovascular events such as acute myocardial infarctions, or heart attacks, strokes and renal events. The serious gastrointestinal complications alone account for an estimated 3,200 to 16,000 deaths and 32,000 to 103,000 hospitalizations per year in the U.S.  Multiple studies have indicated a correlation between systemic exposure to NSAIDs and these adverse events. As a result, in 2005 the FDA issued a public health advisory titled “Important Changes and Additional Warnings for COX-2 Selective and Non-Selective Non-Steroidal Anti-Inflammatory Drugs (NSAIDs)”. In this advisory the FDA requires manufacturers of all marketed prescription NSAIDs to revise the labeling (package insert) for their products to include a boxed warning (commonly referred to as a “black box” warning) and a medication guide. The boxed warning highlights the potential for increased risk of cardiovascular events with these drugs and the documented, serious, and potentially life-threatening adverse health effects associated with their use. The FDA requires companies to provide a medication guide which informs patients of the need to discuss with their doctor the risks and benefits of using NSAIDs and the importance of using the lowest effective dose for the shortest duration possible if treatment with an NSAID is warranted for an individual. Health Canada also issued a guidance document to aid in the revision of the content of the NSAID Product Monograph and associated labeling materials by the pharmaceutical industry. This guidance indicated that the use of NSAID products “should be limited to the lowest effective dose for the shortest possible duration of treatment in order to minimize the potential risk for cardiovascular or gastrointestinal adverse events.” Additionally, the European Medicines Agency, or EMA, and other regulatory bodies and medical societies similarly have recommended that NSAIDs should be used at their lowest effective dose for the shortest duration of time.

 

 

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Our Strategy

We use the proprietary SoluMatrix™ technology platform to create a suite of submicron, lower dose formulations of known NSAIDs. The proprietary technology platform we use has been shown to fundamentally change the absorption profile of our late-stage NSAID product candidates so that they are quickly dissolved and absorbed to allow for rapid onset of pain relief at lower doses and lower systemic exposures than comparable commercially available NSAIDs. With improved dissolution, formulations using this technology may offer meaningful benefits: reduction of the amount of drug required to achieve, speed up or improve consistency of, the drug’s therapeutic effect. We are applying this proprietary technology platform to additional NSAID molecules in preclinical development and expect to experience similar results. We believe that our product candidates offer potentially promising, efficacious pain treatment options for patients with the potential for an improved safety profile.

The key elements of our strategy are to:

 

  n  

build a leading pain treatment company focused on our branded submicron NSAID franchise;

 

  n  

build marketing and sales capabilities in the U.S.;

 

  n  

maximize the value of our submicron NSAID franchise by launching in selected markets outside the U.S.; and

 

  n  

maximize the value of our currently marketed products.

Our Product Candidates

Our product candidates address a critical need for new NSAIDs that provide efficacious pain relief while potentially reducing the risk of serious gastrointestinal, cardiovascular and renal events. They address FDA, EMA and other regulatory bodies’ and medical societies’ recommendations that NSAIDs should be used at their lowest effective dose for the shortest duration of time. The availability of these product candidates will provide physicians and patients with alternatives to currently available NSAIDs and other analgesic products, including, in some cases, opioid and acetaminophen products. The following table highlights the current stage of clinical development for each of our product candidates.

SoluMatrix™ Technology Platform

The proprietary SoluMatrix™ technology platform uses a dry milling process to reduce the drug particle size in our submicron NSAIDs by at least ten times compared to the particle size in the pre-milled NSAID. The smaller particle size results in increased surface area relative to mass, which increases the dissolution and absorption rates without changing the chemical structures of the drug molecules themselves. Because of this altered absorption profile, our late-stage NSAID product candidates dissolve and are absorbed at a rate that allows for the rapid onset of pain relief at lower doses and lower systemic exposures than comparable commercially available NSAIDs. This technology has been licensed to us by iCeutica for exclusive use in the NSAID market.

Late-Stage Pipeline

 

 

 

PRODUCT CANDIDATE

  

TARGET INDICATION

  

DEVELOPMENT STATUS

  

COMMERCIAL RIGHTS

Zorvolex

   Acute pain   

NDA submitted December 2012; accepted for filing February 2013

   Worldwide

Zorvolex

   Osteoarthritis pain    Phase 3 complete    Worldwide

Tiforbex

   Acute pain    NDA submitted April 2013; accepted for filing July 2013    Worldwide

Submicron meloxicam

   Osteoarthritis pain    Phase 1 and Phase 3 ongoing (1)    Worldwide

Submicron naproxen

   Osteoarthritis pain    Phase 2 complete (2)    Worldwide

 

 

 

 

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(1)  

We have begun, and are enrolling patients for, two Phase 3 clinical trials for submicron meloxicam. In addition, we have completed two Phase 1 clinical trials for submicron meloxicam and have commenced a third Phase 1 clinical trial, which is proceeding concurrently with the Phase 3 clinical trials.

(2)  

Phase 2 clinical trials have been completed for submicron naproxen. We are planning Phase 3 clinical trials with a potential start date in 2014.

Zorvolex is a novel formulation of diclofenac developed using the proprietary SoluMatrixTM technology platform and is being developed for the treatment of acute pain of mild to moderate severity in adult patients. Products containing diclofenac salts have been approved in the U.S. since 1988 and are indicated for a range of conditions, including primary dysmenorrhea, the treatment of mild to moderate pain, and for the relief of the signs and symptoms of osteoarthritis and rheumatoid arthritis. We have completed a Phase 3 trial for the treatment of acute pain. We have an SPA in place and in December 2012 submitted an NDA with the FDA for this initial product candidate for acute pain, which was accepted for filing in February 2013. We believe we have followed all procedures and met all endpoints described in this SPA. We have completed the efficacy component of our Phase 3 trial program for osteoarthritis pain, have completed the open label safety study component and intend to file an sNDA with the FDA in late 2013.

Tiforbex is a novel formulation of indomethacin using the proprietary SoluMatrix™ technology platform and is being developed for the treatment of acute pain of mild to moderate severity in adult patients. Products containing indomethacin have been licensed in the U.S. since 1965 and are indicated for the treatment of moderate to severe rheumatoid arthritis, including acute flares of chronic disease, moderate to severe ankylosing spondylitis, moderate to severe osteoarthritis, acute painful shoulder (bursitis and/or tendinitis) and acute gouty arthritis. We have completed two Phase 3 clinical trials for the treatment of acute pain in adult patients. We have submitted an NDA for this product candidate for acute pain with the FDA in April 2013, which was accepted for filing in July 2013.

Submicron meloxicam is a novel formulation of meloxicam using the proprietary SoluMatrix™ technology platform. Meloxicam is the active ingredient in Mobic® Tablets, a product sold by Boehringer Ingelheim Pharmaceuticals Inc.  Mobic® was approved in the U.S. in 2000 and is indicated for the relief of the signs and symptoms of osteoarthritis, rheumatoid arthritis and pauciarticular or polyarticular juvenile rheumatoid arthritis in patients two years of age and older. We are developing submicron meloxicam for the treatment of osteoarthritis pain in adult patients. We commenced Phase 3 clinical trials for this product candidate for this indication in March 2013. We plan to submit an NDA with the FDA in late 2014.

Submicron naproxen is a novel formulation of naproxen using the proprietary SoluMatrix™ technology platform. Products containing naproxen have been available in the U.S. since 1976 and are indicated for the treatment of rheumatoid arthritis, osteoarthritis, ankylosing spondylitis, tendonitis, bursitis, acute gout, relief of mild to moderate acute pain and acute dysmenorrhea. We are developing submicron naproxen for the treatment of osteoarthritis pain in adult patients. We have completed Phase 2 clinical trials and plan to commence Phase 3 clinical trials for the treatment of osteoarthritis pain in adult patients in 2014.

Preclinical Pipeline

In addition to late-stage product candidates, we have submicron formulations of celecoxib and ibuprofen. We intend to continue advancing these and potentially other submicron NSAID product candidates that we have the right to exclusively license from iCeutica as we build our pipeline.

Our Marketing Strategy

Our marketing plan involves increasing awareness among physicians of the rationale and the FDA’s and other regulatory bodies’ and medical societies’ recommendations for the use of the lowest effective doses of NSAIDs. Our submicron NSAID products will be positioned as uniquely offering effective pain relief at lower doses and systemic exposures. Zorvolex will be positioned as the effective lower dose NSAID that can be used both for short and long periods of time. Tiforbex will be positioned as the effective lower dose NSAID best used for pain relief related with acute conditions and for shorter periods of time. We believe that co-positioning Zorvolex and Tiforbex, in part a reflection of existing medical practice, will allow these products to gain share from the different NSAID market segments.

 

 

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Our marketing strategies for the submicron NSAIDs are based on extensive marketing research studies conducted with over 2,400 physicians, predominantly primary care physicians and rheumatologists. Market research studies were conducted with over 1,500 physicians for Zorvolex alone. These market research studies were conducted over the last two and a half years beginning in the fall of 2010 and consisted of both qualitative and quantitative studies including conjoint studies, positioning, message testing and concept testing studies. The insights derived from these studies along with sophisticated analytics such as segmentation and core base statistical areas, or CBSA, mapping has shaped our focus on the appropriate targets of physicians matched to CBSAs where patients are likely to have relatively unrestricted managed care coverage and core product messages that will be compelling to those physicians. About $1.5 million has been spent over the past two and a half years for the primary market research studies to physicians and an additional $1.4 million has been spent on data and analytics.

The marketing strategy for our submicron NSAIDs has been developed to:

 

  n  

ensure physicians have top of mind awareness of the rationale and numerous recommendations to use the lowest effective dose of NSAIDs for the shortest period of time;

 

  n  

differentiate our submicron NSAIDs individually and as a portfolio from other NSAIDs;

 

  n  

effectively co-position our submicron NSAID products for optimal share penetration;

 

  n  

ensure formulary availability and optimize reimbursement of our submicron NSAID products; and

 

  n  

use sophisticated analytics for efficient segmentation, targeting and geographical allocation of resources.

Reimbursement Strategy

Our reimbursement strategy in the U.S. is to demonstrate the value proposition of our submicron NSAID products to managed care payors. Our payor targeting and strategies have been guided by extensive market intelligence studies and analytics. During the past two and a half years, qualitative and quantitative market research have been conducted with about 50 key managed care decision makers made of medical directors and pharmacy directors. An additional 14 managed care decision makers have provided guidance in advisory board settings. Detailed CBSA level analysis has been conducted indexing coverage by plan and co-pay levels allowing for prioritization of favorable areas. Also, detailed plan level analytics have been conducted for approximately 55 payor accounts, including managed care plans and pharmacy benefit managers, evaluating their formulary management strategies and the relative effectiveness of those strategies. Overall, approximately $500,000 has been spent over the past two and a half years towards the efforts to understand the payors’ perspectives that guide our payor strategies.

The value proposition is as follows:

 

  n  

provide effective pain relief at lower doses;

 

  n  

provide products that facilitate the use of NSAIDs in accordance with the recommendations provided by the FDA, EMA, other regulatory bodies and medical societies;

 

  n  

potentially reduce serious adverse events thereby improving the pharmacoeconomic advantage of using our submicron NSAID products; and

 

  n  

provide an alternative that could reduce the usage of opioids.

Suppliers/Manufacturing

Our supply chain is composed of a network of third-party providers. This network consists of suppliers of raw material, excipients, active pharmaceutical ingredients, or APIs, contract manufacture operations and packaging. We do not own or operate facilities for the manufacturing or packaging of any of our current products. We do not have any current plans to establish our own manufacturing or packaging operations for our products.

 

 

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Risks Affecting Our Business

Our business is subject to a number of risks, including risks that may prevent us from achieving our business objectives or may adversely affect our business, financial condition, results of operations, cash flows and prospects, that you should consider before making a decision to invest in our ordinary shares. These risks are discussed more fully in the “Risk Factors” section of this prospectus, beginning on page 14.

These risks include, but are not limited to, the following:

 

  n  

we expect to incur losses in the near term and may never achieve or sustain profitability;

 

  n  

we cannot be certain that Zorvolex, Tiforbex or any of our other product candidates will receive regulatory approval, and without regulatory approval we will not be able to market our product candidates;

 

  n  

our products, if approved, may not be accepted in the marketplace;

 

  n  

we could be unsuccessful in obtaining or maintaining adequate patent protection for one or more of our product candidates and may be unable to maintain and protect our intellectual property assets, which could impair the advancement of our pipeline and commercial opportunities; and

 

  n  

all of our rights to patents and patent applications are exclusively licensed from iCeutica and we currently do not own or license any issued U.S. patents with respect to any of our proposed products.

Corporate Information

Iroko Pharmaceuticals, LLC, our primary operating company, was founded in 2007. Iroko Pharmaceuticals Inc. was incorporated on September 10, 2012, under the laws of the British Virgin Islands and is registered at the Registry of Corporate Affairs of the British Virgin Islands under the number 1732699, in connection with the transactions further described in “Corporate Formation and Reorganization” below and as a result controls Iroko Pharmaceuticals, LLC. Our principal executive office is located at One Kew Place, 150 Rouse Boulevard, Philadelphia, PA 19112, and our telephone number is (267) 546-3003. Our website address is http://www.iroko.com. The information contained in or accessible from our website is not incorporated into this prospectus, and you should not consider it part of this prospectus.

The “Iroko” name, the “Indocin®” name, the “Aldomet®” name, the “Zorvolex” name, the “Tiforbex” name, and related images, logos and symbols appearing in this prospectus are registered trademarks of Iroko in the U.S. and/or foreign jurisdictions. The “SoluMatrix™” name is the property of iCeutica. Other marks appearing in this prospectus are the property of their respective owners.

 

 

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SUMMARY OF THE OFFERING

 

Ordinary shares offered by us

6,500,000 shares.

 

Ordinary shares outstanding after this offering

31,753,549 shares (assuming no exercise of the underwriters’ over-allotment option).

 

Option to purchase additional shares

We have granted the underwriters a 30-day option to purchase up to 975,000 additional ordinary shares to cover over-allotments, if any.

 

Use of proceeds

We estimate that the net proceeds to us from this offering, after deducting underwriting discounts and estimated offering expenses payable by us, will be approximately $90.4 million, assuming an initial public offering price of $15.50 per share (the midpoint of the price range set forth on the cover page of this prospectus), or approximately $104.5 million if the underwriters exercise in full their option to purchase additional shares. We intend to use the net proceeds of this offering for working capital, and other general corporate purposes, which may include financing growth (including payment of increased levels of expenditures), developing, commercializing and launching new products and funding capital expenditures, acquisitions and investments. See “Use of Proceeds.”

 

Dividend policy

We do not anticipate paying any cash dividends on our ordinary shares in the foreseeable future. See “Dividend Policy.”

 

Directed share program

At our request, the underwriters have reserved up to 483,871 ordinary shares offered by this prospectus for sale, at the initial public offering price, to our directors, officers and other parties associated with us. Shares purchased by our directors, officers and other parties associated with us will be subject to the 180-day lock-up restriction described in the ‘‘Underwriting’’ section of this prospectus. The number of shares of common stock available for sale to the general public will be reduced to the extent these parties purchase such reserved shares. Any reserved shares that are not so purchased will be offered by the underwriters to the general public on the same basis as the other shares offered by this prospectus.

 

Proposed NASDAQ Global Select Market listing symbol (reserved)

“IRKO”

 

Risk factors

Investment in our ordinary shares involves substantial risks. You should read and consider this prospectus carefully, including the section entitled “Risk Factors” and the financial statements and the related notes to those statements included in this prospectus, before investing in our ordinary shares.

The number of ordinary shares outstanding after this offering is based on 25,253,549 ordinary shares outstanding as of March 31, 2013, which number assumes the automatic conversion of all of our outstanding convertible preference shares and class 1 ordinary shares into an aggregate of 24,160,358 ordinary shares, and the conversion of our convertible note into 967,742 ordinary shares, in each case assuming an initial public offering price of $15.50 per ordinary share (the midpoint of the price range set forth on the cover page

 

 

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of this prospectus), a closing date of July 31, 2013 and the completion of the Reorganization Transactions as described in the section of this prospectus titled “Corporate Formation and Reorganization.” The number of ordinary shares outstanding after this offering also includes 125,449 ordinary shares which we intend to grant as restricted shares to certain of our employees and other individuals associated with us prior to the consummation of the offering.

The number of ordinary shares outstanding after this offering excludes the following (each as of March 31, 2013 and at an assumed initial public offering price of $15.50 per share (the midpoint of the price range set forth on the cover page of this prospectus) and a closing date of July 31, 2013):

 

  n  

804,875 ordinary shares issuable upon the exercise of options at a weighted-average exercise price of $1.90 per share; and

 

  n  

15,631 ordinary shares reserved for future issuance under our 2012 Share Option Plan, or the 2012 Plan. Prior to the consummation of this offering, we intend to grant options to purchase ordinary shares (which will have an exercise price equal to the price at which ordinary shares are sold in this offering) to certain of our employees for all of the remaining ordinary shares reserved for issuance under the 2012 Plan.

Except as otherwise noted, all information in this prospectus:

 

  n  

assumes no exercise of the underwriters’ over-allotment option to purchase additional shares;

 

  n  

gives effect to the assumed automatic conversion prior to the completion of this offering of all of our outstanding convertible preference shares and class 1 ordinary shares into an aggregate of                  ordinary shares;

 

  n  

assumes the conversion upon the completion of this offering of our convertible note into              ordinary shares;

 

  n  

assumes the effectiveness of our Amended and Restated Memorandum and Articles of Association, which was filed on July 10, 2013; and

 

  n  

assumes an initial public offering price of $15.50 per ordinary share (the midpoint of the price range set forth on the cover page of this prospectus) and a closing date of July 31, 2013.

 

 

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SUMMARY CONSOLIDATED FINANCIAL DATA

The following tables summarize the consolidated financial data for the periods indicated. The summary consolidated statements of operations data for the years ended December 31, 2011 and 2012 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The consolidated statements of operations data for the three months ended March 31, 2012 and 2013 and the summary consolidated balance sheet data as of March 31, 2013 have been derived from our unaudited interim consolidated financial statements included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected in the future and our interim period results are not necessarily indicative of the results for a full year. The summary consolidated financial data below should be read in conjunction with the information contained in “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the consolidated financial statements and notes thereto, and other financial information included elsewhere in this prospectus.

 

 

 

    YEAR ENDED DECEMBER 31,     THREE MONTHS ENDED MARCH 31,  
            2011                     2012                       2012                          2013             
                (unaudited)  
    (in thousands, except share and per share data)  

Consolidated Statements of Operations Data:

       

Revenues:

       

Net product sales

  $ 7,443      $ 6,704      $ 1,652      $ 1,879   

Royalty revenues

    3,538        3,176        770        755   
 

 

 

   

 

 

   

 

 

   

 

 

 
    10,981        9,880        2,422        2,634   
 

 

 

   

 

 

   

 

 

   

 

 

 

Costs and expenses:

       

Cost of sales (excluding amortization of intangible assets)

    6,054        3,187        812        747   

Amortization of intangible assets

    1,717        1,717        429        429   

Selling, general and administrative

    18,913        27,017        4,946        10,519   

Research and development

    18,299        33,884        10,112        4,786   

Acquired in-process research and development

           11,000                 

Related-party management fee

    1,500        1,500        375        375   

Change in fair value of contingent consideration

    1,000        3,500                 
 

 

 

   

 

 

   

 

 

   

 

 

 
    47,483        81,805        16,674        16,856   
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

    (36,502     (71,925     (14,252     (14,222

Total other income (expense), net

    1,697        (2,789     58        (2,887
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations before income tax benefit

    (34,805     (74,714     (14,194     (17,109

Income tax benefit

    (1,079                     
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations

    (33,726     (74,714     (14,194     (17,109

Income from discontinued operations, net of tax

    1,877                        
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (31,849   $ (74,714   $ (14,194   $ (17,109
 

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) earnings per ordinary share—basic and diluted:

       

Loss per ordinary share from continuing operations

  $ (33,726   $ (74,714   $ (14,194   $ (17,109

Discontinued operations per ordinary share, net of tax

    1,877                        
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per ordinary share—basic and diluted

  $ (31,849   $ (74,714   $ (14,194   $ (17,109
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average basic and diluted ordinary shares outstanding

    1,000        1,000        1,000        1,000   
 

 

 

   

 

 

   

 

 

   

 

 

 

Unaudited pro forma net loss

    $ (72,056     $ (14,654
   

 

 

     

 

 

 

Unaudited pro forma basic and diluted net loss per ordinary share

    $ (3.86     $ (0.66
   

 

 

     

 

 

 

Unaudited pro forma weighted average basic and diluted ordinary shares outstanding

      18,670,892          22,102,958   
   

 

 

     

 

 

 

 

 

 

 

 

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     AS OF MARCH 31, 2013  
     ACTUAL     PRO FORMA (1)      PRO FORMA AS
ADJUSTED (1)(2)
 
    

(unaudited)

(in thousands)

 

Consolidated Balance Sheet Data:

       

Cash and cash equivalents

   $ 11,060      $ 36,060       $ 126,458   

Related-party note receivable

     4,500                  

Working capital

     (68,088     22,024         112,422   

Total assets

     79,371        99,871         190,269   

Related-party line of credit

     49,500                  

Related-party note payable

     25,000        10,000         10,000   

Total liabilities

     100,922        31,310         31,310   

Total shareholder’s equity (deficit)

     (21,551     68,561         158,959   

 

 

(1)  

Reflects (i) in April 2013, the conversion of $45.0 million in borrowings under our related-party line of credit and accrued interest of $4.9 million into 45,000,000 convertible preference shares, the conversion of $15.0 million of related-party promissory notes and accrued interest of $0.2 million into 15,000,000 convertible preference shares and the repayment of $4.5 million in borrowings under our related-party line of credit via an assignment of a $4.5 million note receivable due from iCeutica, (ii) the May 2013 issuance of 5,000,000 convertible preference shares for $5.0 million, (iii) the June 2013 issuance of 5,000,000 convertible preference shares for $5.0 million, (iv) the June 2013 issuance of a convertible note for $15.0 million, (v) the automatic conversion of all outstanding convertible preference shares and class 1 ordinary shares into an aggregate of 24,160,358 ordinary shares prior to the consummation of this offering and the conversion of our convertible note into 967,742 ordinary shares upon the consummation of this offering, and (vi) the issuance of 125,449 ordinary shares which we intend to grant as restricted shares to certain of our employees and other individuals associated with us prior to the consummation of the offering, in each case at an assumed initial public offering price of $15.50 per share (the midpoint of the price range set forth on the cover page of this prospectus) and a closing date of July 31, 2013, in each case as if such events had occurred on March 31, 2013.

(2)  

Further reflects (i) the effectiveness of our Amended and Restated Memorandum and Articles of Association which was filed on July 10, 2013, (ii) the issuance and sale by us of 6,500,000 ordinary shares in this offering at an assumed initial public offering price of $15.50 per share (the midpoint of the price range set forth on the cover page of this prospectus) and a closing date of July 31, 2013 and (iii) the application of our estimated net proceeds from this offering as set forth under “Use of Proceeds,” after deducting the estimated underwriting discounts and estimated offering expenses payable by us, as if this offering had occurred on March 31, 2013.

 

 

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CORPORATE FORMATION AND REORGANIZATION

Iroko Pharmaceuticals, LLC, a Delaware limited liability company and our primary operating company, was founded in 2007. On August 10, 2010, an investor group comprised of Vollin Holdings Limited, or Vollin, our controlling shareholder, and affiliates of Phoenix IP Ventures-III, LLC, or Phoenix IP Ventures, acquired Iroko Holdings LLC, a Delaware limited liability company, or Iroko Holdings, and the parent of Iroko Pharmaceuticals, LLC, through Iroko Intermediate Holdings, Inc., or Iroko Intermediate, a newly-formed Delaware corporation. Simultaneously with the acquisition of Iroko Holdings LLC, Iroko Holdings S.A. purchased 68,237,335 shares of common stock of Iroko Intermediate for aggregate proceeds of $68.2 million.

Subsequent to such acquisition, Iroko Holdings S.A. purchased 25,724,853 shares of common stock of Iroko Intermediate for aggregate proceeds to Iroko Intermediate of $25.7 million. In February 2012, Iroko Intermediate issued 98,393,500 shares of Series A preferred stock and 9,000,000 shares of common stock in exchange for all 93,962,188 shares of its common stock that were outstanding at that time. The terms of the Series A preferred stock provide that, upon a liquidation event, the holder of each share shall receive $1.00 per share plus a 20% annual compounding dividend from the date of purchase (which date of purchase was deemed to be date of the various original purchases of common stock). Subsequent to such exchange, Iroko Holdings S.A. purchased 14,000,000 shares of Series A preferred stock of Iroko Intermediate for $14.0 million.

In order to fund the company’s ongoing operations and development activities, during 2012 Vollin made loans to Iroko Pharmaceuticals, LLC totaling $49.5 million. Upon receipt of certain of these loans, Iroko Pharmaceuticals, LLC lent an aggregate of $4.5 million to iCeutica Inc., a subsidiary of Iroko Holdings S.A. at that time.

In September 2012, Iroko Pharmaceuticals Inc. was incorporated under the laws of the British Virgin Islands. In December 2012, Iroko Pharmaceuticals Inc. and iCeutica Holdings Inc. (which is also incorporated under the laws of the British Virgin Islands) each became wholly owned subsidiaries of Cordial Investments Inc., or Cordial, also incorporated under the laws of the British Virgin Islands. Vollin and affiliates of Phoenix IP Ventures own 100% of the outstanding voting interests of Cordial. Also in December 2012, all shares of Series A preferred stock and common stock of Iroko Intermediate held by Iroko Holdings S.A. were transferred to Iroko Pharmaceuticals Inc.

The chart below shows our corporate structure as of December 31, 2012:

 

LOGO

 

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In February 2013, Cordial entered into a promissory note with Iroko Pharmaceuticals Inc. whereby Iroko Pharmaceuticals Inc. could request that up to $30.0 million be lent to it by Cordial. In February 2013, Cordial lent Iroko Pharmaceuticals Inc. $5.0 million pursuant to such promissory note. In March 2013, Cordial lent Iroko Pharmaceuticals Inc. an additional $10.0 million pursuant to such promissory note. This promissory note was terminated on April 12, 2013 in connection with the consummation of the April Transactions.

On April 12, 2013, we consummated a series of transactions, or the April Transactions, which consolidated our capital structure. As part of the Reorganization Transactions, (i) the loans made by Vollin were repaid via an assignment of a related-party $4.5 million note receivable due from iCeutica and the issuance to Cordial of 45,000,000 of Iroko Pharmaceuticals Inc.’s convertible preference shares, which will convert into ordinary shares prior to the consummation of this offering and (ii) the loans made by Cordial were repaid via the issuance to Cordial of 15,000,000 of our convertible preference shares, which will convert into ordinary shares prior to the consummation of this offering. The convertible preference shares of Iroko Pharmaceuticals Inc. have substantially the same economic terms as the Series A preferred stock of Iroko Intermediate, and the date of purchase of the convertible preference shares issued in connection with the loan repayment was deemed to be the date of each respective loan.

Additionally, the April Transactions resulted in (i) the conversion of all 112,393,500 shares of Series A preferred stock of Iroko Intermediate into 112,393,501 convertible preference shares of Iroko Pharmaceuticals Inc., (ii) the conversion of all 9,000,000 shares of common stock of Iroko Intermediate held by Iroko Pharmaceuticals Inc. into 8,999,000 ordinary shares of Iroko Pharmaceuticals Inc. (which were subsequently converted into that number of class 1 ordinary shares), (iii) the conversion of the 18,375 shares of common stock of Iroko Intermediate into 18,375 ordinary shares of Iroko Pharmaceuticals Inc. (which were subsequently converted into that number of class 1 ordinary shares), (iv) the conversion of options to purchase 962,925 shares of common stock of Iroko Intermediate held by our officers, employees and consultants into options to purchase 962,925 ordinary shares of Iroko Pharmaceuticals Inc. (which were subsequently converted into that number of class 1 ordinary shares), and (v) the distribution to Cordial of an aggregate of 112,393,501 convertible preference shares and 9,000,000 ordinary shares of Iroko Pharmaceuticals Inc. (which were subsequently converted into that number of class 1 ordinary shares).

Upon the consummation of the April Transactions, Cordial owned 172,393,501 convertible preference shares and 9,000,000 ordinary shares of Iroko Pharmaceuticals Inc. (which were subsequently converted into that number of class 1 ordinary shares), which will constitute the only outstanding equity interests of Iroko Pharmaceuticals Inc. other than the 18,375 ordinary shares (which were subsequently converted into that number of class 1 ordinary shares) issued pursuant to our 2012 Share Option Plan, or the 2012 Plan, and the 981,625 options to purchase ordinary shares (which were subsequently converted into options to purchase that number of class 1 ordinary shares) issued pursuant to, or reserved under, the 2012 Plan or any successor plan adopted by Iroko Pharmaceuticals Inc. The convertible preference shares of Iroko Pharmaceuticals Inc. have a liquidation preference equal to the number of outstanding convertible preference shares plus a 20% annual compounding dividend.

On May 8, 2013, we issued Cordial an additional 5,000,000 convertible preference shares in exchange for $5.0 million. On June 3, 2013, we issued Cordial an additional 5,000,000 convertible preference shares in exchange for $5.0 million.

In May 2013, we entered into a revolving credit facility with Cordial under which Cordial agreed to lend us up to $40 million in one or more installments upon our request at an annual interest rate of 0.25%. We are required to repay all amounts borrowed on or before September 1, 2013.

On June 26, 2013, we issued a convertible note with a principal balance of up to $15.0 million to Cordial, which we refer to as the convertible note. Pursuant to the terms of the convertible note, Cordial funded $5.0 million on June 26, 2013 and funded an additional $10.0 million on July 8, 2013. The convertible note provides for interest to accrue on the principal balance of the convertible note that has been funded, at a rate of 0.23% percent per year. Pursuant to the terms of the convertible note, upon the consummation of this offering, the principal amount of the convertible note, plus any accrued but unpaid interest thereon, will convert into our ordinary shares at the per-share initial public offering price of ordinary shares in this offering. In the event that this offering is not consummated prior to September 30, 2013, the unpaid principal amount of the convertible note will convert into a number of

 

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convertible preference shares equal to the principal amount plus a 20% internal rate of return from the funding dates of the convertible note.

On July 10, 2013, we filed amendments to our constitutional documents with the Registry of Corporate Affairs of the British Virgin Islands, which will become effective upon their registration by the Registry of Corporate Affairs, to effect certain changes to our capital structure, which changes we refer to as the Restructuring. The effect of the Restructuring is to redesignate the previously outstanding ordinary shares as class 1 ordinary shares, and to provide that the class 1 ordinary shares and convertible preference shares will convert into an aggregate of 25,089,846 ordinary shares upon pricing of this offering. The conversion ratios of the convertible preference shares and class 1 ordinary shares will be based on our valuation as reflected by the price at which ordinary shares are sold pursuant to this offering, with the convertible preference shares being converted into the percentage of the 25,089,846 ordinary shares equal to the ratio of the liquidation preference of our convertible preference shares to our value based on the price at which ordinary shares are sold in this offering, and the class 1 ordinary shares converting into the remainder of the 25,089,846 ordinary shares. We refer to the April Transactions and the Restructuring together as the Reorganization Transactions. The table below shows the conversion ratios for each outstanding convertible preference share and class 1 ordinary share into ordinary shares based on an offering price of $14.00, $15.50, and $17.00 per share, the low-, mid-, and high-points of the price range indicated on the cover page of this prospectus, assuming a closing date for this offering of July 31, 2013.

        Ordinary Shares
($14.00)
      

Ordinary Shares

($15.50)

      

Ordinary Shares

($17.00)

 

  Convertible Preference Share

       0.1010           0.0911           0.0830   

  Class 1 Ordinary Share

       0.6561           0.8358           0.9839   

 

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Except as noted below, upon the consummation of this offering (assuming no exercise of the underwriters’ over-allotment option), our organizational structure, the ownership percentages of our outstanding ordinary shares and the ownership of voting shares of Cordial will be as follows (percentages assume (i) an initial offering price of $15.50, the midpoint of the price range set forth on the cover page of this prospectus and (ii) a closing date of July 31, 2013):

 

LOGO

 

*   Entity is in the process of being formed.

 

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RISK FACTORS

Any investment in our ordinary shares involves risk. You should carefully consider the risks and uncertainties described below and all information contained in this prospectus, including our consolidated financial statements and the related notes thereto, before you decide whether to purchase our ordinary shares. If any of the following risks or uncertainties actually occur, our business, financial condition, results of operations and prospects would likely suffer, possibly materially. In addition, the trading price of our ordinary shares could decline due to any of these risks or uncertainties, and you may lose part or all of your investment.

Risks Related to Our Business and Our Industry

We expect to incur losses in the near term and may never achieve or sustain profitability.

Subsequent to 2009, we have not been profitable and do not expect to be profitable in the near term due to expenditures associated with developing and marketing our submicron product candidates. We have incurred net losses of $31.8 million and $74.7 million for the years ended December 31, 2011 and 2012, respectively. We had an accumulated deficit of $114.1 million as of December 31, 2012. Our cash and cash equivalents and working capital deficit as of December 31, 2012 were $11.9 million and $50.3 million, respectively.

To date, we have devoted most of our financial resources to our corporate overhead and research and development of our submicron product candidates, including our drug formulations, preclinical development activities and clinical trials. We expect to continue to incur losses in the near term, and we expect our losses to increase as we continue our development of, and seek regulatory approvals for, our product candidates, prepare for and begin the commercialization of any approved products, and add infrastructure and personnel to support our product development efforts and operations as a public company. We anticipate that any such losses could be significant as we complete clinical trials and other activities required for regulatory approval of our products. As a result of the foregoing, we expect to continue to experience net losses and negative cash flows for the foreseeable future. These net losses and negative cash flows have had, and will continue to have, an adverse effect on our shareholders’ equity and working capital.

We face substantial hurdles to achieving profitability. For example, we may never become profitable if:

 

  n  

our clinical trials for our product candidates are not successful;

 

  n  

Zorvolex, Tiforbex or any of our other product candidates does not gain regulatory approval;

 

  n  

we are not able to obtain satisfactory contracts with manufacturers of our product candidates;

 

  n  

we are not able to build our sales and marketing capabilities;

 

  n  

our product candidates do not achieve market acceptance; or

 

  n  

we are unable to adequately protect our intellectual property.

Because of the numerous risks and uncertainties associated with pharmaceutical product development, we are unable to accurately predict the timing or amount of increased expenses and when, or if, we will be able to achieve profitability. In addition, our expenses could increase if we are required by the U.S. Food and Drug Administration, or FDA, to perform studies or trials in addition to those currently expected, or if there are any delays in completing our clinical trials or the development of any of our product candidates. The amount of future net losses will depend, in part, on the rate of future growth of our expenses and our ability to generate revenues.

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

Our recurring losses from operations, our need for additional capital, and the uncertainties surrounding our ability to raise such capital raise substantial doubt about our ability to continue as a going concern, and as a result, our independent registered public accounting firm included an explanatory paragraph in its report on our financial statements as of and for the year ended December 31, 2012 with respect to this uncertainty. This going concern opinion could materially limit our ability to raise additional funds through the issuance of new debt or equity securities or otherwise. Future reports on our financial statements may include an explanatory paragraph with respect to our ability to continue as a going concern. To the extent that our capital resources are insufficient to meet

 

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our future operating and capital requirements, we may be forced to reduce our operating expenses and will need to finance our cash needs through public or private equity offerings, debt financings, corporate collaboration and licensing arrangements or other financing alternatives. We have no committed external sources of funds other than the Cordial revolving credit facility which is described below under “Certain Relationships and Related Person Transactions—Cordial Investments Inc. Revolving Credit Facility”. Additional equity or debt financing or corporate collaboration and licensing arrangements may not be available on acceptable terms, if at all. If we are unable to raise sufficient additional capital or complete a strategic transaction, we may be unable to continue to fund our operations, develop our product candidates, or realize value from our assets and discharge our liabilities in the normal course of business. These uncertainties raise substantial doubt about our ability to continue as a going concern. If we become unable to continue as a going concern, we may have to liquidate our assets, and might realize significantly less than the values at which they are carried on our financial statements, and stockholders may lose all or part of their investment in our common stock.

We are subject to significant regulatory requirements which could delay, prevent or limit our ability to market our product candidates.

Our development activities, preclinical studies, clinical trials, manufacturing and anticipated marketing of our product candidates are subject to extensive regulation by a wide range of governmental authorities in the U.S., including the FDA, and by comparable authorities in other jurisdictions. We will not be able to commercialize any of our product candidates until we obtain approval of the FDA in the U.S., or the approval of comparable regulatory agencies in other jurisdictions. To satisfy the FDA or non-U.S. regulatory approval standards for the commercial sale of our product candidates, we must, among other requirements, demonstrate in adequate and well-controlled clinical trials that our product candidates are safe and effective.

We have successfully conducted Phase 3 clinical trials of Zorvolex and Tiforbex, Phase 2 trials of submicron naproxen and Phase 1 trials of submicron meloxicam. Even if our product candidates achieve positive results in preclinical and clinical trials, similar results may not be observed in subsequent trials and results may not prove to be statistically significant or demonstrate safety and efficacy to the satisfaction of the FDA or other non-U.S. regulatory agencies.

The FDA and non-U.S. regulatory authorities also regulate the conduct of clinical trials, ensuring compliance with current good clinical practice regulations and guidance, or cGCP, and other applicable U.S. and non-U.S. regulatory requirements. Clinical investigator sites contracted by us may be inspected, unannounced, by any regulatory authority at any time. Failure of the clinical site to successfully complete the regulatory inspection may adversely affect us whether or not our trials are the cause of the inspection. This occurs because clinical investigators routinely conduct trials for other companies and inspection of those trials may uncover systemic problems at the site that are not known to us.

The regulatory approval process is expensive and, while the time required to complete clinical trials and FDA and non-U.S. regulatory approval processes is uncertain, it typically takes many years. Our analysis of data obtained from our preclinical studies and clinical trials is subject to confirmation and interpretation by these regulatory authorities who may have different views on the design, scope, or results of our clinical trials, which could delay, limit, or prevent regulatory approval. At any time, changes in regulatory policy during the development period of any of our product candidates, changes in, or the enactment of, additional regulations or statutes, or changes in regulatory review practices for a submitted product application may result in failure of the agency to accept our application for review, which could cause a delay in obtaining approval, or result in the rejection of an application for regulatory approval. We could also encounter unanticipated delays or increased costs due to government regulation from future legislation or administrative action or changes in FDA or non-U.S. regulatory policies during the period of product development, clinical trials, or regulatory review. We seek to ensure a productive dialogue with regulatory authorities throughout product development, application review and thereafter. We may reach the conclusion to not follow all of the regulatory authorities’ advice for the content of a new drug application and instead justify our position with supporting data and expert analyses contained in the original application. The regulatory authorities may agree or disagree with this approach, which may affect acceptance of the application, the length of agency review, or other action on the application. The regulatory review process may be subject to political, technical, economic, and other developments. This results in dynamic and unpredictable risks in drug development, regulatory compliance, and commercialization of pharmaceuticals.

 

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The FDA also regulates the manufacturing facilities of our third-party manufacturers. Prior to approval, the FDA, and other non-U.S. regulatory authorities, may inspect manufacturing facilities to ensure compliance with current good manufacturing practice, or cGMP, including quality control and record-keeping measures. Post-approval, the FDA and certain state and non-U.S. agencies subject these facilities to unannounced inspections to ensure continued compliance with cGMP. Failure to satisfy the pre-approval inspection or subsequent discovery of problems with a product, or a manufacturing or laboratory facility used by us or third-party manufacturers may result in an inability to receive approval, recall of products, delay in approval or restrictions on the product or on the manufacturing post-approval, including a voluntary withdrawal of the drug from the market or suspension of manufacturing. Such inspections of third-party manufacturers may adversely affect us whether or not our products are the cause of the inspection because other products or a general cGMP review may cause the inspection. Our third-party manufacturers rely on a variety of suppliers of raw materials, equipment, and other supplies to comply with cGMP and other specifications and standards. The failure of a supplier to our third-party manufacturers to meet such requirements could have a material adverse effect on our research, development, and future commercial activities. Non-U.S. regulatory authorities have similar manufacturing compliance requirements that may result in similar outcomes to those noted above.

As a result of these factors, our product candidates could require a significantly longer time to gain regulatory approval than expected or may never gain approval. We cannot assure you that, even after expending substantial time and resources, we will obtain regulatory approval for any of our product candidates. A delay or denial of regulatory approval could delay or prevent our ability to generate product revenues and to achieve profitability. If regulatory approval is obtained, our marketing of any product will be limited to its indicated uses, which will limit the size of the market for a product and affect our potential product revenues.

We cannot be certain that Zorvolex, Tiforbex or any of our other product candidates will receive regulatory approval, and without regulatory approval we will not be able to market our product candidates and our ability to become profitable may be materially impaired.

We are developing Zorvolex for acute and osteoarthritis pain and Tiforbex for acute pain. Our ability to achieve profitability currently depends on the successful development and commercialization of Zorvolex, Tiforbex or one of our other product candidates.

The development of a product candidate and issues relating to its approval and marketing are subject to extensive regulation by the FDA in the U.S. and regulatory authorities in other countries, with regulations differing from country to country. We are not permitted to market our product candidates in the U.S. until we receive approval of an NDA from the FDA.

NDAs must include extensive preclinical and clinical data and supporting information to establish the product candidate’s safety and effectiveness for each desired indication. NDAs must also include significant information regarding the chemistry, manufacturing and controls for the product. Obtaining approval of an NDA is a lengthy, expensive and uncertain process, and we may not be successful in obtaining approval. If we submit an NDA to the FDA, the FDA must decide whether to accept or reject the submission for filing. We cannot be certain that any submissions will be accepted for filing and review by the FDA. Even if a product is approved, the FDA may limit the indications for which the product may be marketed, require extensive warnings on the product labeling or require expensive and time-consuming clinical trials or reporting as conditions of approval. Regulators of other countries and jurisdictions have their own procedures for approval of product candidates with which we must comply prior to marketing in those countries or jurisdictions.

Obtaining regulatory approval for marketing of a product candidate in one country does not ensure that we will be able to obtain regulatory approval in any other country. In addition, delays in approvals or rejections of marketing applications in the U.S. or other countries may be based upon many factors, including regulatory requests for additional analyses, reports, data, preclinical studies and clinical trials, regulatory questions regarding different interpretations of 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. Also, regulatory approval for any of our product candidates may be withdrawn.

We have completed Phase 3 trials for Zorvolex and Tiforbex in acute pain in adult patients. In December 2012, we submitted an NDA for Zorvolex for acute pain, which was accepted for filing with the FDA in February 2013,

 

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and submitted an NDA for Tiforbex for acute pain in April 2013, which was accepted for filing in July 2013. Before we submit the NDA to the FDA for Zorvolex for osteoarthritis pain, we must successfully complete our ongoing open label safety Phase 3 trial of Zorvolex for that indication. We cannot predict whether our ongoing trials and studies will be successful or whether regulators will agree with our conclusions regarding the preclinical studies and clinical trials we have conducted to date.

If we are unable to obtain approval from the FDA or other regulatory agencies for Zorvolex, Tiforbex or our other product candidates, we will not be able to market such product candidates and our ability to achieve profitability may be materially impaired.

Our future revenue growth depends entirely on the success of our submicron NSAID product candidates. Even if approved, our submicron NSAID product candidates may not be accepted in the marketplace and our business may be materially harmed.

Even if all regulatory approvals are obtained and we are allowed to market our submicron NSAID product candidates, the commercial success of our submicron NSAID product candidates depends on gaining market acceptance among physicians, patients and third-party payors. The degree of market acceptance of our submicron NSAID product candidates will depend on many factors, including:

 

  n  

the scope of regulatory approvals, including limitations or warnings contained in a submicron NSAID product candidate’s regulatory-approved labeling;

 

  n  

the acceptance in the medical community of the safety and efficacy of the submicron NSAID product candidate;

 

  n  

the incidence, prevalence and severity of adverse side effects of our submicron NSAID product candidates;

 

  n  

the willingness of physicians to prescribe submicron NSAIDs and of the target patient population to try these therapies;

 

  n  

the price and cost-effectiveness of our submicron NSAID product candidates;

 

  n  

alternative treatment methods and potentially competitive products;

 

  n  

the potential advantages of the submicron NSAID product candidate over existing and future treatment methods;

 

  n  

the strength of our sales, marketing and distribution support; and

 

  n  

the availability of sufficient third-party coverage and reimbursement.

If our submicron NSAID product candidates are approved but do not achieve an adequate level of acceptance by physicians, patients and third-party payors, we may never generate significant revenue from these products, and our business, financial condition and results of operations may be materially harmed. Even if our products achieve market acceptance, we may not be able to maintain that market acceptance over time if new therapeutics are introduced that are more favorably received than our products or that render our products obsolete, or if significant adverse events occur. If our products do not achieve and maintain market acceptance, we will not be able to generate sufficient revenue from product sales to attain profitability.

The market opportunity for submicron NSAIDs may be smaller than we estimate.

The potential market opportunity for our product candidates is difficult to precisely estimate. Our estimates of the potential market opportunity for submicron NSAIDs include several key assumptions based on our industry knowledge, industry publications, third-party research reports and other surveys. While we believe that our internal assumptions are reasonable, if any of these assumptions proves to be inaccurate, then the actual market for submicron NSAIDs could be smaller than our estimates of our potential market opportunity. If the actual market for submicron NSAIDs is smaller than we expect, our product revenue may be limited and it may be more difficult for us to achieve or maintain profitability.

Our revenues to date have been generated through sales of and royalties on sales of Indocin® and Aldomet®, our currently approved products, and we will not achieve profitability if our product candidates are not approved.

To date, our sources of revenue have been generated through sales of and royalties on sales of Indocin® and Aldomet®, our currently approved products. If we are unable to develop and commercialize one or more of our product candidates, or if revenues from any such product candidate that receives marketing approval are insufficient, we will not achieve profitability. Even if we achieve profitability, we may not be able to sustain or increase profitability.

 

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Even if our product candidates receive regulatory approval, we may still face future development and regulatory difficulties. If we fail to comply with continuing U.S. and non-U.S. regulations or new safety data arise, we could lose our marketing approvals and our business would be seriously harmed.

Our product candidates, if approved, will also be subject to ongoing regulatory requirements for manufacturing, distribution, sale, labeling, packaging, storage, advertising, promotion, record-keeping and submission of safety and other post-market information. In addition, approved products, manufacturers and manufacturers’ facilities are required to comply with extensive FDA requirements and requirements of other similar agencies even after approval, including ensuring that quality control and manufacturing procedures conform to cGMPs. As such, we and our contract manufacturers are subject to continual review and periodic inspections, both announced and unannounced, to assess compliance with cGMPs. Accordingly, we and others with whom we work must continue to expend time, money and effort in all areas of regulatory compliance, including manufacturing, production and quality control. We will also be required to report certain adverse reactions and production problems, if any, to the FDA and other similar agencies 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. Accordingly, we may not promote our approved products, if any, for indications or uses for which they are not approved.

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, it may impose restrictions on that product or us, including requiring withdrawal of the product from the market. These unknown problems could be discovered as a result of any post-marketing follow-up studies, routine safety surveillance or other reporting required as a condition to approval.

If our product candidates fail to comply with applicable regulatory requirements, or if a problem with one of our products is discovered, a regulatory agency may:

 

  n  

issue warning letters which may require corrective action;

 

  n  

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

 

  n  

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

 

  n  

impose other administrative or judicial civil or criminal penalties including fines, imprisonment and disgorgement of profits;

 

  n  

suspend or withdraw regulatory approval;

 

  n  

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

 

  n  

close the facilities of our contract manufacturers;

 

  n  

suspend ongoing clinical trials;

 

  n  

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

 

  n  

seize or detain products or recommend or require a product recall.

The FDA’s and non-U.S. regulatory agencies’ policies are subject to change and additional federal, state, local or non-U.S. governmental regulations may be enacted that could affect our ability to maintain compliance. We cannot predict the likelihood, nature or extent of adverse governmental regulation that may arise from future legislation or administrative action, either in the U.S. or abroad.

Our products and product candidates, like other NSAIDs, may have undesirable side effects which may delay or prevent marketing approval, or, if approval is received, require them to include safety warnings, require them to be taken off the market or otherwise limit their sales.

NSAID products are associated with serious adverse health effects including cardiovascular, gastrointestinal and renal events. The FDA requires manufacturers of all marketed prescription NSAIDs to include a boxed warning, commonly referred to as a “black box” warning, and a medication guide. The boxed warning highlights the potential for increased risk of cardiovascular events with these drugs and the documented, serious, and potentially life-

 

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threatening adverse health effects associated with their use. The FDA will likely require similar warnings on the packaging and labeling of any of our product candidates that are approved by the FDA.

The range and potential severity of possible side effects from systemic therapies are significant. 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, and result in delay of, or failure to obtain, marketing approval from the FDA and other regulatory authorities, or result in marketing approval from the FDA and other regulatory authorities with restrictive label warnings. Recent developments in the pharmaceutical industry have prompted heightened government focus on safety reporting during both pre- and post-approval time periods and pharmacovigilance. Global health authorities may impose regulatory requirements to monitor safety that may burden our ability to commercialize our drug products.

Since the approval of Indocin®, the most frequent adverse events reported in our post market spontaneous drug safety reporting database are dizziness, gastrointestinal hemorrhage and mental disorder. The most frequent serious adverse events are gastrointestinal hemorrhage, renal failure and general symptoms. Serious adverse events are considered to be potentially life-threatening, may require initial/prolonged hospitalization or represent a significant risk. Some of the adverse event reports have been associated with death. Adverse events from the spontaneous reporting system do not consider actual usage and are subject to limitations such as reporting bias, under reporting, inclusion of events not causally related and deficient data quality.

Since the approval of Aldomet®, the most frequent adverse events reported in our post market spontaneous drug safety reporting database are hemolytic anemia, pyrexia and hepatic function abnormal. The most frequent serious adverse events are hemolytic anemia, hepatitis and pyrexia. Some of the adverse event reports have been associated with death. Adverse events from the spontaneous reporting system do not consider actual usage and are subject to limitations such as reporting bias, under reporting, inclusion of events not causally related and deficient data quality.

Based upon a completed 12 week Phase 3 study in patients with osteoarthritis, the most common reported adverse events related to Zorvolex were nausea, constipation, and upper abdominal pain, and the most common serious adverse events related to Zorvolex were non-cardiac chest pain (chest pain not considered to be due to angina) and increases in certain liver enzymes (alanine aminotransferase and aspartate aminotransferase). Based upon an analysis of pooled safety data from two Phase 3 studies of Tiforbex in patients with pain following bunionectomy surgery, the most common adverse events related to Tiforbex were nausea, dizziness, vomiting and headache. In the two Phase 3 studies, there were no serious adverse events reported that were considered related to Tiforbex. In a Phase 2 study of submicron naproxen for the treatment of post-operative pain, the most common adverse event was somnolence (drowsiness). One serious adverse event, an adverse drug reaction, was reported in such study. In a completed Phase 1 study of submicron meloxicam, the most common reported adverse event was tension headache. There were no serious adverse events reported in such study.

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

 

  n  

regulatory authorities may require the addition of labeling statements, including “black box” warnings, contraindications or dissemination of field alerts to physicians and pharmacies;

 

  n  

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

 

  n  

we may be subject to limitations on how we may promote the product;

 

  n  

sales of the product may decrease significantly;

 

  n  

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

 

  n  

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

 

  n  

our reputation may suffer.

Any of these events could prevent us 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.

 

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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 they will be widely used.

Our future revenues and profitability will be adversely affected if U.S. and non-U.S. governmental, private third-party insurers and payors, and other third-party payors, including Medicare and Medicaid, do not agree to defray or reimburse the cost of our products to the patients. If these entities refuse to provide coverage and reimbursement with respect to our products or provide an insufficient level of coverage and reimbursement, our products may be too costly for some patients to afford them, and physicians may not prescribe them. In addition, limitations on the amount of reimbursement for our products may also reduce our profitability. In the U.S. and some non-U.S. jurisdictions, there have been, and we expect there will continue to be, actions and proposals to control and reduce healthcare costs. There have been a number of legislative and regulatory changes and proposed changes regarding the healthcare system that could prevent or delay marketing approval for our product candidates, restrict or regulate post-approval activities and affect our ability to profitably sell any of our product candidates for which we obtain marketing approval. Government and other third-party payors are also challenging the prices charged for healthcare products and increasingly limiting, and attempting to limit, both coverage and level of reimbursement for prescription drugs.

Market acceptance and sales of our products and product candidates that we develop, if approved, will depend on reimbursement policies and may be affected by future healthcare reform measures. Government authorities and third-party payors, such as private health insurers and health maintenance organizations, decide which drugs they will cover and establish payment levels. We cannot be certain that reimbursement will be available for any of our product candidates, or that reimbursement rates will not change for our current products. Also, we cannot be certain that reimbursement policies will not reduce the demand for, or the price paid for, our products. If reimbursement is not available or is available on a limited basis, we may not be able to successfully commercialize any of our product candidates.

In the U.S., the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, or MMA, changed the way Medicare covers and pays for pharmaceutical products. The legislation established Medicare Part D, which expanded Medicare coverage for outpatient prescription drug purchases by the elderly but provided authority for limiting the number of drugs that will be covered in any therapeutic class. The MMA also introduced a new reimbursement methodology based on average sales prices for physician-administered drugs. Any negotiated prices for our products covered by a Part D prescription drug plan will likely be lower than the prices we might otherwise obtain. Moreover, while the MMA applies only to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy and payment limitations in setting their own payment rates. Any reduction in payment that results from the MMA may result in a similar reduction in payments from non-governmental payors.

The U.S. and several other jurisdictions are considering, or have already enacted, a number of legislative and regulatory proposals to change the healthcare system in ways that could affect our ability to sell our products profitably. Among policy makers and payors in the U.S. and elsewhere, there is significant interest in promoting changes in healthcare systems with the stated goals of containing healthcare costs, improving quality and/or expanding access to healthcare. In the U.S., the pharmaceutical industry has been a particular focus of these efforts and has been significantly affected by major legislative initiatives. We expect to experience pricing pressures in connection with the sale of Zorvolex and Tiforbex and any other products that we develop due to the trend toward managed healthcare, the increasing influence of health maintenance organizations and additional legislative proposals.

In March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, or collectively, the ACA, became law in the U.S. The goal of the ACA is to reduce the cost of health care and substantially change the way health care is financed by both governmental and private insurers. While we cannot predict what impact on federal reimbursement policies this legislation will have in general or on our business specifically, the ACA may result in downward pressure on pharmaceutical reimbursement, which could negatively affect market acceptance of our products and our product candidates. In addition, although the U.S. Supreme Court recently upheld the constitutionality of most of the ACA, some states have indicated that they intend to not implement certain sections of the ACA and some members of the U.S. Congress are still working to repeal the ACA. We cannot predict whether these challenges will continue or other proposals will be made or adopted, or what impact these efforts may have on us.

 

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Since our products, like other branded products, are likely to be too expensive for some patients to afford without health insurance coverage, if we are unable to obtain adequate coverage and reimbursement by third-party payors for our products, our ability to successfully commercialize our product candidates may be adversely impacted. Any limitation on the use of our products or any decrease in the price of our products will have a material adverse effect on our ability to achieve profitability.

Consolidation in the healthcare industry could lead to demands for price concessions or the exclusion of some suppliers from certain of our markets, which could have an adverse effect on our business, results of operations or financial condition.

Because healthcare costs have risen significantly over the past decade, numerous initiatives and reforms initiated by legislators, regulators and third-party payors to curb these costs have resulted in a consolidation trend in the healthcare industry to aggregate purchasing power. As the healthcare industry consolidates, competition to provide products and services to industry participants has become and will continue to become more intense. This in turn has resulted and will likely continue to result in greater pricing pressures and the exclusion of certain suppliers from important market segments as group purchasing organizations, independent delivery networks and large single accounts continue to use their market power to consolidate purchasing decisions for healthcare providers. We expect that market demand, government regulation, third-party coverage and reimbursement policies and societal pressures will continue to change the worldwide healthcare industry, resulting in further business consolidations and alliances among our customers, which may reduce competition, exert further downward pressure on the prices of our products and may adversely impact our business, results of operations or financial condition.

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

As of March 31, 2013, we had 71 employees, 15 of whom were primarily engaged in development functions, 12 of whom were primarily engaged in sales and marketing, 17 of whom were primarily engaged in providing implementation and professional support services and 27 of whom were primarily engaged in administration and finance. We intend to further enhance our staff strength to approximately 150 employees by the end of the third quarter of 2013. As our product candidates continue to progress toward potential commercialization, we anticipate the need to hire additional employees as required to add depth and specialized expertise to our team. This growth could place a strain on our administrative and operational infrastructure. If the product candidates that we are developing continue to advance in clinical trials, we will need to expand our development, regulatory, manufacturing, quality, compliance, recordkeeping, information technology, training, marketing and sales capabilities or contract with third parties to provide these capabilities for us. As our operations expand, we expect that we will need to develop additional relationships with various collaborators, contract research organizations, or CROs, suppliers, manufacturers and other organizations. We may not be able to establish such relationships or may incur significant costs to do so. Our ability to manage our growth will also require us to continue to improve our operational, financial and management controls, reporting systems and procedures, and other compliance programs and processes, which will further increase our operating costs. If we are unable to successfully manage the expansion of our operations or operate on a larger scale, we will not achieve our strategic objectives.

We are currently developing a sales organization and have limited experience marketing and selling drug products. If we are unable to establish marketing and sales capabilities or enter into agreements with third parties to market and sell our product candidates, we may not be able to generate product revenues.

We currently have a small internal sales and marketing infrastructure. In order to commercialize our product candidates, we must expand our marketing, sales, distribution, managerial and other non-technical capabilities and/or make arrangements with third parties to perform these services. We expect to have our sales management team in place during the third quarter of 2013. We have contracted with a contract sales organization to sell our products in the U.S., and we expect that, during the fourth quarter of 2013, such sales organization will have recruited the necessary sales representatives to sell our products in the U.S. Additionally, we seek third-party partners in international markets, in addition to our current partner, Aspen, which markets our two approved products, Indocin® and Aldomet®, along with us, in 48 countries. We may not be successful in entering into arrangements with such contract sales organization or other third parties on terms that are favorable to us. We may not be able to control our contract counterparties’ efforts, and they may fail to devote the necessary resources and attention to sell and market our products effectively. In addition, we intend to establish an internal sales management team. The establishment and implementation of a contract sales force and internal sales management team to market any of our product candidates that receive regulatory approval will be expensive and time consuming.

 

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Factors that may inhibit our efforts to commercialize our products include:

 

  n  

our inability to recruit and train adequate numbers of sales and marketing personnel;

 

  n  

the inability of sales personnel to obtain access to or to persuade adequate numbers of physicians to prescribe any of our product candidates that receive regulatory approval;

 

  n  

the lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage relative to companies with more extensive product lines; and

 

  n  

unforeseen costs and expenses associated with creating an independent sales and marketing organization.

In the event that we are unable to effectively implement our sales organization on a timely and effective basis, if at all, the commercialization of our product candidates could be delayed which would negatively impact our ability to generate product revenues.

We currently depend, and will in the future continue to depend, on third parties to manufacture our marketed products and product candidates, including Zorvolex and Tiforbex. If these manufacturers fail to provide us and our collaborators with adequate supplies of clinical trial materials and commercial product or neglect to comply with the requirements of regulatory authorities, we may be unable to develop or commercialize our products.

We currently do not own or operate manufacturing facilities for the production of clinical or commercial quantities of our marketed products and product candidates. For our marketed products, we utilize a number of different specialist manufacturing and packaging partners, including Aspen, NextPharma, G&W Laboratories, Famar and Patheon Pharmaceuticals, Inc., or Patheon. Our ability to develop and commercialize Zorvolex and Tiforbex and any other product candidates depends in part on our ability to arrange for third parties to manufacture our products at a competitive cost in accordance with strictly enforced regulatory requirements and in sufficient quantities for clinical testing and eventual commercialization. We have arranged for our product candidates to be manufactured by Catalent and to be packaged by Patheon. We have used third parties to manufacture and package product for clinical trials and plan to continue to use third-party manufacturers in connection with future clinical trials. In the event that we receive marketing approval for any of our product candidates, we intend to use third parties for the production of commercial batches using a commercial-scale process that has been developed. However, neither we nor our third-party manufacturers have manufactured commercial batches of Zorvolex, Tiforbex or any of our other submicron product candidates. Collaborators or third-party manufacturers that we select to manufacture our product candidates for clinical testing or on a commercial scale may encounter difficulties with the formulation and manufacturing processes required for such manufacture. Such difficulties could result in delays in clinical trials, regulatory submissions or commercialization of our product candidates. Our reliance on third-party manufacturers exposes us to significant risks. These third-party manufacturers might:

 

  n  

terminate their agreements with us;

 

  n  

be unable or unwilling to provide us with sufficient product(s) to meet our demands;

 

  n  

fail to meet our standards of quality or other specifications;

 

  n  

increase significantly the prices they charge us for the products;

 

  n  

not carry out their contractual duties or meet anticipated deadlines, which could result in delays in obtaining or maintaining regulatory approvals; or

 

  n  

not be diligent about protecting the Iroko trade secret or the process/manufacturing know-how resulting in loss of valuable intellectual property, or IP.

Our inability to enter into and maintain agreements with third-party manufacturers on acceptable terms would cause shortages of commercial products or clinical trial supplies of our product candidates, thereby resulting in stock-out, delaying or preventing regulatory approval and/or commercialization of the affected product candidate, and adversely affecting our ability to generate revenues. Once a product candidate is approved and being marketed, such difficulties could also result in the later recall or withdrawal of the product from the market. Large-scale commercial manufacturing processes will require FDA review and approval. Even if we are able to establish additional or replacement manufacturers, identifying these sources and entering into definitive supply agreements and obtaining regulatory approvals may take a substantial amount of time and cost and such supply arrangements may not be available on acceptable economic terms or at all.

 

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The FDA and non-U.S. and state regulators require manufacturers to register manufacturing facilities. The FDA and these regulators also inspect these facilities to confirm compliance with cGMP or similar requirements that the FDA and these regulators establish. The manufacture of product candidates and active pharmaceutical ingredients, or APIs, at any facility is subject to strict quality control, testing, and record keeping requirements, as well as continuing obligations regarding the submission of safety reports and other post-market information. We and our collaborators have little control over third-party manufacturers’ compliance with these regulations and standards. In addition, we have no control over these manufacturers’ ability to maintain adequate quality control, quality assurance and qualified personnel. Ultimately, we, our third-party manufacturers or other suppliers may not meet these requirements. Our third-party manufacturers may face manufacturing or quality control problems causing product production and shipment delays or a situation where we or they may not be able to maintain compliance with the FDA’s cGMP requirements or those of non-U.S. or state regulators, necessary to continue manufacturing our product candidates and materials. Any failure to comply with cGMP requirements or other FDA and non-U.S. or state regulatory requirements could adversely affect our clinical research activities and our ability to market and develop our products candidates.

We purchase some of the compounds utilized in our product candidates from a single source or a limited group of suppliers, and the partial or complete loss of any one of these suppliers could cause production delays and a substantial loss of revenues.

We purchase APIs and other compounds used to manufacture our product candidates from outside suppliers. We source the API for Indocin® from Fabbrica Italiana Sinteci, or FIS, Italy and the API for Aldomet® from Zhejiang Chiral Medicine Chemicals Co., Ltd., China. APIs for our submicron NSAIDs are sourced from a number of manufacturers: Unique Laboratories, India (diclofenac); FIS, Italy (indomethacin); Cadila Healthcare Ltd., India (meloxicam); and Dr. Reddy’s Laboratories, India (naproxen). In some cases, we have a single source or a limited number of suppliers. See “Business—Suppliers/Manufacturing” for a description of our supply agreements. Our reliance on our suppliers exposes us to significant risks. These suppliers might:

 

  n  

be unable or unwilling to provide us with sufficient materials to meet our demands;

 

  n  

fail to meet our standards of quality or other specifications;

 

  n  

significantly increase the prices they charge us for materials; or

 

  n  

not carry out their contractual duties or meet anticipated deadlines, which could result in delays in obtaining or maintaining regulatory approvals.

If our suppliers are unwilling or unable to timely supply us with materials meeting our specifications, we may not be able to locate alternative suppliers that are acceptable to the FDA or foreign regulatory authorities or enter into commercially reasonable agreements with suppliers in a timely manner or at all. In addition, the failure of our suppliers to comply with regulatory requirements could expose us to regulatory action, including warning letters, product recalls, termination of distribution, product seizures or civil penalties. Furthermore, since some of our suppliers are located outside of the U.S., we are subject to foreign export laws and U.S. import and customs regulations, which complicate and could delay shipments to us. If we experience a delay in obtaining or are unable to obtain any compound of an acceptable quality for the manufacture of our product candidates on reasonable terms, or at all, it could have a material adverse effect on our business, financial condition and results of operations.

We depend on third parties to conduct the clinical trials for our product candidates, and any failure of those parties to fulfill their obligations could harm our development and commercialization plans.

We depend on independent clinical investigators, CROs, academic institutions and other third-party service providers to conduct clinical trials for our product candidates. Although we rely heavily on these parties for successful execution of our clinical trials, we are ultimately responsible for the results of their activities and many aspects of their activities are beyond our control. For example, we are responsible for ensuring that each of our clinical trials is conducted in accordance with the general investigational plan and protocols for the trial, but the independent clinical investigators may prioritize other projects over ours or may fail to timely communicate issues regarding our products to us. Third parties may not complete activities on schedule or may not conduct our clinical trials in accordance with regulatory requirements or our stated protocols. The delay or early termination of any of our clinical trial arrangements, the failure of third parties to comply with the regulations and requirements governing clinical trials, or our reliance on results of trials that we have not directly conducted or monitored could hinder or delay the

 

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development, approval and commercialization of our product candidates and would adversely affect our business, results of operations and financial condition.

We maintain compliance programs related to our clinical trials through our clinical operations and development personnel working with our finance and legal group’s support. Our clinical trial vendors are required to monitor and report to us the possible remedial action required for the conduct of clinical studies; and we are obliged to take the appropriate action. We also monitor clinical trial vendors through our regulatory and quality assurance staff and service providers. However, we cannot assure you that our programs and personnel will timely and fully discover any fraud or abuse that may occur in connection with our clinical trials. Such fraud or abuse, if it occurs, could have a material adverse effect on our research, development, commercialization activities and results.

Delays in conducting clinical trials could result in increased costs to us and delay our ability to obtain regulatory approval and commercialize our clinical-stage product candidates.

Significant delays in conducting clinical trials and related drug development programs could materially affect our product development costs and delay regulatory approval of our product candidates. We do not know whether planned clinical trials will begin on time, will need to be redesigned, or will be completed on schedule, if at all. A clinical trial can be delayed for a variety of reasons, including:

 

  n  

delays or failures in obtaining regulatory authorization to commence a trial because of safety concerns of regulators relating to our product candidates or similar product candidates, competitive or comparator products or supportive care products or failure to follow regulatory guidelines;

 

  n  

delays or failures in obtaining clinical materials and manufacturing sufficient quantities of the product candidate for use in a trial;

 

  n  

delays or failures in reaching agreement on acceptable terms with prospective study sites or other CROs;

 

  n  

delays or failures in obtaining approval of our clinical trial protocol from an institutional review board, or IRB, to conduct a clinical trial at a prospective study site;

 

  n  

delays in recruiting or enrolling subjects to participate in a clinical trial;

 

  n  

failure of a clinical trial or clinical investigators to be in compliance with cGCP;

 

  n  

unforeseen safety issues;

 

  n  

inability to monitor subjects adequately during or after treatment;

 

  n  

difficulty monitoring multiple study sites;

 

  n  

failure of our third-party clinical trial managers to satisfy their contractual duties, comply with regulations, or meet expected deadlines; and

 

  n  

determination by regulators that the clinical design of a trial is not adequate.

We may be subject to a variety of types of product liability or other claims based on allegations that the use of our product candidates has resulted in adverse effects, and our insurance may not cover all product liability or other claims.

We may face liability claims related to the use or misuse of our product candidates. These claims may be expensive to defend and may result in large judgments against us. During the course of treatment, patients using our product candidates could suffer adverse medical effects for reasons that may or may not be related to our product candidates. Any of these events could result in a claim of liability. Any such claims against us, regardless of their merit, could result in significant costs to defend or awards against us that could materially harm our business, financial condition or results of operations. In addition, any such claims against us could result in a distraction to management, decreased demand for our products, an adverse effect on our public reputation, and/or difficulties in commercializing our products. To date, we have not received notice of any product liability claims against us or any of our subsidiaries. We maintain total products liability insurance coverage of $10.0 million.

Although we maintain product liability insurance for claims arising from the use of our product candidates in clinical trials prior to FDA approval and for claims arising from the use of our products after FDA approval at levels that we believe are appropriate, we may not be able to maintain our existing insurance coverage or obtain additional coverage on commercially reasonable terms for the use of our other product candidates and products in the future. Also, our insurance coverage and resources may not be sufficient to satisfy any liability resulting from product liability claims, which could materially harm our business, financial condition or results of operations.

 

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Product liability claims could result in an FDA or other regulatory authority investigation of the safety or efficacy of our products, our manufacturing processes and facilities, our marketing programs, our internal safety reporting systems or our staff conduct. A regulatory authority investigation could also potentially lead to a recall of our products or more serious enforcement actions, limitations on the indications for which they may be used, or suspension or withdrawal of approval. Product liability claims could also result in investigation, prosecution or enforcement action by the U.S. Department of Justice, or DOJ, or other federal or state government agencies.

Our business could suffer if we lose the services of key members of our senior management, key advisors or personnel.

We are dependent upon the continued services of key members of our senior management and a limited number of key advisors and personnel. In particular, we are highly dependent on the skills and leadership of Osagie Imasogie, who will be our Executive Chairman upon the consummation of this offering, John Vavricka, our Chief Executive Officer, Rohit Mehta, our Senior Vice President—Corporate Development & Alliance Management, and Clarence L. Young, M.D., Senior Vice President and Chief Medical Officer. The loss of any one of the key members of our senior management could disrupt our operations or our strategic plans. Additionally, our future success will depend on, among other things, our ability to continue to hire and retain the necessary qualified scientific, technical and managerial personnel, for whom we compete with numerous other companies, academic institutions and organizations. The loss of members of our management team, key advisors or personnel, or our inability to attract or retain other qualified personnel or advisors, could have a material adverse effect on our business, results of operations and financial condition.

Our submicron product candidates are licensed from iCeutica, a company that is also controlled by Cordial Investments Inc.

Following completion of this offering, Cordial, which is controlled by Vollin and entities affiliated with Phoenix IP Ventures, will own approximately 79.1% of our outstanding ordinary shares (assuming (i) an initial offering price of $15.50, the midpoint of the price range set forth on the cover page of this prospectus and (ii) a closing date of July 31, 2013). Cordial will also own substantially all of the outstanding equity interests of iCeutica. We license the intellectual property for our submicron product candidates, including the patent applications related to our product candidates and the technology that is necessary to manufacture our product candidates, from a wholly owned subsidiary of iCeutica. To the extent that Cordial exerts influence or control over iCeutica, there can be no assurance that our existing or future agreements with iCeutica, including any royalty payments or other licensing fees, will be on terms no less favorable to us than those that we could obtain from unrelated third parties. Furthermore, we cannot provide any assurance that our relationship with iCeutica will continue on comparable terms if Cordial were to dispose of its equity interests in iCeutica. Similarly, there can be no assurance that the reduction in the ownership of our ordinary shares by Cordial, or Vollin, the controlling shareholder of Cordial, following this offering, will not negatively impact our relationship with iCeutica. A reduction of involvement of Cordial or Vollin in our business, whether or not it continues to be a shareholder, may also negatively impact this relationship.

If we experience material weaknesses in the future or otherwise fail to maintain an effective system of internal controls in the future, we may not be able to accurately report our financial condition or results of operations, which may adversely affect investor confidence in us and, as a result, the value of our ordinary shares.

As a result of becoming a public company, we will be required, under Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting beginning with our Annual Report on Form 20-F for the year ending December 31, 2014. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting. A material weakness is a deficiency or combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual and interim financial statements will not be detected or prevented on a timely basis.

We are further enhancing the computer systems, processes and related documentation necessary to perform the evaluation needed to comply with Section 404 of the Sarbanes-Oxley Act. We may not be able to complete our evaluation, testing and any required remediation in a timely fashion. During the evaluation and testing process, if we identify one or more material weaknesses in our internal controls over financial reporting, we will be unable to assert that our internal controls are effective. If we are unable to conclude that our internal controls over financial reporting

 

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are effective, we could lose investor confidence in the accuracy and completeness of our financial reports, which would likely cause the price of our ordinary shares to decline.

As and when we cease to be an emerging growth company under the federal securities laws, our auditors will be required to express an opinion on the effectiveness of our internal controls. See “Risks Related to Our Ordinary Shares and this Offering—We are an emerging growth company and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our ordinary shares less attractive to investors” elsewhere in this section. If we are unable to confirm that our internal controls over financial reporting are effective, or if our auditors are unable to express an opinion on the effectiveness of our internal controls, we could lose investor confidence in the accuracy and completeness of our financial reports, which would cause the price of our ordinary shares to decline.

We expect to incur significant additional costs as a result of being a public company, which may adversely affect our operating results and financial condition.

We expect to incur costs associated with corporate governance requirements, including requirements under the Sarbanes-Oxley Act, as well as rules implemented by the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Securities and Exchange Commission, or the SEC, and the exchange on which our ordinary shares are listed. These rules and regulations are expected to increase our accounting, legal and financial compliance costs and make some activities more time-consuming and costly. In addition, we will incur additional costs associated with our public company reporting requirements and expect those costs to increase in the future. For example, we will be required to devote significant resources to complete the assessment and documentation of our internal control system and financial processes under Section 404 of the Sarbanes-Oxley Act, including an assessment of the design of our information systems associated with our internal controls. We will incur significant costs to remediate any material weaknesses we identify through these efforts. We also expect these rules and regulations to make it more expensive for us to maintain directors’ and officers’ liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers. We cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.

New laws and regulations, as well as changes to existing laws and regulations affecting public companies, including the provisions of the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act and rules adopted by the SEC and the exchange on which our ordinary shares are listed, would likely result in increased costs to us as we respond to their requirements, which may adversely affect our operating results and financial condition.

We may require substantial additional funding, which may not be available to us on acceptable terms, or at all, and, if not so available, may require us to delay, limit, reduce or cease our operations.

We are currently advancing our submicron NSAID product candidates through clinical development. Developing pharmaceutical products, including conducting preclinical studies and clinical trials, is expensive. Our cash and cash equivalents and working capital deficit as of March 31, 2013 were $11.1 million and $68.1 million, respectively. We may require substantial additional future capital in order to commercialize Zorvolex and Tiforbex and to further advance our other product candidates by completing those development, clinical and regulatory activities necessary to bring them to market. To complete the work necessary to file a supplemental NDA for Zorvolex for osteoarthritis pain in late 2013, we estimate that our development and regulatory work will cost between approximately $6.6 million and $9.0 million, including the internal resources needed to manage the program. If the FDA requires that we perform additional preclinical studies or clinical trials, our expenses would further increase beyond what we currently expect and the anticipated timing of any potential NDA would likely be delayed. If we obtain regulatory approval for Zorvolex or Tiforbex, we expect to incur significant commercialization expenses related to product manufacturing, marketing, distribution and sales. We intend to use substantially all of the net proceeds from this offering as follows (i) $20.0 million for the continued clinical development and regulatory filing of our submicron NSAID programs, including completion of the open label safety trial of Zorvolex for osteoarthritis pain, the continuation of Phase 3 trials of submicron meloxicam, the initiation of Phase 3 trials of submicron naproxen and further development of our other submicron NSAID product candidates; (ii) $27.0 million for certain pre-commercialization activities for Zorvolex and Tiforbex; and (iii) $5.0 million for the launch of Zorvolex. Additionally, we expect approximately $20.0-$25.0 million will be used to fund the initial implementation of our contract sales force. Any remaining amounts will be used for

 

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general corporate purposes, general and administrative expenses, capital expenditures, working capital and prosecution and maintenance of our intellectual property. The expected net proceeds from this offering may not be sufficient to complete advanced clinical development of any of our product candidates other than Zorvolex and Tiforbex. Accordingly, we may continue to require substantial additional capital beyond the expected proceeds of this offering to continue our clinical development and commercialization activities. Because successful development of our product candidates is uncertain, we are unable to estimate the actual funds we will require to complete research and development and commercialize our products under development.

The amount and timing of our future funding requirements will depend on many factors, including but not limited to:

 

  n  

the willingness of the FDA to accept the results of our trials as the basis for review and approval of Zorvolex and Tiforbex;

 

  n  

the outcome, costs and timing of seeking and obtaining FDA and any other regulatory approvals;

 

  n  

the number and characteristics of product candidates that we pursue, including our product candidates in preclinical development;

 

  n  

the ability of our product candidates to progress through clinical development successfully;

 

  n  

our need to expand our development activities;

 

  n  

the costs associated with securing and establishing sales, marketing, distribution and manufacturing capabilities;

 

  n  

market acceptance of our product candidates;

 

  n  

the costs of acquiring, licensing or investing in businesses, products, product candidates and technologies;

 

  n  

our ability to maintain, expand and defend the scope of our intellectual property portfolio, including the amount and timing of any payments we may be required to make, or that we may receive, in connection with the licensing, filing, prosecution, defense and enforcement of any patents or other intellectual property rights;

 

  n  

our need and ability to hire additional management, scientific and medical personnel;

 

  n  

the effect of competing technological and market developments;

 

  n  

our need to implement additional internal systems and infrastructure, including financial and reporting systems; and

 

  n  

the economic and other terms, timing of and success of our existing licensing arrangements and any collaboration, licensing or other arrangements into which we may enter in the future.

Some of these factors are outside of our control. Upon the completion of this offering, based upon our currently expected level of operating expenditures, we believe that we will be able to fund our operations through at least the next twelve months. This period could be shortened if there are any significant increases in planned spending on development programs or more rapid progress of development programs than anticipated. See also “Use of Proceeds.” Accordingly, we expect that we could need to raise additional funds in the future.

We may seek additional funding through a combination of equity offerings, debt financings, government or other third-party funding, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements. Additional funding may not be available to us on acceptable terms or at all. In addition, the terms of any financing may adversely affect the holdings or the rights of our shareholders. In addition, the issuance of additional shares by us, or the possibility of such issuance, may cause the market price of our shares to decline.

If we are unable to obtain funding on a timely basis, we may be required to significantly curtail one or more of our development programs. We also could be required to seek funds through arrangements with collaborative partners or otherwise that may require us to relinquish rights to some of our technologies or product candidates or otherwise agree to terms unfavorable to us.

Raising additional capital may cause dilution to our shareholders, including purchasers of ordinary shares in this offering, restrict our operations or require us to relinquish rights to our product candidates.

Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings and/or debt financings. Upon completion of this offering, we may not have any committed external source of funds. To the extent that we raise additional capital through the sale of equity or

 

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convertible debt securities, your ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a holder of our ordinary shares. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends.

If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product candidate development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

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

We have a limited operating history upon which to base an evaluation of our business and prospects. We were founded in 2007 and currently market two approved products. Our product pipeline includes six submicron NSAID product candidates, four in late-stage development and two that are preclinical. Any predictions made about our future success or viability may not be as accurate as they could be if we had a longer operating history. Our financial condition and operating results are expected to significantly fluctuate 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:

 

  n  

any delays in regulatory review and FDA approval of Zorvolex, Tiforbex and our other submicron NSAID product candidates in clinical development;

 

  n  

market acceptance of our product candidates;

 

  n  

our ability to establish an effective sales and marketing infrastructure directly or through collaborations with third parties;

 

  n  

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

 

  n  

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

 

  n  

delays in the commencement, enrollment and completion of clinical trials for our submicron NSAID product candidates, other than Zorvolex and Tiforbex, currently in preclinical or clinical development;

 

  n  

the success of our clinical trials through all phases of clinical development for our submicron NSAID product candidates, other than Zorvolex and Tiforbex, currently in preclinical or clinical development;

 

  n  

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

 

  n  

competition from existing products or new products that may emerge;

 

  n  

our ability to adhere to clinical study requirements directly or with third parties such as CROs;

 

  n  

our dependency on third-party manufacturers to manufacture our products and key ingredients;

 

  n  

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

 

  n  

the costs to us, and our ability to obtain, maintain and protect our intellectual property rights;

 

  n  

costs related to and outcomes of potential intellectual property litigation;

 

  n  

our ability to adequately support future growth;

 

  n  

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

 

  n  

our ability to build our finance infrastructure and improve our accounting systems and controls;

 

  n  

potential product liability claims;

 

  n  

potential liabilities associated with hazardous materials; and

 

  n  

our ability to obtain and maintain adequate insurance coverage.

Clinical failure can occur at any stage of clinical development. The results of earlier clinical trials are not necessarily predictive of future results and any product candidate we 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 may decide, or regulators may require us, to conduct additional clinical trials or preclinical studies. In addition, data obtained from trials and studies 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.

 

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Success in preclinical studies and early clinical trials does not ensure that subsequent clinical trials will generate the same or similar results or otherwise provide adequate data to demonstrate the efficacy and safety of a product candidate. 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 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. Further, clinical trials of potential products often reveal that it is not practical or feasible to continue development efforts. If any of our product candidates are found to be unsafe or lack efficacy, we will not be able to obtain regulatory approval for them and our business would be harmed.

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 composition of the patient populations, adherence to the dosing regimen and other trial protocols and the rate of dropout among clinical trial participants. We do not know whether any clinical trials we may conduct will demonstrate consistent or adequate efficacy and safety to obtain regulatory approval to market our product candidates. If we are unable to bring any of our current or future product candidates to market, or to acquire any marketed, previously approved products, our ability to create long-term shareholder value will be limited.

The obligations associated with being a public company will require additional resources and significant management attention, which may divert from our business operations.

As a result of this offering, we will become subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and the Sarbanes-Oxley Act. The requirements of these rules and regulations applicable to public companies will significantly increase our legal and financial compliance costs, including costs associated with the hiring of additional personnel, will make some of our corporate activities more difficult, time-consuming or costly and may also place undue strain on our personnel, systems and resources.

The Exchange Act requires that we file annual reports with respect to our business and financial condition. We also intend to make available to our shareholders our quarterly reports for each of the first three quarters of each fiscal year.

The Sarbanes-Oxley Act requires, among other things, that we establish and maintain effective internal controls and procedures for financial reporting. Ensuring that we have adequate internal financial and accounting controls and procedures in place is a costly and time-consuming effort that needs to be re-evaluated frequently, and as a result, we will incur significant legal, accounting and other expenses that we did not previously incur. The need to establish the corporate infrastructure demanded of a public company may divert management’s attention from implementing our growth strategy, which could prevent us from improving our business, results of operations and financial condition. We have made, and will continue to make, changes to our internal controls and procedures for financial reporting and accounting systems to meet our reporting obligations as a stand-alone public company. The measures we take, however, may not be sufficient to satisfy our obligations as a public company. Such testing is not required until the second filing of an Annual Report on Form 20-F with the SEC after becoming a public company. Implementing any appropriate changes to our internal controls may require specific compliance training for our directors, officers and employees, require the hiring of additional personnel, involve substantial costs to modify our existing accounting systems and take a significant period of time to complete. These changes may not, however, be effective in maintaining the adequacy of our internal controls, and any failure to maintain that adequacy, or consequent inability to produce accurate financial statements on a timely basis, could increase our operating costs and could materially impair our ability to operate our business. Moreover, effective internal controls are necessary for us to produce reliable financial reports and are important to help prevent fraud.

Various rules and regulations applicable to public companies make it more difficult and more expensive for us to maintain directors’ and officers’ liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers. We cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.

 

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The various costs related to being a public company will materially increase our general and administrative expenses.

We are increasingly dependent on sophisticated information technology and if we fail to properly maintain the integrity of our data or if our products do not operate as intended, our business could be materially affected.

We are increasingly dependent on sophisticated information technology for our products and infrastructure. As a result of technology initiatives, recently enacted regulations, changes in our system platforms and integration of new business acquisitions, we have been consolidating and integrating the number of systems we operate and have upgraded and expanded our information systems capabilities. Our information systems require an ongoing commitment of significant resources to maintain, protect, and enhance existing systems and develop new systems to keep pace with continuing changes in information processing technology, evolving systems and regulatory standards, the increasing need to protect patient and customer information, and changing customer patterns. In addition, third parties may attempt to hack into our systems and may obtain data relating to patients with our products or our proprietary information. If we fail to maintain or protect our information systems and data integrity effectively, we could lose existing customers, have difficulty attracting new customers, have problems in determining product cost estimates and establishing appropriate pricing, have difficulty preventing, detecting, and controlling fraud, have disputes with customers, physicians, and other health care professionals, have regulatory sanctions or penalties imposed, have increases in operating expenses, incur expenses or lose revenues as a result of a data privacy breach, or suffer other adverse consequences. There can be no assurance that our process of consolidating the number of systems we operate, upgrading and expanding our information systems capabilities, protecting and enhancing our systems and developing new systems to keep pace with continuing changes in information processing technology will be successful or that additional systems issues will not arise in the future. Any significant breakdown, intrusion, interruption, corruption, or destruction of these systems, as well as any data breaches, could have a material adverse effect on our business.

Fluctuations in insurance cost and availability could adversely affect our profitability or our risk management profile.

We hold a number of insurance policies, including product liability insurance, directors’ and officers’ liability insurance, property insurance and workers’ compensation insurance. Our coverage under these policies is $10.0 million for our product liability insurance, $20.0 million for our directors’ and officers’ liability insurance, $12.0 million for our property insurance and $0.5 million per accident for our workers’ compensation insurance. We also maintain a general liability policy with $2.0 million of coverage and an umbrella policy with $5.0 million of coverage. If the costs of maintaining adequate insurance coverage increase significantly in the future, our operating results could be materially adversely affected. Likewise, if any of our current insurance coverage should become unavailable to us or become economically impractical, we would be required to operate our business without indemnity from commercial insurance providers. If we operate our business without insurance, we could be responsible for paying claims or judgments against us that would have otherwise been covered by insurance, which could adversely affect our results of operations or financial condition.

Risks Related to our Legal and Regulatory Environment

We must comply with U.S. federal and state fraud and abuse laws, including anti-kickback laws and other U.S. federal and state anti-referral laws.

There are numerous U.S. federal and state laws pertaining to healthcare fraud and abuse, including anti-kickback laws and physician self-referral laws. Our relationships with health care professionals are subject to scrutiny under these laws. Violations of these laws are punishable by criminal and civil sanctions, including, in some instances, imprisonment and exclusion from participation in federal and state healthcare programs, including the Medicare, Medicaid and Veterans Administration health programs. Because of the far-reaching nature of these laws, we may be required to alter or discontinue one or more of our business practices to be in compliance with these laws.

Healthcare fraud and abuse regulations are complex, and even minor irregularities can potentially give rise to claims that a statute or prohibition has been violated. The laws that may affect our ability to operate include:

 

  n  

the federal healthcare programs’ anti-kickback law, which prohibits, among other things, persons from knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual for, or the purchase, order or recommendation of, any good or service for which payment may be made under federal healthcare programs such as the Medicare and Medicaid programs;

 

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  n  

federal false claims laws which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payors that are false or fraudulent;

 

  n  

the federal Health Insurance Portability and Accountability Act of 1996, which created federal criminal laws that prohibit executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters;

 

  n  

the Food, Drug and Cosmetic Act and similar laws regulating advertisement and labeling;

 

  n  

the federal Foreign Corrupt Practices Act of 1997, which prohibits corrupt payments, gifts or transfers of value to non-U.S. officials; and

 

  n  

non-U.S. and U.S. state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payor, including commercial insurers.

The federal false claims laws have been interpreted to apply to arrangements between pharmaceutical manufacturers on the one hand and prescribers, purchasers or formulary managers on the other. Although there are several statutory exemptions and regulatory safe harbors protecting certain common activities from prosecution, the exemptions and safe harbors are drawn narrowly, and practices that involve remuneration intended to induce prescribing, purchasing or recommending may be subject to scrutiny if they do not qualify for an exemption or safe harbor. Most states also have statutes or regulations similar to the federal anti-kickback law and federal false claims laws, which apply to items and services covered by Medicaid and other state programs, or, in several states, apply regardless of the payor. Administrative, civil and criminal sanctions may be imposed under these federal and state laws.

Further, the ACA, among other things, amends the intent requirement of the federal anti-kickback and criminal healthcare fraud statutes. A person or entity can now be found guilty under the ACA without actual knowledge of the statute or specific intent to violate it. In addition, the ACA provides that the government may assert that a claim including items or services resulting from a violation of the federal anti-kickback statute constitutes a false or fraudulent claim for purposes of the false claims statutes. Possible sanctions for violation of these anti-kickback laws include monetary fines, civil and criminal penalties, exclusion from Medicare and Medicaid programs and forfeiture of amounts collected in violation of such prohibitions. Any violations of these laws, or any action against us for violation of these laws, even if we successfully defend against it, could result in a material adverse effect on our reputation, business, results of operations and financial condition.

To enforce compliance with the federal laws, the DOJ has recently increased its scrutiny of interactions between healthcare companies and healthcare providers, which has led to a number of investigations, prosecutions, convictions and settlements in the healthcare industry. Dealing with investigations can be time- and resource-consuming and can divert management’s attention from the business. Additionally, if a healthcare provider settles an investigation with the DOJ or other law enforcement agencies, we may be forced to agree to additional onerous compliance and reporting requirements as part of a consent decree or corporate integrity agreement. Any such investigation or settlement could increase our costs or otherwise have an adverse effect on our business.

Over the past few years, a number of pharmaceutical and other healthcare companies have been prosecuted under these laws for a variety of promotional and marketing activities, such as: providing free trips, free goods, sham consulting fees and grants and other monetary benefits to prescribers; reporting inflated average wholesale prices that were then used by federal programs to set reimbursement rates; engaging in off-label promotion; and submitting inflated best price information to the Medicaid Rebate Program to reduce liability for Medicaid rebates.

In addition, there has been a recent trend of increased federal and state regulation of payments made to physicians for marketing. Some states, such as California, Massachusetts and Vermont, mandate implementation of commercial compliance programs, along with the tracking and reporting of gifts, compensation and other remuneration to physicians. The shifting commercial compliance environment and the need to build and maintain robust and expandable systems to comply with different compliance and/or reporting requirements in multiple jurisdictions increase the possibility that a healthcare company may run afoul of one or more of the requirements.

The scope and enforcement of these laws is uncertain and subject to rapid change in the current environment of healthcare reform, especially in light of the lack of applicable precedent and regulations. Federal or state regulatory

 

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authorities might challenge our current or future activities under these laws. Any such challenge could have a material adverse effect on our reputation, business, results of operations and financial condition. In addition, efforts to ensure that our business arrangements with third parties will comply with these laws and regulations will involve substantial costs. Any state or federal regulatory review of us or the third parties with whom we contract, regardless of the outcome, would be costly and time-consuming. Additionally, we cannot predict the impact of any changes in these laws, whether or not retroactive.

We may fail to obtain or maintain non-U.S. regulatory approvals to market our products in other countries.

In non-U.S. jurisdictions, we plan to establish collaborations with third parties in order to seek regulatory approval and to commercialize our product candidates. The regulatory approval procedure varies among countries and can involve additional testing. If additional clinical trials are required, international ethical review boards may cause our clinical trials to be delayed pending their review of safety data, clinical procedures, and comments provided by non-U.S. regulatory authorities. The time required to obtain approval may differ from country to country from that required to obtain FDA approval. Failure to obtain regulatory approval in non-U.S. jurisdictions could prevent us and our marketing partners from marketing our products abroad and may have a material adverse effect on our business, financial condition and results of operations.

The non-U.S. regulatory approval process may include all of the risks associated with obtaining FDA approval. We have had limited interaction with non-U.S. regulatory authorities. We may not obtain non-U.S. regulatory approvals on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory authorities in other countries, and approval by one non-U.S. regulatory authority does not ensure approval by regulatory authorities in other non-U.S. countries or by the FDA. We may not be able to file for regulatory approvals and may not receive necessary approvals to commercialize our products in any market. The failure to obtain these approvals could materially harm our business, financial condition and results of operations.

We may be subject to enforcement action if we engage in the off-label promotion of our products.

Our promotional materials and training methods must comply with FDA and other applicable laws and regulations, including the prohibition of the promotion of off-label use. Physicians may use our products off-label, as the FDA does not restrict or regulate a physician’s choice of treatment within the practice of medicine. However, if the FDA determines that our promotional materials or training constitutes promotion of an off-label use, it could request that we modify our training or promotional materials or subject us to regulatory or enforcement actions, including the issuance of an untitled letter, a warning letter, injunction, seizure, civil fine or criminal penalties. It is also possible that other federal, state or non-U.S. enforcement authorities might take action if they consider our promotional or training materials to constitute promotion of an unapproved use, which could result in significant fines or penalties under other statutory authorities, such as laws prohibiting false claims for reimbursement. In that event, our reputation could be damaged and adoption of the products could be impaired. Although our policy is to refrain from statements that could be considered off-label promotion of our products, the FDA or another regulatory agency could disagree and conclude that we have engaged in off-label promotion. In addition, the off-label use of our products may increase the risk of product liability claims. Product liability claims are expensive to defend and could divert our management’s attention, result in substantial damage awards against us and harm our reputation.

Legislative or regulatory healthcare reforms may make it more difficult and costly for us to obtain regulatory clearance or approval of our products and to produce, market and distribute our products after clearance or approval is obtained.

Recent political, economic and regulatory influences are subjecting the healthcare industry to fundamental changes. The sales of our products depend in part on the availability of coverage and reimbursement from third-party payors such as government health administration authorities, private health insurers, health maintenance organizations and other healthcare-related organizations. Both the federal and state governments in the U.S. and non-U.S. governments continue to propose and pass new legislation and regulations designed to contain or reduce the cost of healthcare. Such legislation and regulations may result in decreased reimbursement for our products, which may further exacerbate industry-wide pressure to reduce the prices charged for pain treatments. This could harm our ability to market our products and generate sales.

In addition, FDA regulations and guidance are often revised or reinterpreted by the FDA in ways that may significantly affect our business and our products. Any new regulations or revisions or reinterpretations of existing regulations may impose additional costs or lengthen review times of our products. Delays in receipt of or failure to

 

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receive regulatory clearances or approvals for our new products would have a material adverse effect on our business, results of operations and financial condition.

Federal and state governments in the U.S. have recently enacted legislation to overhaul the nation’s healthcare system. While the goal of healthcare reform is to expand coverage to more individuals, it also involves increased government price controls, additional regulatory mandates and other measures designed to constrain medical costs. The ACA substantially changes the way healthcare is financed by both governmental and private insurers, encourages improvements in the quality of healthcare items and services and significantly impacts the pharmaceutical industry. Among other things, the ACA:

 

  n  

establishes a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in and conduct comparative clinical effectiveness research;

 

  n  

implements payment system reforms including a national pilot program on payment bundling to encourage hospitals, physicians and other providers to improve the coordination, quality and efficiency of certain healthcare services through bundled payment models, beginning on or before January 1, 2013; and

 

  n  

creates an independent payment advisory board that will submit recommendations to reduce Medicare spending if projected Medicare spending exceeds a specified growth rate.

A number of state governments have strenuously opposed certain of the ACA’s provisions and initiated lawsuits challenging its constitutionality. In June 2012, the U.S. Supreme Court upheld most of the provisions of the ACA. However, it remains unclear whether there will be changes made to certain provisions of the ACA through acts of Congress in the future.

In addition, other legislative changes have been proposed and adopted since the ACA was enacted. Most recently, on August 2, 2011, the President signed into law the Budget Control Act of 2011, which, among other things, creates the Joint Select Committee on Deficit Reduction to recommend to Congress proposals in spending reductions. The Joint Select Committee did not achieve a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, triggering the legislation’s automatic reduction to several government programs. This includes aggregate reductions to Medicare payments to providers of up to 2% per fiscal year, starting on April 1, 2013. The uncertainties regarding the ultimate features of the ACA and other healthcare reform initiatives and their enactment and implementation may have an adverse effect on our customers’ purchasing decisions regarding our products. In the coming years, additional changes could be made to governmental healthcare programs that could significantly impact the success of our products. Cost control initiatives could decrease the price that we receive for our products. At this time, we cannot predict which, if any, additional healthcare reform proposals will be adopted, when they may be adopted or what impact they, or the ACA, may have on our business and operations. Any such impact may be adverse on our operating results and financial condition.

Risks Related to our Intellectual Property and Potential Litigation

We could be unsuccessful in obtaining or maintaining adequate patent protection for one or more of our product candidates.

Our commercial success will depend, in large part, on our ability to obtain and maintain patent and other intellectual property protection with respect to our product candidates. All of our rights to patents and patent applications are exclusively licensed from iCeutica. We currently do not own any issued U.S. patents or pending U.S. patent applications with respect to any of our proposed products. Although we have licensed pending U.S. patent applications owned by iCeutica, none of those pending applications have issued as patents.

Neither our New Drug Application submission for our ZorvolexTM product nor our New Drug Application submission for our TiforbexTM product lists granted patents that can be listed after drug approval in the FDA’s “Approved Drug Product/Therapeutic Equivalence Evaluations”, or the Orange Book. Unless a patent covering the drug product or its therapeutic use is listed in the Orange Book, a generic company does not have to provide advance notice to us of any Abbreviated New Drug Application, or the ANDA, filed with the FDA to obtain permission to sell a generic version of our drug. Should patents which qualify for listing in the Orange Book be granted, we will seek to have them listed in the Orange Book in a timely manner. Further, while we seek patent protection on our new method of manufacture of our submicron particles, as well as on the particles themselves and their therapeutics uses, only issued patents on the particles themselves and their therapeutic uses can be included in the Orange Book.

 

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Patent term extensions are not available in the U.S. for new formulations of previously approved drug products. Therefore, we do not expect to receive any patent term extensions in the United States on our licensed patents. We have licensed from iCeutica non-U.S. patents and U.S. and foreign patent applications with respect to submicron technology. Patents related to the SoluMatrixTM Technology Platform have been granted in Australia, South Africa and New Zealand. These patents will expire on June 29, 2027, and may qualify for certain patent term extensions in foreign countries, including perhaps Supplementary Patent Certificates in Europe. In addition, patents related to a first generation milling technology that is not being used in the SolumatrixTM Technology Platform have been granted in Australia, South Africa and New Zealand. These patents will expire on December 30, 2025.

We cannot be certain that patents will be issued or granted with respect to our licensed patent applications, or that any issued or granted patents licensed by us will not later be found to be invalid or unenforceable, be interpreted in a manner that does not adequately protect our products, or otherwise provide us with any competitive advantage. In the course of prosecuting its patent application for its submicron technology, iCeutica received two office actions from the United States Patent Office, or the USPTO, rejecting the claims on several grounds, including prior art. In reply, iCeutica filed a Request for Continued Examination along with a substantive response, which resulted in the examiner’s withdrawal of all previous rejections. The examiner issued a new non-final office action which cited two additional prior art references. While we understand that iCeutica intends to promptly respond to this non-final office action, we cannot assure you they will be successful or that a patent will ultimately issue. Even if our licensed patent applications issue as patents, they may not issue in a form that will provide us with any meaningful protection, prevent competitors from competing with us or otherwise provide us with any competitive advantage. The patent position of biotechnology and pharmaceutical companies is generally uncertain because it involves complex legal and factual considerations. The standards applied by the USPTO and non-U.S. patent offices in granting patents are not always applied uniformly or predictably. For example, there is no uniform worldwide policy regarding patentable subject matter or the scope of claims allowable in biotechnology and pharmaceutical patents. Consequently, patents may not issue from the patent applications that we have licensed. As such, we do not know the degree of future protection that we will have on our product candidates and technology, if any, and a failure to obtain adequate intellectual property protection with respect to our product candidates could have a material adverse impact on our business.

The patents and patent applications associated with our product candidates are licensed from iCeutica. If iCeutica terminates the license or fails to maintain or enforce the underlying patents, our competitive position and market share will be harmed.

We have licensed the patents and patent applications associated with our product candidates, including the technology that is used to manufacture our product candidates, from iCeutica. (See “Certain Relationships and Related Person Transactions—iCeutica License and Option Agreement” for more information regarding our license agreement with iCeutica). iCeutica may not successfully prosecute certain patent applications under which we have licenses and which are material to our business. Even if patents are issued from these applications, iCeutica may fail to maintain these patents, may decide not to pursue litigation against third-party infringers, may fail to prove infringement, or may fail to defend against counterclaims of patent invalidity or unenforceability. We have been granted an option under our license agreement with iCeutica to obtain licenses for other submicron NSAIDs developed by iCeutica. There can be no assurance, however, that any such submicron NSAIDs will be made available. Even if such submicron NSAIDs are made available for license, we may elect not to exercise our option, in which case the option would be forfeited. Under the license agreement, we are required to use commercially reasonable diligence efforts to develop, commercialize, market and sell our licensed NSAIDs. If we fail to use such efforts as to any NSAID, iCeutica may terminate our license to that NSAID. If iCeutica were to attempt to terminate the license agreement for this or any other reason, that could remove our ability to obtain regulatory approval and to market our product candidates covered by the license agreement. In addition, if iCeutica or any other licensor we have in the future were to enter bankruptcy, there is a risk that the license iCeutica or such licensor has granted to us could be terminated or modified in a manner adverse to us. If our license agreement with iCeutica is terminated for any reason, we would be required to cease the development and commercialization of our products and product candidates that are subject to such agreement, which would have a material adverse effect on our business. If the underlying patents and patent applications fail to provide the intended market exclusivity, competitors would have the freedom to seek regulatory approval of, and to market, products similar to ours, which could have a material adverse impact on our business.

 

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Blocking patents or claims of infringement may stop or delay the development of our product candidates.

Third parties may have or obtain proprietary rights that could impair our competitive position. Our commercial success depends in part on avoiding claims of infringement of the patents or proprietary rights of such third parties. Although we investigated the patent protection surrounding certain of our product candidates, there are numerous patents, each with multiple claims, which makes it difficult to uncover and interpret the extent of patent protection which can lead to uncertainty about our freedom to operate. It is possible that we will not be aware of issued patents or pending patent applications that are relevant to our product candidates because our searches do not find them or because they are not yet publicly available. Our interpretation of the scope, validity or enforceability of patents could be challenged, leading to litigation, and we could face claims of infringement or other violation of rights of which we are unaware. As we proceed with the development of our product candidates, we may face uncertainty and litigation could result, which could lead to liability for damages, prevent our development and commercialization efforts and divert resources and management’s attention from our business strategy. Third parties from time to time may allege that we are infringing or otherwise violating their patents, trade secrets or know-how. In addition, our technology may infringe patents that may be issued in the future to third parties. Regardless of the outcome of any infringement claims, we would likely incur substantial costs in defending ourselves and our indemnitees against such claims. Furthermore, parties making such claims may be able to obtain substantial damage awards or injunctive or other equitable relief that could effectively block our ability or our partners’ ability to further develop or commercialize some or all of our products or technology in the United States and abroad. If we are found to infringe other parties’ patents, trade secrets or know-how, we may be required to obtain licenses from third parties or otherwise be unable to proceed with development or commercialization of our product candidates. We may not be able to obtain such licenses on reasonable terms, or at all. Defense of any lawsuit or failure to obtain any such required license could have a material adverse effect on our business

If we are unable to protect our intellectual property rights, our competitive position could be harmed or we could be required to incur significant expenses to enforce our rights.

We rely primarily on patent, trademark and trade secret laws, as well as confidentiality and non-disclosure agreements and other methods, to protect our proprietary technologies and know-how. iCeutica has applied for patent protection relating to certain existing and proposed products and processes. While we or iCeutica generally apply for patents in those countries where we intend to make, have made, use or sell our products, we or iCeutica may not file for patent protection in all of the countries where patent protection will ultimately be necessary. If we or iCeutica or any other licensor on which we may depend in the future fail to timely file a patent application or fail to comply with other procedural, documentary, fee payment or other provisions during the patent process in any such country, we may be precluded from filing at a later date or may lose some or all patent rights in the relevant jurisdiction. Furthermore, we cannot assure you that any of our licensed patent applications (now or in the future) will be approved. The rights granted to us under our licensed patents, including prospective rights sought in our pending patent applications, may not be meaningful or provide us with any commercial advantage and they could be opposed, contested or circumvented by our competitors or be declared invalid or unenforceable in judicial or administrative proceedings. Our, iCeutica’s or any of our other licensor’s failure to adequately protect the intellectual property rights to our licensed technology might make it easier for our competitors to offer the same or similar products or technologies. Due to differences between non-U.S. and U.S. patent laws, our patented intellectual property rights may not receive the same degree of protection in non-U.S. countries as they would in the U.S. Even if patents are granted outside the United States, effective enforcement in those countries may not be available. In countries where we do not have significant patent protection, we may not be able to stop a competitor from marketing products that are the same as or similar to our products.

Competitors may be able to design around our patents or develop products that provide outcomes which are comparable to ours without infringing on our intellectual property rights. We have entered into confidentiality agreements and intellectual property assignment agreements with our officers, employees, consultants and advisors regarding our intellectual property and proprietary technology. In the event of unauthorized use or disclosure or other breaches of such agreements, we may not be provided with meaningful protection for our trade secrets or other proprietary information.

We rely on our trademarks, trade names and brand names to distinguish our products from the products of our competitors, and have registered or applied to register many of these trademarks. We cannot assure you that our

 

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pending and future trademark applications will be approved. Third parties may also oppose our trademark applications, or otherwise challenge our use of the trademarks. In the event that our trademarks are successfully challenged, we could be forced to rebrand our products, which could result in loss of brand recognition, and could require us to devote resources to advertising and marketing new brands. Further, we cannot assure you that competitors will not infringe upon our trademarks, or that we will have adequate resources to enforce our trademarks.

If a competitor infringes upon one of our patents, trademarks or other intellectual property rights, enforcing those patents, trademarks or other rights may be difficult and time consuming. Even if successful, litigation to defend our patents and trademarks against challenges or to enforce our intellectual property rights could be expensive and time consuming and could divert management’s attention from managing our business. Moreover, we may not have sufficient resources or desire to defend our patents or trademarks against challenges or to enforce our intellectual property rights.

We may be subject to claims that we, our board members, employees or consultants have used or disclosed alleged trade secrets or other proprietary information belonging to third parties and any such individuals who are currently affiliated with one of our competitors may disclose our proprietary technology or information.

As is commonplace in the biotechnology and pharmaceutical industries, some of our board members, employees and consultants are or have been employed at, or associated with, other biotechnology or pharmaceutical companies that compete with us. While employed at or associated with these companies, these individuals may become exposed to or involved in research and technology similar to the areas of research and technology in which we are engaged. We may be subject to claims that we, or our employees, board members, or consultants have inadvertently or otherwise used or disclosed alleged trade secrets or other proprietary information of those companies. Litigation may be necessary to defend against such claims. We have entered into confidentiality agreements with our executives and key consultants. However, we do not have, and are not planning to enter into, any confidentiality agreements with our non-executive directors because they have a fiduciary duty of confidentiality as directors. There is the possibility that any of our former board members, employees, or consultants who are currently employed at, or associated with, one of our competitors may unintentionally or willfully disclose our proprietary technology or information.

Our unpatented trade secrets, know-how, confidential and proprietary information, and technology may be inadequately protected.

We rely on unpatented trade secrets, know-how and technology. This intellectual property is difficult to protect, especially in the pharmaceutical industry, where much of the information about a product must be submitted to regulatory authorities during the regulatory approval process. We seek to protect trade secrets, confidential information and proprietary information, in part, by entering into confidentiality and invention assignment agreements with employees, consultants, and others. These parties may breach or terminate these agreements, and we may not have adequate remedies for such breaches. Furthermore, these agreements may not provide meaningful protection for our trade secrets or other confidential or proprietary information or result in the effective assignment to us of intellectual property, and may not provide an adequate remedy in the event of unauthorized use or disclosure of confidential information or other breaches of the agreements. Despite our efforts to protect our trade secrets and our other confidential and proprietary information, we or our collaboration partners, board members, employees, consultants, contractors, or scientific and other advisors may unintentionally or willfully disclose our proprietary information to competitors.

There is a risk that our trade secrets and other confidential and proprietary information could have been, or could, in the future, be shared by any of our former employees with, and be used to the benefit of, any company that competes with us.

If we fail to maintain trade secret protection or fail to protect the confidentiality of our other confidential and proprietary information, our competitive position may be adversely affected. Competitors may also independently discover our trade secrets. Enforcement of claims that a third party has illegally obtained and is using trade secrets is expensive, time consuming and uncertain. If our competitors independently develop equivalent knowledge, methods and know-how, we would not be able to assert our trade secret protections against them, which could have a material adverse effect on our business.

 

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Risks Related to Our International Operations

We are exposed to risks related to our international operations and failure to manage these risks may adversely affect our operating results and financial condition.

We, through our distribution partners, or through a license to Aspen Pharmacare Holdings Limited and its subsidiaries, or Aspen, sell our products globally. During the years ended December 31, 2011 and 2012 approximately 90% and 79% of our revenues, respectively, was attributable to our international customers. As of December 31, 2012, approximately 6% of our employees were located abroad. We expect that our international activities will be dynamic over the foreseeable future as we continue to pursue opportunities in international markets. Therefore, we are subject to risks associated with having worldwide operations. These international operations will require significant management attention and financial resources.

International operations are subject to inherent risks and our future results could be adversely affected by a number of factors, including:

 

  n  

requirements or preferences for domestic products or solutions, which could reduce demand for our solutions;

 

  n  

differing existing or future regulatory and certification requirements;

 

  n  

management communication and integration problems related to entering new markets with different languages, cultures and political systems;

 

  n  

greater difficulty in collecting accounts receivable and longer collection periods;

 

  n  

difficulties in enforcing contracts;

 

  n  

difficulties and costs of staffing and managing non-U.S. operations;

 

  n  

the uncertainty of protection for intellectual property rights in some countries;

 

  n  

potentially adverse tax consequences, including regulatory requirements regarding our ability to repatriate profits to the U.S.;

 

  n  

tariffs and trade barriers, export regulations and other regulatory and contractual limitations on our ability to sell our solutions in certain non-U.S. markets; and

 

  n  

political and economic instability and terrorism.

Additionally, our international operations expose us to risks of fluctuations in foreign currency exchange rates. In certain circumstances and depending on the currencies in which certain sales are denominated, a decline in the value of the U.S. dollar relative to the value of these other local currencies could have a material adverse effect on the gross margins and profitability of our international operations. Additionally, an increase in the value of the U.S. dollar relative to the value of these local currencies results in our solutions being more expensive to potential customers and could have an adverse impact on our pricing or our ability to sell our solutions internationally. To date, we have not used risk management techniques to hedge the risks associated with these fluctuations. Even if we were to implement hedging strategies, not every exposure can be hedged and, where hedges are put in place based on expected foreign currency exchange exposure, they are based on forecasts that may vary or that may later prove to have been inaccurate. As a result, fluctuations in foreign currency exchange rates or our failure to successfully hedge against these fluctuations could have a material adverse effect on our operating results and financial condition.

Failure to comply with the U.S. Foreign Corrupt Practices Act, or the FCPA, and similar laws associated with our activities outside the U.S. could subject us to penalties and other adverse consequences.

We expect that a portion of our future revenue will be from jurisdictions outside of the U.S. We face significant risks if we fail to comply with the FCPA and other laws that prohibit improper payments or offers of payment to non-U.S. governments and their officials and political parties by us and other business entities for the purpose of obtaining or retaining business. In many non-U.S. countries, particularly in countries with developing economies, some of which represent significant markets for us, it may be a local custom that businesses operating in such countries engage in business practices that are prohibited by the FCPA or other laws and regulations. Although we have implemented a company policy requiring our employees and consultants to comply with the FCPA and similar laws, such policy may not be effective at preventing all potential FCPA or other violations. Although our agreements with our distributors and resellers clearly state our expectations for our distributors’ and resellers’ compliance with U.S. laws and provide

 

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us with various remedies upon any non-compliance, including the ability to terminate the agreement, we also cannot guarantee our distributors’ and resellers’ compliance with U.S. laws, including the FCPA. Therefore there can be no assurance that none of our employees and agents, or those companies to which we outsource certain of our business operations, will take actions in violation of our policies or of applicable laws, for which we may be ultimately held responsible. As a result of our focus on managing our growth, our development of infrastructure designed to identify FCPA matters and monitor compliance is at an early stage. Any violation of the FCPA and related policies could result in severe criminal or civil sanctions, which could have a material and adverse effect on our reputation, business, operating results and financial condition.

Non-U.S. governments tend to impose strict price controls that may adversely affect our future profitability.

In most non-U.S. countries, particularly in the European Union, prescription drug pricing and/or reimbursement is subject to governmental control. In those countries that impose price controls, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a product. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our product candidate to other available therapies. If reimbursement of our products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, or if there is competition from lower priced cross-border sales, our profitability will be negatively affected.

Risks Related to Our Ordinary Shares and this Offering

No public market for our ordinary shares currently exists and an active trading market may not develop or be sustained following this offering.

Prior to this initial public offering, there has been no public market for our ordinary shares. An active trading market may not develop following the completion of this offering or, if developed, may not be sustained. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the fair market value or the trading price of your shares. An inactive market may also impair our ability to raise capital to continue to fund operations by selling shares and may impair our ability to acquire other companies or technologies by using our shares as consideration.

Our share price may be volatile, and you may not be able to resell our ordinary shares at or above the price you paid.

The initial public offering price for our ordinary shares has been determined through our negotiations with the underwriters and may not be representative of the price that will prevail in the open market following the offering. Our share price after the completion of this offering may be highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control. These factors include those discussed in this “Risk Factors” section of this prospectus and others such as:

 

  n  

a slowdown in the pharmaceutical industry or the general economy;

 

  n  

actual or anticipated quarterly or annual variations in our results of operations or those of our competitors;

 

  n  

actual or anticipated changes in our growth rate relative to our competitors;

 

  n  

changes in earnings estimates or recommendations by securities analysts;

 

  n  

fluctuations in the values of companies perceived by investors to be comparable to us;

 

  n  

announcements by us or our competitors of new products or services, significant contracts, commercial relationships, capital commitments or acquisitions;

 

  n  

competition from existing technologies and products or new technologies and products that may emerge;

 

  n  

the entry into, modification or termination of agreements with our sales representatives or distributors;

 

  n  

developments with respect to intellectual property rights;

 

  n  

sales, or the anticipation of sales, of our ordinary shares by us, our insiders or our other shareholders, including upon the expiration of contractual lock-up agreements;

 

  n  

our ability to develop and market new and enhanced solutions on a timely basis;

 

  n  

our commencement of, or involvement in, litigation;

 

  n  

additions or departures of key management or technical personnel;

 

  n  

changes in laws or governmental regulations applicable to us; and

 

  n  

the other factors described in this “Risk Factors” section.

 

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In addition, in recent years, the stock markets generally have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry factors may significantly affect the market price of our ordinary shares, regardless of our actual operating performance. These fluctuations may be even more pronounced in the trading market for our ordinary shares shortly following this offering. If the market price of our ordinary shares after this offering does not ever exceed the initial public offering price, you may not realize any return on your investment in us and may lose some or all of your investment.

In addition, in the past, class action litigation has often been instituted against companies whose securities have experienced periods of volatility in market price. Securities litigation brought against us following volatility in our share price, regardless of the merit or ultimate results of such litigation, could result in substantial costs, which would hurt our financial condition and operating results and divert management’s attention and resources from our business.

Securities analysts may not publish favorable research or reports about our business or may publish no information at all, which could cause our share price or trading volume to decline.

The trading market for our ordinary shares will be influenced to some extent by the research and reports that industry or financial analysts publish about us and our business. We do not control these analysts. As a newly public company, we may be slow to attract research coverage and the analysts who publish information about our ordinary shares will have had relatively little experience with our company, which could affect their ability to accurately forecast our results and could make it more likely that we fail to meet their estimates. In the event we obtain securities or industry analyst coverage, if any of the analysts who cover us provide inaccurate or unfavorable research or issue an adverse opinion regarding our share price, our share price could decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports covering us, we could lose visibility in the market, which in turn could cause our share price or trading volume to decline.

We are an emerging growth company and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our ordinary shares less attractive to investors.

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and we may take advantage of certain exemptions and relief from various reporting requirements that are applicable to other public companies that are not emerging growth companies. In particular, while we are an emerging growth company (i) we will not be required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, (ii) we will be exempt from any rules that may be adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotations or a supplement to the auditor’s report on financial statements, (iii) we will be subject to reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and (iv) we will not be required to hold nonbinding advisory votes on executive compensation or shareholder approval of any golden parachute payments not previously approved.

As a result, our financial statements may not be comparable to companies that are not emerging growth companies or elect not to avail themselves of this relief. We may remain an emerging growth company until as late as December 31, 2018 (the fiscal year-end following the fifth anniversary of the completion of this initial public offering), though we may cease to be an emerging growth company earlier under certain circumstances, including (i) if the market value of our ordinary shares that is held by nonaffiliates exceeds $700 million as of any June 30, in which case we would cease to be an emerging growth company as of the following December 31, or (ii) if our gross revenues exceed $1 billion in any fiscal year. Although we are eligible under the JOBS Act to delay adoption of new or revised financial accounting standards until they are applicable to private companies, we have elected not to avail ourselves of this exclusion. This election by us is irrevocable.

The exact implications of the JOBS Act are still subject to interpretations and guidance by the SEC and other regulatory agencies, and we cannot assure you that we will be able to take advantage of all of the benefits of the JOBS Act. In addition, investors may find our ordinary shares less attractive if we rely on the exemptions and relief granted by the JOBS Act. If some investors find our ordinary shares less attractive as a result, there may be a less active trading market for our ordinary shares and the trading price of our ordinary shares may decline and/or become more volatile.

 

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Our management might apply the proceeds of this offering in ways that do not increase the value of your investment.

Our management will have broad discretion as to the use of the net proceeds of this offering, and you will be relying on the judgment of our management regarding the application of these proceeds. We might apply the net proceeds of this offering in ways with which you do not agree, or in ways that do not yield a favorable return. If our management applies these proceeds in a manner that does not yield a significant return, if any, on our investment of these net proceeds, it would adversely affect the market price of our ordinary shares. For more information on our management’s planned use of proceeds, please read “Use of Proceeds” elsewhere in this prospectus.

Because our initial public offering price is substantially higher than the pro forma net tangible book value per share of our outstanding ordinary shares, new investors will incur immediate and substantial dilution.

The initial public offering price is substantially higher than the pro forma net tangible book value per share of our ordinary shares based on our total tangible assets, reduced by the amount of our total liabilities immediately following this offering. Therefore, if you purchase ordinary shares in this offering, you will experience immediate and substantial dilution of approximately $11.65 per share in pro forma, as adjusted net tangible book value, assuming (i) an initial offering price of $15.50, the midpoint of the price range set forth on the cover page of this prospectus, (ii) a closing date of July 31, 2013 and (iii) no exercise of the underwriters’ over-allotment option to purchase additional shares the difference between the price you pay for our ordinary shares and its pro forma, as adjusted net tangible book value per share after completion of this offering. Please read the section of this prospectus entitled “Dilution” for more information on this calculation. Furthermore, any issuance of shares in connection with acquisitions by us, the exercise of stock options or warrants or otherwise would dilute the percentage ownership held by the investors who purchase our shares in this offering.

A significant portion of our total outstanding ordinary shares are restricted from immediate resale but may be sold into the market in the near future. This could cause the market price of our ordinary shares to drop significantly, even if our business is doing well.

Sales of a substantial number of our ordinary shares in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of our ordinary shares intend to sell shares, could reduce the market price of our ordinary shares. Assuming the completion of the Reorganization Transactions described in the section of this prospectus entitled “Corporate Formation and Reorganization,” as of March 31, 2013, Cordial, which is controlled by Vollin and entities affiliated with Phoenix IP Ventures, beneficially owned substantially all of our outstanding equity interests. If one or more of them were to sell a substantial portion of the shares they hold, it could cause our share price to decline. Based on shares outstanding as of March 31, 2013, upon completion of this offering, we will have approximately 31.8 million outstanding ordinary shares, assuming (i) an initial public offering price of $15.50 per share, the midpoint of the price range set forth on the cover page of this prospectus, (ii) a closing date of July 31, 2013 and (iii) no exercise of the underwriters’ over-allotment option to purchase additional shares. As of the date of this prospectus, approximately 25.2 million ordinary shares will be subject to a 180-day contractual lock-up with the underwriters. The underwriters may, in their sole discretion and without notice, release all or any portion of the shares from these lock-up arrangements, and the lock-up agreements are subject to certain exceptions. See “Underwriting” for more information.

In addition, as of March 31, 2013, assuming the completion of the Reorganization Transactions, there were 804,875 ordinary shares subject to outstanding options granted (at an assumed initial public offering price of $15.50 per share (the midpoint of the price range set forth on the cover page of this prospectus) and a closing date of July 31, 2013), an additional 15,359 ordinary shares issued pursuant to exercised options (at an assumed initial public offering price of $15.50 per share (the midpoint of the price range set forth on the cover page of this prospectus) and a closing date of July 31, 2013) issued under our 2012 Share Option Plan, or the 2012 Plan, that will become eligible for sale in the public market to the extent permitted by any applicable vesting requirements, the lock-up agreements described above and Rules 144 and 701 promulgated under the Securities Act of 1933, as amended. Prior to the consummation of this offering, we intend to grant options to purchase ordinary shares (which will have an exercise price equal to the price at which ordinary shares are sold in this offering) to certain of our employees for all of the remaining ordinary shares reserved for issuance under the 2012 Plan. We intend to register the ordinary shares issuable upon exercise of these options. Once we register these shares, they can be freely sold in the public market upon issuance and once vested, subject to the 180-day lock-up periods under the lock-up agreements described above and in the “Underwriting” section of this prospectus.

 

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Vollin Holdings Limited will be able to exert significant influence over us and our significant corporate decisions.

After this offering, Vollin will continue to beneficially own more than 50% of our outstanding ordinary shares. For as long as Vollin continues to beneficially own ordinary shares representing more than 50% of the voting power of our ordinary shares, Vollin will be able to direct the election of all of the members of our board of directors and control the outcome of all other matters requiring shareholder approval, including amending our Memorandum and Articles of Association, regardless of whether others believe that any such transaction is in our best interests. Vollin may act in a manner that advances its best interests and not necessarily those of other shareholders, including investors in this offering, by, among other things:

 

  n  

delaying, preventing or deterring a change in control of us;

 

  n  

entrenching our management or our board of directors; or

 

  n  

causing us to enter into transactions or agreements that are not in the best interests of all shareholders.

So long as Vollin continues to beneficially own a significant amount of our outstanding ordinary shares, even if such amount is less than 50%, it will continue to be able to strongly influence our decisions. The concentration of ownership could deprive shareholders of an opportunity to receive a premium for their ordinary shares as part of a sale of our company and may adversely affect the trading price for our ordinary shares because some investors perceive disadvantages in owning shares in companies with concentrated equity ownership.

We do not anticipate paying any cash dividends in the foreseeable future, and accordingly, shareholders must rely on share appreciation for any return on their investment.

After the completion of this offering, we do not anticipate declaring any cash dividends to holders of our ordinary shares in the foreseeable future. Consequently, investors must rely on sales of their ordinary shares after price appreciation, which may never occur, as the only way to realize any future gains on their investment. Investors seeking cash dividends should not invest in our ordinary shares.

Provisions in our constitutional documents may delay or prevent our acquisition by a third party.

Our Amended and Restated Memorandum of Association and Articles of Association, or our Amended and Restated Memorandum and Articles of Association, contain several provisions that may make it more difficult or expensive for a third party to acquire control of us without the approval of our board of directors. These provisions also may delay, prevent or deter a merger, acquisition, tender offer, proxy contest or other transaction that might otherwise result in our shareholders receiving a premium over the market price for their ordinary shares. These provisions include, among others:

 

  n  

providing for a classified board of directors with staggered, three-year terms;

 

  n  

providing for plurality voting in the election of directors;

 

  n  

providing that our directors may be removed, with or without cause, by a vote of more than 50% of the votes of the ordinary shares present at the meeting of shareholders that are voted on the matter, provided, that if Cordial, its shareholders and their respective affiliates no longer beneficially own at least 50% of our then-outstanding ordinary shares, the vote of shareholders holding at least 75% of the voting power of the then-outstanding ordinary shares will be required to remove directors;

 

  n  

authorizing the board of directors to issue, without shareholder approval, additional shares of our share capital, including shares that have rights senior to our ordinary shares;

 

  n  

authorizing the board of directors to change the authorized number of directors and to fill board vacancies;

 

  n  

requiring the approval of our board of directors and/or a vote of more than 50% of the votes of the ordinary shares that are present at the meeting of shareholders and are voted (depending upon the type of amendment(s) in question) to amend our Amended and Restated Memorandum and Articles of Association, provided, that (where a shareholders’ resolution is required in connection with such amendment) if Cordial, its shareholders and their respective affiliates no longer beneficially own at least 50% of our then-outstanding ordinary shares, the vote of shareholders holding at least 75% of the voting power of the then-outstanding ordinary shares will be required for shareholders to amend our Amended and Restated Memorandum and Articles of Association;

 

  n  

requiring shareholders that seek to present proposals before, or to nominate candidates for election of directors at, a meeting of shareholders to provide advance written notice of such proposals or nominations;

 

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  n  

prohibiting shareholder action by written consent without prior board approval at such time as Cordial, its shareholders and their respective affiliates no longer beneficially own at least 50% of our then-outstanding ordinary shares; and

 

  n  

limiting the liability of, and providing indemnification to, our directors and officers.

These and other provisions in our Amended and Restated Memorandum and Articles of Association could discourage potential takeover attempts, reduce the price that investors might be willing to pay in the future for our ordinary shares and result in the market price of our ordinary shares being lower than it would be without these provisions. Please read “Description of Share Capital.”

We will be a “foreign private issuer” and “controlled company” under NASDAQ rules, and as such we are entitled to exemption from certain NASDAQ corporate governance standards, and you may not have the same protections afforded to shareholders of companies that are subject to all NASDAQ corporate governance requirements.

After the consummation of this offering, we will be a “foreign private issuer” under the securities laws of the U.S. and the rules of the NASDAQ Global Select Market, or NASDAQ, the exchange on which we applied to have our ordinary shares listed. Under the securities laws of the U.S., “foreign private issuers” are subject to reduced disclosure requirements under the Exchange Act and different financial reporting requirements, and are exempt from both U.S. federal proxy requirements and the short-swing profit disclosure and recovery provisions of Section 16 of the Exchange Act. Under NASDAQ rules, a “foreign private issuer” is subject to less stringent corporate governance requirements. Subject to certain exceptions, the rules of NASDAQ permit a “foreign private issuer” to follow its home jurisdiction practice in lieu of the listing requirements of NASDAQ. As a foreign private issuer, we may follow British Virgin Islands law, the law of our home jurisdiction, with respect to the foregoing requirements, which does not require that a majority of our board consist of independent directors or that we implement a nominating or corporate governance committee. Our board therefore may include fewer independent directors than would be required if we were subject to the NASDAQ rules. While we intend to comply with the NASDAQ corporate governance rules, for so long as we remain a foreign private issuer, our board’s approach may be different from that of a board with a majority of independent directors, and as a result, our management oversight may be more limited than if we were subject to the NASDAQ rules. If in the future we lose our status as a foreign private issuer, we would be required to comply with the NASDAQ rules within six months of the date of determination.

In addition, because Vollin will beneficially own more than 50% of the voting power of our ordinary shares after this offering, we will be considered to be a “controlled company” for the purposes of NASDAQ listing requirements. Under NASDAQ rules, a “controlled company” is permitted to opt out of the provisions that would otherwise require (i) our board of directors to be comprised of a majority of independent directors, (ii) compensation of our officers to be determined or recommended to the board of directors by a majority of its independent directors or by a compensation committee that is composed entirely of independent directors, and (iii) director nominees to be selected or recommended for selection by a majority of the independent directors or by a nominating committee composed solely of independent directors. Although we intend to comply with these rules, we cannot assure you that we will not take advantage of these exemptions in the future. Accordingly, you may not have the same protections afforded to shareholders of companies that are subject to all of the NASDAQ rules.

We may lose our foreign private issuer status in the future, which could result in significant additional costs and expenses.

As discussed above, we are a foreign private issuer, and therefore, we are not required to comply with all of the periodic disclosure and current reporting requirements of the Exchange Act. The determination of foreign private issuer status is made annually on the last business day of an issuer’s most recently completed second fiscal quarter, and, accordingly, the next determination will be made with respect to us on June 30, 2013. If more than 50% of our ordinary shares are directly or indirectly held by residents of the U.S. on June 30 of any fiscal year, we will no longer be considered a foreign private issuer. If we lose our foreign private issuer status, we will be required to file with the SEC periodic reports and registration statements on U.S. domestic issuer forms beginning on the first day of the fiscal year after the fiscal year during which we make a determination that we no longer qualify as a foreign private issuer, which reports are more detailed and extensive than the forms available to a foreign private issuer. We will also have to mandatorily comply with U.S. federal proxy requirements, and our officers, directors and principal shareholders will become subject to the short-swing profit disclosure and recovery provisions of Section 16 of the

 

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Exchange Act. In addition, we will lose our ability to rely upon exemptions from certain corporate governance requirements under the listing requirements of NASDAQ. As a result, the regulatory and compliance costs to us under U.S. securities laws as a U.S. domestic issuer could be significantly higher.

Rights of shareholders under British Virgin Islands law differ from those under U.S. law, and, accordingly, you may have fewer protections as a shareholder.

Our corporate affairs are governed by our Amended and Restated Memorandum and Articles of Association, the BVI Business Companies Act, 2004, as amended, or the BVI Act, and the common law of the British Virgin Islands. The rights of shareholders to take legal action against our directors, actions by minority shareholders and the fiduciary responsibilities of our directors under British Virgin Islands law are to a large extent governed by the common law of the British Virgin Islands and by the BVI Act. The common law of the British Virgin Islands is derived in part from comparatively limited judicial precedent in the British Virgin Islands as well as from English common law, which has persuasive, but not binding, authority on a court in the British Virgin Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under British Virgin Islands law are not as clearly established as they would be under statutes or judicial precedents in some jurisdictions in the U.S.. In particular, the British Virgin Islands has a less developed body of securities laws as compared to the U.S., and some states (such as Delaware) have more fully developed and judicially interpreted bodies of corporate law. As a result of the foregoing, holders of our ordinary shares may have more difficulty in protecting their interests through actions against our management, directors or major shareholders than they would as shareholders of a U.S. company.

The laws of the British Virgin Islands provide limited protection for minority shareholders, so minority shareholders will have limited or no recourse if they are dissatisfied with the conduct of our affairs.

Under the laws of the British Virgin Islands, there is limited statutory law for the protection of minority shareholders other than the provisions of the BVI Act dealing with shareholder remedies, as summarized under “Description of Share Capital—Shareholders’ Rights Under British Virgin Islands Law Generally.” The principal protection under statutory law is that shareholders may bring an action to enforce the constituent documents of a British Virgin Islands company and are entitled to have the affairs of the company conducted in accordance with the BVI Act and the memorandum and articles of association of the company. As such, if those who control the company have persistently disregarded the requirements of the BVI Act or the provisions of the company’s memorandum and articles of association, then the courts will likely grant relief. Generally, the areas in which the courts will intervene are the following: (i) an act complained of which is outside the scope of the authorized business or is illegal or not capable of ratification by the majority; (ii) acts that constitute fraud on the minority where the wrongdoers control the company; (iii) acts that infringe on the personal rights of the shareholders, such as the right to vote; and (iv) acts where the company has not complied with provisions requiring approval of a special or extraordinary majority of shareholders, which are more limited than the rights afforded to minority shareholders under the laws of many states in the U.S.

It may be difficult to enforce judgments against us or our executive officers and directors in jurisdictions outside the U.S.

Under our Amended and Restated Memorandum and Articles of Association, we may indemnify and hold our directors harmless against all claims and suits brought against them, subject to limited exceptions. Furthermore, to the extent allowed by law, the rights and obligations among or between us, any of our current or former directors, officers and employees and any current or former shareholder will be governed exclusively by the laws of the British Virgin Islands and subject to the jurisdiction of the British Virgin Islands courts, unless those rights or obligations do not relate to or arise out of their capacities as such. Although there is doubt as to whether U.S. courts would enforce these provisions in an action brought in the U.S. under U.S. securities laws, these provisions could make judgments obtained outside of the British Virgin Islands more difficult to enforce against our assets in the British Virgin Islands or jurisdictions that would apply British Virgin Islands law.

British Virgin Islands companies may not be able to initiate shareholder derivative actions, thereby depriving shareholders of one avenue to protect their interests.

British Virgin Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the U.S. The circumstances in which any such action may be brought, and the procedures and defenses that may be available in respect of any such action, may result in the rights of shareholders of a British Virgin Islands company being more limited than those of shareholders of a company organized in the U.S. Accordingly,

 

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shareholders may have fewer alternatives available to them if they believe that corporate wrongdoing has occurred. The British Virgin Islands courts are also unlikely to recognize or enforce judgments of courts in the U.S. based on certain liability provisions of U.S. securities law or to impose liabilities, in original actions brought in the British Virgin Islands, based on certain liability provisions of the U.S. securities laws that are penal in nature. There is no statutory recognition in the British Virgin Islands of judgments obtained in the U.S., although the courts of the British Virgin Islands will generally recognize and enforce the non-penal judgment of a non-U.S. court of competent jurisdiction without retrial on the merits. This means that even if shareholders were to sue us successfully, they may not be able to recover anything to make up for the losses suffered.

Legislation has been introduced that could, if enacted, treat us as a U.S. corporation for U.S. federal income tax purposes.

On February 7, 2012, U.S. Senator Carl Levin introduced legislation in the U.S. Senate entitled the “CUT Loopholes Act.” Senator Levin and U.S. Representative Lloyd Doggett originally introduced similar legislative proposals in 2009 and similar legislation was proposed in 2010 and 2011. If enacted, this legislation could, among other things, cause us to be treated as a U.S. corporation for U.S. tax purposes, as the proposed legislation would generally so treat any corporation the shares of which are publicly traded on an established securities market, or whose gross assets are $50 million or more, if the “management and control” of such a corporation is, directly or indirectly, treated as occurring primarily within the U.S. The proposed legislation provides that a corporation will be so treated if substantially all of the executive officers and senior management of the corporation who exercise day-to-day responsibility for making decisions involving strategic, financial and operational policies of the corporation are located primarily within the U.S. To date, this legislation has not been approved by either the House of Representatives or the Senate. However, we can provide no assurance that this legislation or similar legislation will not ultimately be adopted. Any modification to the U.S. federal income tax laws that affects the tax residency of a non-U.S. company managed and controlled in the U.S. could adversely affect the U.S. federal taxation of some or all of our income and the value of our ordinary shares.

Challenges to our tax structure by tax authorities may adversely affect our financial position.

Iroko Pharmaceuticals Inc. is incorporated under the laws of the British Virgin Islands and as such is subject to British Virgin Islands tax laws. We believe that Iroko Pharmaceuticals Inc. is resident solely in the British Virgin Islands. If this tax position were challenged successfully by the relevant tax authorities in other jurisdictions in which Iroko Pharmaceuticals Inc. may operate, or if there are any changes in applicable tax laws or regulations or the interpretation thereof, such tax authorities could determine that Iroko Pharmaceuticals Inc. is a tax resident of a jurisdiction other than the British Virgin Islands. Such a determination could have a material adverse effect on our financial position and, in particular, result in unforeseen and possibly retroactive tax liabilities.

Iroko Pharmaceuticals Inc. has and will continue to have subsidiaries organized under the laws of various jurisdictions. Such subsidiaries are and will be subject to the tax laws of such jurisdictions. If the tax authorities of any or all of these jurisdictions were to successfully challenge our tax position with respect to income tax treaties and transfer prices affecting transactions between our subsidiaries or between our subsidiaries and us, we could be subject to increased taxes and possibly penalties, which could have a material adverse effect on our financial position.

Iroko Pharmaceuticals Inc. and each non-U.S. subsidiary intends to structure its operations with the goal that each such entity would not be subject to U.S. corporate income tax on the basis that it is not engaged in a trade or business in the United States. Nevertheless, there is a risk that the U.S. Internal Revenue Service, or IRS, may successfully assert that one or more of such entities is engaged in a trade or business in the United States, in which case these entities would be subject to U.S. tax at regular corporate rates on income that is effectively connected with the conduct of a U.S. trade or business, plus an additional 30% (or a lower applicable treaty rate, if any) “branch profits” tax on the dividend equivalent amount, which is generally effectively connected income with certain adjustments, deemed withdrawn from the United States. Any such tax would result in an effective tax rate that is higher than anticipated.

Our effective tax rate could increase, which would increase our income tax expense.

Our effective tax rate could be adversely affected by factors which are outside of our control, including:

 

  n  

changes in the relative proportions of income before taxes in the various jurisdictions in which we and our subsidiaries operate that have differing statutory tax rates;

 

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  n  

changing tax laws, regulations and administrative positions and interpretations in various jurisdictions in which we and our subsidiaries operate;

 

  n  

determinations by tax authorities that we or any of our subsidiaries have established a taxable presence in jurisdictions in which we or they had not theretofore paid taxes;

 

  n  

successful challenges by tax authorities to the transfer prices among us and our subsidiaries; and

 

  n  

tax assessments, or any related interest or penalties, which could significantly affect our income tax expense.

We have a risk of being classified as a “controlled foreign corporation.”

As a company incorporated in the British Virgin Islands, we would be classified as a “controlled foreign corporation” for U.S. federal income tax purposes if any U.S. person held 10% or more of our ordinary shares (including ownership through the attribution rules of Section 958 of the Internal Revenue Code of 1986, as amended, or the Code), each such person a U.S. 10% Shareholder, and the sum of the percentages of ownership by all U.S. 10% Shareholders exceeded 50% (by voting power or value) of our ordinary shares. We are not currently a controlled foreign corporation; however, as a result of future sales of our ordinary shares by Vollin, we may be determined to be a controlled foreign corporation in the future. If we become a controlled foreign corporation, all U.S. 10% Shareholders would be subject to taxation under subpart F of the Code. The ultimate consequences of this determination are fact-specific but could include taxation of such U.S. 10% Shareholder on a pro rata portion of certain of our income, even in the absence of any distribution of such income, and the taxation of all or a portion of the gain recognized by such U.S. 10% Shareholders on a sale of our ordinary shares at rates applicable to ordinary income.

Certain non-U.S. shareholders may be subject to Foreign Accounts Tax Compliance Act withholding.

Provisions of the Code commonly referred to as FATCA impose a 30% withholding tax on “withholdable payments” to foreign financial institutions (which include most foreign investment vehicles) and certain other foreign entities unless various information reporting rules have been satisfied. For this purpose, withholdable payments generally include U.S.-source dividends, as well as the entire gross proceeds from a sale of equity instruments that can produce U.S.-source dividends. For FATCA purposes, under existing Treasury regulations, investors and financial intermediaries should treat any dividends paid by us as U.S.-source dividends. The FATCA withholding tax will apply even if the payment would otherwise not be subject to U.S. nonresident withholding tax (e.g., because it is exempt from withholding tax generally or is capital gain). Applicable Treasury regulations will apply this withholding tax to dividend payments beginning on January 1, 2014 and gross proceeds payments beginning on January 1, 2017.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. The forward-looking statements are contained principally in the sections entitled “Prospectus Summary,” “Risk Factors,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Business.” All statements other than statements of historical facts contained in this prospectus, including statements regarding our future results of operations or financial condition, business strategy and plans and objectives of management for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “believe,” “will,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “expect,” “predict,” “could,” “potentially” or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs.

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

 

  n  

our use of the net proceeds from this offering;

 

  n  

the accuracy of our estimates regarding future expenses, revenues and capital requirements;

 

  n  

our ability to obtain and maintain regulatory approval of product candidates we may develop and our ability to maintain regulatory approval of our existing products;

 

  n  

regulatory developments in the U.S. and other countries;

 

  n  

the performance of third-party manufacturers and other service providers;

 

  n  

our plans to develop and commercialize our product candidates;

 

  n  

the rate and degree of market acceptance of our product candidates, if they receive regulatory approval;

 

  n  

our ability to obtain and maintain intellectual property protection for our product candidates;

 

  n  

the successful development of our sales and marketing capabilities; and

 

  n  

the success of competing drugs that are or become available.

These statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results of operation, financial condition, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements contained in this prospectus are reasonable, we caution you that these statements are based on a combination of facts and factors currently known by us and our projections of the future, about which we cannot be certain. Moreover, we operate in a competitive and rapidly-changing industry in which new risks may emerge from time to time, and it is not possible for management to predict all risks.

You should refer to the section of this prospectus entitled “Risk Factors” for a discussion of important risks that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors and new risks that may emerge in the future, we cannot assure you that the forward-looking statements in this prospectus will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. We do not undertake to update any of the forward-looking statements after the date of this prospectus, except to the extent required by law.

 

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INDUSTRY AND MARKET DATA

The market data and certain other statistical information used throughout this prospectus are based on independent industry publications, reports by market research firms, and other published independent sources. Independent industry publications and market reports relied upon include those generated by the FDA, Consumer Reports, IMS Health, the American Heart Association, the European Medicines Agency, the Osteoarthritis Research Society International, the National Institutes of Health, the Agency for Healthcare Research and Quality, the Journal of Medical Regulation, the American Society of Hypertension and Health Canada, among others. We draw conclusions from independent studies published in American Journal of Therapeutics, Journal of Rheumatology, Geriatrics Magazine, Arthritis Research and Therapy Journal, Journal of Obstetrics and Gynaecology Canada, Journal of Clinical Epidemiology, Pharmacoepidemiol Drug Safety Journal, PLoS Medicine Journal, Archives of Internal Medicine, and BMJ Journal.

Some data are also based on our good faith estimates, which are derived from other relevant statistical information, as well as the independent sources listed above. Estimates of historical growth rates in the markets where we operate are not necessarily indicative of future growth rates in such markets. Our assumptions and estimations are subject to change, and involve risks including those discussed in the “Risk Factors” section of this prospectus.

 

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USE OF PROCEEDS

We estimate that the net proceeds to us from this offering of 6,500,000 ordinary shares, after deducting underwriting discounts and estimated offering expenses payable by us, will be approximately $90.4 million, assuming an initial public offering price of $15.50 per ordinary share (the midpoint of the price range set forth on the cover page of this prospectus), or approximately $104.5 million if the underwriters exercise in full their option to purchase additional shares. Each $1.00 increase or decrease in the assumed initial public offering price would increase or decrease, as applicable, our cash and cash equivalents, working capital, total assets and total shareholders’ equity by approximately $6.0 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and estimated offering expenses payable by us.

The principal purposes of this offering are to obtain additional capital, create a public market for our ordinary shares, facilitate future access to public equity markets, increase awareness of our company among potential customers and improve our competitive position.

We intend to use the net proceeds of this offering as follows: (i) $19.5 million to fund the continued clinical development and regulatory filing of our submicron NSAID programs, including completion of the open label safety trial of Zorvolex for osteoarthritis pain ($0.5 million), Phase 3 trials for submicron meloxicam and submicron naproxen ($10.4 million), and further development of our other submicron NSAID product candidates ($8.6 million); (ii) $27.0 million for certain pre-commercialization activities for Zorvolex and Tiforbex; and (iii) $5.0 million for the launch of Zorvolex. We believe that the net proceeds from this offering will fund our product candidates through the development stages as indicated in the table below.

 

 

 

PRODUCT CANDIDATE

 

TARGET INDICATION

  

DEVELOPMENT STATUS

 

ANTICIPATED

DEVELOPMENT STATUS

FOLLOWING THE USE OF
PROCEEDS

FROM THIS OFFERING

Zorvolex

  Acute pain   

NDA submitted December 2012; accepted for filing February 2013

  Marketed

Zorvolex

  Osteoarthritis pain    Phase 3 complete  

sNDA submitted

Tiforbex

  Acute pain    NDA submitted April 2013; accepted for filing July 2013   NDA filed

Submicron meloxicam

 

Osteoarthritis pain

   Phase 1 and Phase 3 ongoing (1)   Phase 3 trials ongoing

Submicron naproxen

 

Osteoarthritis pain

   Phase 2 complete (2)   Phase 3 trials ongoing

 

 

(1)  

We have begun, and are enrolling patients for, two Phase 3 clinical trials for submicron meloxicam. In addition, we have completed two Phase 1 clinical trials for submicron meloxicam and have commenced a third Phase 1 clinical trial, which is proceeding concurrently with the Phase 3 clinical trials.

(2)  

Phase 2 clinical trials have been completed for submicron naproxen. We are planning Phase 3 clinical trials with a potential start date in 2014.

In addition to the amounts disclosed above, we expect approximately $20.0-$25.0 million will be used to fund the initial implementation of our contract sales force. We expect the remaining proceeds to be used to fund our daily operations, including the sales of our currently marketed products, Indocin® and Aldomet®, general and administrative expenses, capital expenditures, working capital and the prosecution and maintenance of our intellectual property.

 

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DIVIDEND POLICY

We have never declared or paid any cash dividends on our shares. We currently intend to retain any future earnings to fund the development and expansion of our business, and therefore we do not anticipate paying cash dividends on our ordinary shares in the foreseeable future. Any future determination to pay dividends will be at the discretion of our board of directors and will depend on our results of operations, financial condition, capital requirements and other factors deemed relevant by our board of directors. Under British Virgin Islands law, the Company may pay dividends to shareholders only if, immediately after the dividend, the value of the Company’s assets would exceed the Company’s liabilities and the Company would be able to pay its debts as they fall due. Furthermore, the Company’s directors must pass a resolution authorizing the payment of a dividend, which resolution must contain a statement that, in the opinion of the directors, immediately after the dividend, the value of the Company’s assets will exceed the Company’s liabilities and the Company will be able to pay its debts as they fall due.

 

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CAPITALIZATION

The following table sets forth our capitalization as of March 31, 2013:

 

  n  

on an actual basis;

 

  n  

on a pro forma basis to reflect (i) in April 2013, the conversion of $45.0 million in borrowings under our related-party line of credit and $4.9 million of accrued interest into 45,000,000 convertible preference shares, the conversion of $15.0 million of related-party promissory notes and accrued interest of $0.2 million into 15,000,000 convertible preference shares and the repayment of $4.5 million in borrowings under our related-party line of credit via an assignment of a $4.5 million note receivable due from iCeutica, (ii) the May 2013 issuance of 5,000,000 convertible preference shares for $5.0 million, (iii) the June 2013 issuance of 5,000,000 convertible preference shares for $5.0 million, (iv) the June 2013 issuance of a convertible note for $15.0 million, (v) the automatic conversion of all outstanding convertible preference shares and class 1 ordinary shares into an aggregate of 24,160,358 ordinary shares prior to the consummation of this offering and the conversion of our convertible note into 967,742 ordinary shares upon the consummation of this offering, in each case at an assumed initial public offering price of $15.50 per share (the midpoint of the price range set forth on the cover page of this prospectus) and a closing date of July 31, 2013, and (vi) the issuance of 125,449 ordinary shares which we intend to grant as restricted shares to certain of our employees and other individuals associated with us prior to the consummation of the offering, in each case as if such events had occurred on March 31, 2013, and

 

  n  

on a pro forma as-adjusted basis to further reflect (i) the effectiveness of our Amended and Restated Memorandum and Articles of Association, which was filed on July 10, 2013, (ii) the issuance and sale by us of 6,500,000 ordinary shares in this offering at an assumed initial public offering price of $15.50 per share (the midpoint of the price range set forth on the cover page of this prospectus) and a closing date of July 31, 2013, and (iii) the application of our estimated net proceeds from this offering as set forth under “Use of Proceeds,” after deducting the estimated underwriting discounts and estimated offering expenses payable by us, as if this offering had occurred on March 31, 2013.

You should read the information below in conjunction with the financial statements and the related notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Use of Proceeds,” “Corporate Formation and Reorganization” and “Certain Relationships and Related Person Transactions” included elsewhere in this prospectus.

 

 

 

    AS OF MARCH 31, 2013  
    ACTUAL     PRO FORMA     PRO FORMA
AS ADJUSTED
 
   

(unaudited)

(in thousands)

 

Cash and cash equivalents

  $ 11,060      $ 36,060      $ 126,458   
 

 

 

   

 

 

   

 

 

 

Related-party line of credit

    49,500                 

Related-party note payable

    25,000        10,000        10,000   
 

 

 

   

 

 

   

 

 

 

Shareholder’s equity (deficit):

     

Ordinary shares, par value $0.01; unlimited shares authorized, 1,000 shares issued and outstanding, actual; 1,000 shares authorized, 1,000 shares issued and outstanding, pro forma;             shares authorized, 31,753,549 shares issued and outstanding, pro forma as adjusted

                  318   

Additional paid-in capital

    110,053        200,165        290,245   

Accumulated other comprehensive loss

    (408     (408     (408

Accumulated deficit

    (131,196     (131,196     (131,196
 

 

 

   

 

 

   

 

 

 

Total shareholder’s equity (deficit)

    (21,551     68,561        158,959   
 

 

 

   

 

 

   

 

 

 

Total capitalization

  $ 52,949      $ 78,561      $ 168,959   
 

 

 

   

 

 

   

 

 

 

 

 

 

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The table above excludes the following as of March 31, 2013 (at an assumed initial public offering price of $15.50 per share (the midpoint of the price range set forth on the cover page of this prospectus) and a closing date of July 31, 2013):

 

  n  

804,875 ordinary shares issuable upon the exercise of options at a weighted-average exercise price of $1.90 per share; and

 

  n  

15,631 options to purchase ordinary shares reserved for future issuance under the 2012 Plan. Prior to the consummation of this offering, we intend to grant options to purchase ordinary shares (which will have an exercise price equal to the price at which ordinary shares are sold in this offering) to certain of our employees for all of the remaining ordinary shares reserved for issuance under the 2012 Plan.

 

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DILUTION

If you invest in our ordinary shares in this offering, your interest will be diluted to the extent of the difference between the public offering price per share of our ordinary shares and the pro forma as adjusted net tangible book value per share of our ordinary shares after this offering.

The discussion and tables in this section are based on 25,253,549 ordinary shares outstanding as of March 31, 2013, which number reflects the pro forma adjustments as follows: (i) the conversion of $45.0 million in borrowings under our related-party line of credit and $4.9 million of accrued interest into 45,000,000 convertible preference shares, the conversion of $15.0 million of related-party promissory notes and accrued interest of $0.2 million into 15,000,000 convertible preference shares and the repayment of $4.5 million in borrowings under our related-party line of credit via an assignment of a $4.5 million note receivable due from iCeutica, (ii) the May 2013 issuance of 5,000,000 convertible preference shares for $5.0 million, (iii) the June 2013 issuance of 5,000,000 convertible preference shares for $5.0 million, (iv) the June 2013 issuance of a convertible note for $15.0 million and (v) the automatic conversion of all outstanding convertible preference shares and class 1 ordinary shares into an aggregate of 24,160,358 ordinary shares prior to the consummation of this offering and the conversion of our convertible note into 967,742 ordinary shares upon the consummation of this offering, and (vi) the issuance of 125,449 ordinary shares which we intend to grant as restricted shares to certain of our employees other individuals associated with us prior to the consummation of the offering, in each case at an assumed initial public offering price of $15.50 per share (the midpoint of the price range set forth on the cover page of this prospectus) and a closing date of July 31, 2013.

Our historical net tangible book value as of March 31, 2013 was $(58.4) million, or $(58,416) per ordinary share. Historical net tangible book value per share represents the amount of our total tangible assets less total liabilities, divided by the total number of ordinary shares outstanding.

After giving effect to the pro forma adjustments, our pro forma net tangible book value as of March 31, 2013 would have been $31.7 million, or $31,696 per ordinary share.

After giving effect to our issuance and sale of 6,500,000 ordinary shares in this offering at the initial public offering price of $15.50 per ordinary share (the midpoint of the price range set forth on the cover of this prospectus) and after deducting underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of March 31, 2013 would have been $122.1 million, or $3.85 per ordinary share. This represents an immediate increase in pro forma net tangible book value of $(31,692) per ordinary share to our existing shareholders and an immediate dilution of $11.65 in pro forma net tangible book value per ordinary share to investors purchasing ordinary shares in this offering.

Dilution per ordinary share to investors purchasing ordinary shares in this offering is determined by subtracting pro forma as adjusted net tangible book value per ordinary share after this offering from the initial public offering price per ordinary share paid by these investors. The following table illustrates this dilution on a per ordinary share basis:

 

 

 

Initial public offering price per ordinary share

     $ 15.50   

Historical net tangible book value per ordinary share as of March 31, 2013

   $ (58,416.00  

Increase in net tangible book value per ordinary share attributable to pro forma adjustments

     90,112.00     
  

 

 

   

Pro forma net tangible book value per ordinary share as of March 31, 2013

     31,696.00     

Increase in net tangible book value per ordinary share attributable to investors

     (31,692.15  
  

 

 

   

Pro forma as adjusted net tangible book value after this offering

       3.85   
    

 

 

 

Dilution per share to investors

     $ 11.65   
    

 

 

 

 

 

A $1.00 increase or decrease in the assumed initial public offering price of $15.50 per ordinary share (the midpoint of the price range set forth on the cover of this prospectus) would increase or decrease, respectively, our pro forma as adjusted net tangible book value per ordinary share after this offering by $0.19 per ordinary share and the dilution in pro forma as adjusted net tangible book value to new investors by $0.81 per ordinary share, assuming the

 

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number of ordinary shares offered by us, as set forth on the cover of this prospectus, remains the same and after deducting underwriting discounts and estimated offering expenses payable by us.

The following table summarizes, on a pro forma as adjusted basis as of March 31, 2013 and after giving effect to the offering, based on an assumed initial public offering price of $15.50 per ordinary share (the midpoint of the price range set forth on the cover of this prospectus) and a closing date of July 31, 2013, the differences between existing shareholders and new investors with respect to the number of ordinary shares purchased from us, the total consideration paid to us, and the average price per ordinary share paid.

 

 

 

     SHARES PURCHASED     TOTAL CONSIDERATION     AVERAGE PRICE
PER  ORDINARY
SHARE
 
     NUMBER      PERCENT     AMOUNT      PERCENT    

Existing shareholders

     25,253,549         79.5   $ 197.3         66.2   $ 7.82   

New investors

     6,500,000         20.5        100.8         33.8        15.50   
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

     31,753,549         100.0   $ 298.1         100.0  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

A $1.00 increase or decrease in the assumed initial public offering price of $15.50 per ordinary share (the midpoint of the price range set forth on the cover page of this prospectus) would increase or decrease, respectively, total consideration paid by new investors and total consideration paid by all shareholders by approximately $6.5 million, assuming that the number of ordinary shares offered by us, as set forth on the cover page of this prospectus, remains the same.

If the underwriters exercise their option to purchase additional ordinary shares in full, our existing shareholders would own 77.2% and our new investors would own 22.8% of the total number of ordinary shares outstanding after this offering.

The number of ordinary shares outstanding after this offering excludes the following (each as of March 31, 2013) (at an assumed initial public offering price of $15.50 per share (the midpoint of the price range set forth on the cover page of this prospectus) and a closing date of July 31, 2013):

 

  n  

804,875 ordinary shares issuable upon the exercise of options at a weighted-average exercise price of $1.90 per share; and

 

  n  

15,631 options to purchase ordinary shares reserved for future issuance under the 2012 Plan. Prior to the consummation of this offering, we intend to grant options to purchase ordinary shares (which will have an exercise price equal to the price at which ordinary shares are sold in this offering) to certain of our employees for all of the remaining ordinary shares reserved for issuance under the 2012 Plan.

To the extent any of these options are exercised, there will be further dilution to new investors.

 

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PRICING SENSITIVITY ANALYSIS

Throughout this prospectus we provide information assuming (i) that the initial public offering price per ordinary share in this offering is $15.50, which is the midpoint of the price range set forth on the cover page of this prospectus, and (ii) a closing date for this offering of July 31, 2013. However, some of this information will be affected if the initial public offering price per ordinary share in this offering is different from the midpoint of the estimated price range or if this offering does not close on July 31, 2013. As further described in “Corporate Formation and Reorganization,” the number of ordinary shares into which our outstanding convertible preference shares and outstanding class 1 ordinary shares will convert will vary depending upon the initial public offering price and the closing date of this offering. This conversion will also impact certain information presented in this prospectus. The following table presents how some of the information set forth in this prospectus would be affected by an initial public offering price per ordinary share at the low-, mid- and high-points of the price range indicated on the cover page of this prospectus, assuming a closing date for this offering of July 31, 2013, that the underwriters’ option to purchase additional common shares is not exercised and that the number of ordinary shares offered remains the same as that set forth on the cover page of this prospectus. The financial data in the following table has been calculated based on our unaudited interim consolidated financial statements as of March 31, 2013 included elsewhere in this prospectus.

Assumed Closing Date of July 31, 2013

 

 

 

      INITIAL PUBLIC OFFERING PRICE
PER ORDINARY SHARE
 
      $14.00     $15.50     $17.00  
    

(unaudited)

(Dollars in thousands, except share

and per share data)

 

Outstanding ordinary shares following this offering

      

Number of ordinary shares held by the public

     6,500,000        6,500,000        6,500,000   

Number of ordinary shares held by Cordial

     25,392,680        25,112,741        24,882,204   

Number of ordinary shares held by others

     138,160        141,644        144,513   

Total number of ordinary shares outstanding following this offering

     32,030,840        31,754,385        31,526,717   

Number of ordinary shares subject to outstanding options

     630,435        803,203        945,482   

Ownership percentages following this offering

      

Percentage held by the public

     19.9     20.0     20.0

Percentage held by Cordial

     77.8     77.1     76.6

Percentage held by others

     0.4     0.4     0.5

Percentage held by option holders

     1.9     2.5     2.9

Use of proceeds

      

Proceeds from offering, net of underwriting discounts, to us

   $ 84,630      $ 93,698      $ 102,765   

Estimated offering expense to be borne by us

   $ 3,300      $ 3,300      $ 3,300   

Remaining proceeds to us

   $ 81,330      $ 90,398      $ 99,465   

Cash and cash equivalents and capitalization

      

Cash and cash equivalents

   $ 117,390      $ 126,458      $ 135,525   

Total debt

   $ 10,000      $ 10,000      $ 10,000   

Total shareholders’ equity

   $ 149,891      $ 158,959      $ 168,026   

Total capitalization

   $ 159,891      $ 168,959      $ 178,026   
  

 

 

   

 

 

   

 

 

 

Dilution

      

Pro forma as adjusted net tangible book value per ordinary share after the offering

   $ 3.53      $ 3.85      $ 4.16   

Dilution in pro forma as adjusted net tangible book value per ordinary share to investors in this offering

   $ 10.47      $ 11.65      $ 12.84   

 

 

 

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The following tables present our selected consolidated financial data for the periods indicated. The selected consolidated statements of operations data for the years ended December 31, 2011 and 2012 and the selected consolidated balance sheet data as of December 31, 2011 and 2012 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The consolidated statements of operations data for the three months ended March 31, 2012 and 2013 and the selected consolidated balance sheet data as of March 31, 2013 have been derived from our unaudited interim consolidated financial statements included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected in the future and our interim period results are not necessarily indicative of our results for a full year. The selected consolidated financial data below should be read in conjunction with the information contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the consolidated financial statements and notes thereto, and other financial information included elsewhere in this prospectus.

 

 

 

    YEAR ENDED DECEMBER 31,     THREE MONTHS ENDED MARCH 31,  
              2011                        2012                         2012                              2013               
                (unaudited)  
    (in thousands, except share and per share data)  

Consolidated Statements of Operations Data:

       

Revenues:

       

Net product sales

  $ 7,443      $ 6,704      $ 1,652      $ 1,879   

Royalty revenues

    3,538        3,176        770        755   
 

 

 

   

 

 

   

 

 

   

 

 

 
    10,981        9,880        2,422        2,634   
 

 

 

   

 

 

   

 

 

   

 

 

 

Costs and expenses:

       

Cost of sales (excluding amortization of intangible assets)

    6,054        3,187        812        747   

Amortization of intangible assets

    1,717        1,717        429        429   

Selling, general and administrative

    18,913        27,017        4,946        10,519   

Research and development

    18,299        33,884        10,112        4,786   

Acquired in-process research and development

           11,000                 

Related-party management fee

    1,500        1,500        375        375   

Change in fair value of contingent consideration

    1,000        3,500                 
 

 

 

   

 

 

   

 

 

   

 

 

 
    47,483        81,805     

 

 

 

16,674

 

  

 

 

 

 

16,856

 

  

 

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

    (36,502     (71,925     (14,252     (14,222

Total other income (expense), net

    1,697        (2,789     58        (2,887
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations before income tax benefit

    (34,805     (74,714     (14,194     (17,109

Income tax benefit

    (1,079                     
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations

    (33,726     (74,714     (14,194     (17,109

Income from discontinued operations, net of tax

    1,877                        
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (31,849   $ (74,714   $ (14,194   $ (17,109
 

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) earnings per ordinary share—basic and diluted:

       

Loss per ordinary share from continuing operations

  $ (33,726   $ (74,714   $ (14,194   $ (17,109

Discontinued operations per ordinary share, net of tax

    1,877                        
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per ordinary share—basic and diluted

  $ (31,849   $ (74,714   $ (14,194   $ (17,109
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average basic and diluted ordinary shares outstanding

    1,000        1,000        1,000        1,000   
 

 

 

   

 

 

   

 

 

   

 

 

 

Unaudited pro forma net loss

    $ (72,056     $ (14,654
   

 

 

     

 

 

 

Unaudited pro forma basic and diluted net loss per ordinary share

    $ (3.86     $ (0.66
   

 

 

     

 

 

 

Unaudited pro forma weighted average basic and diluted ordinary shares outstanding

      18,670,892          22,102,958   
   

 

 

     

 

 

 

 

 

 

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     AS OF DECEMBER 31,       AS OF MARCH 31,  
2013
 
     2011      2012    
                  (unaudited)  
     (in thousands)  

Consolidated Balance Sheet Data:

       

Cash and cash equivalents

   $ 15,017       $ 11,884      $ 11,060   

Related-party note receivable

             4,500        4,500   

Working capital

     16,378         (50,322     (68,088

Total assets

     68,484         80,898        79,371   

Related-party line of credit

             49,500        49,500   

Related-party note payable

             10,000        25,000   

Total liabilities

     12,828         85,671        100,922   

Total shareholder’s equity (deficit)

     55,656         (4,773     (21,551

 

 

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes appearing at the end of this prospectus. Some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. You should read the “Risk Factors” section of this prospectus for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

The consolidated financial statements and financial information contained herein for the years ended December 31, 2011 and 2012 and the three months ended March 31, 2012 and 2013 are presented for Iroko Pharmaceuticals Inc. and its consolidated subsidiaries. For the purposes of this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section, “we” or “us” refers to Iroko Pharmaceuticals Inc.

In September 2012, we were incorporated under the laws of the British Virgin Islands. In December 2012, we became a wholly owned subsidiary of Cordial Investments Inc., or Cordial, also incorporated under the laws of the British Virgin Islands. Vollin Holdings Limited, or Vollin, and affiliates of Phoenix IP Ventures-III, LLC, or Phoenix IP Ventures, own 100% of the outstanding voting shares of Cordial.

Prior to our incorporation, Vollin and Phoenix IP Ventures formed Iroko Intermediate Holdings, Inc., or Iroko Intermediate, a Delaware corporation, and a subsidiary of Iroko Holdings S.A., a Luxembourg societe anonyme. At such time, Vollin and Phoenix IP Ventures owned 100% of the outstanding voting interests of Iroko Holdings S.A. In August 2010, Iroko Intermediate acquired Iroko Holdings LLC, a Delaware limited liability company, or Iroko Holdings, the parent of Iroko Pharmaceuticals, LLC, a Delaware limited liability company, and our primary operating company. We refer to this transaction as the Acquisition. In December 2012, all of the shares of stock of Iroko Intermediate held by Iroko Holdings S.A. were transferred to us.

We have effected a series of transactions which are intended to consolidate our corporate structure. We refer to these transactions as the Reorganization Transactions. For a complete description of the Reorganization Transactions and our corporate structure, please refer to the “Corporate Formation and Reorganization” section of this prospectus.

We currently market two approved products, Indocin® (indomethacin) and Aldomet® (methyldopa). We sell these products in the U.S. and seven European countries: Austria, Belgium, France, Italy, Portugal, Spain and Switzerland. In addition, we receive royalties from rest of world sales generated by our licensee, Aspen Pharmacare Holdings Limited and its subsidiaries, or Aspen.

Our pipeline includes six submicron NSAID product candidates, four in late-stage development and two that are preclinical. Our late-stage product candidates are Zorvolex, Tiforbex, submicron meloxicam and submicron naproxen. Our late-stage product candidates include both acute and osteoarthritis pain indications in adult patients. Our two product candidates in preclinical development are submicron celecoxib and submicron ibuprofen.

We expect to continue to incur substantial additional operating losses and negative cash flows from operations for at least the next several years as we continue to develop our product candidates and seek marketing approval and, subject to obtaining such approval, the eventual commercialization of our product candidates. If we obtain marketing approval for Zorvolex and/or Tiforbex, we will incur significant sales, marketing and outsourced manufacturing expenses. In addition, we expect to incur additional expenses to add operational, financial and information systems as well as personnel, including personnel to support our planned product commercialization efforts. We also expect to incur significant costs to comply with corporate governance, internal controls and similar requirements applicable to us as a public company following the closing of this offering. Our results may vary depending on many factors, including the progress and results of our preclinical studies and clinical trials, our ability to obtain marketing approval of Zorvolex, Tiforbex and our other product candidates and, if approved, our ability to commercialize these products and achieve market acceptance of these products among physicians, patients and third-party payors.

 

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To date, our revenues have been generated through sales of and royalties from Indocin® and Aldomet®, our approved products. We have financed our operations primarily through private placements of Iroko Intermediate’s common stock and preferred stock as well as a revolving credit facility. From our inception through March 31, 2013, we have received net proceeds of $107.9 million, $49.5 million and $15.0 million from the sale of Iroko Intermediate’s common and preferred stock, the revolving line of credit and notes payable, respectively.

Our recurring losses and negative cash flows from operations raise substantial doubt about our ability to continue as a going concern. As a result, our independent registered public accounting firm included an explanatory paragraph regarding this uncertainty in its report on our consolidated financial statements as of and for the year ended December 31, 2012. Our current sources of revenue are not sufficient to sustain our present activities and we do not expect to generate significant incremental revenues until, and unless, the U.S. Food and Drug Administration, or the FDA, or other regulatory agencies approve Zorvolex, Tiforbex or any other of our product candidates and we successfully commercialize any such product candidates. Accordingly, our ability to continue as a going concern will require us to obtain additional financing to fund our operations. Additional financing may not be available to us on acceptable terms, or at all. Our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy.

Our Marketed Products

We currently market two approved products, Indocin® (indomethacin) and Aldomet® (methyldopa). These products are marketed globally in 48 countries using a network of distributors, wholesalers and a licensee. Both products were acquired from Merck & Co., Inc. in 2007. Indocin®, approved in the United States in 1965, has been shown to be an effective anti-inflammatory agent, appropriate for long-term use in rheumatoid arthritis, ankylosing spondylitis and osteoarthritis. Aldomet®, approved in the United States in 1962, is one of the few anti-hypertensive products recommended for the management of hypertension (high blood pressure) during pregnancy.

We sell Indocin® and Aldomet® in seven European countries (Austria, Belgium, France, Italy, Portugal, Spain and Switzerland) using third-party distributors and a third-party logistics provider for warehousing and supplying products to distributors. Our products are manufactured on our behalf by contract manufacturing organizations, or CMOs. Outside of United States and the European countries noted above, our marketed products are sold, marketed and distributed by our licensee, Aspen. Aspen pays us a royalty of 50% on the net proceeds generated by its sales in these markets. The license agreement was entered into in December 2007 and has a 50 year term.

Our direct net sales of these products in the U.S. and Europe generated $6.7 million and $7.4 million of net sales for the years ended December 31, 2012 and 2011, respectively, and $1.9 million and $1.7 million for the three months ended March 31, 2013 and 2012, respectively. We received royalties in the amounts of $3.2 million and $3.5 million for the years ended December 31, 2012 and 2011, respectively, and $0.8 million for each of the three months ended March 31, 2013 and 2012 on net sales of our licensee, Aspen.

In 2007, we also acquired from Eli Lilly Canada, Inc. the rights, including trademarks, health registrations and product rights in Canada, to Vancocin® (vancomycin hydrochloride), an oral antibiotic indicated to treat two significant bacterial infections of the lower digestive tract. We marketed Vancocin® until it was sold in May 2011. The results of operations related to Vancocin® have been presented as discontinued operations in our consolidated statements of operations and as such, our total net sales does not include net sales of Vancocin® of $2.9 million for the year ended December 31, 2011.

Our Product Candidates

In addition to our marketed products, our pipeline includes six submicron NSAID product candidates, four in late-stage development and two that are preclinical. Our late-stage product candidates are Zorvolex, Tiforbex, submicron meloxicam and submicron naproxen. NSAIDs are one of the largest classes of pain-relieving medications and have been a mainstay of treatment for a variety of pain related conditions notwithstanding their potential adverse side effects. Our submicron NSAID product candidates are being developed using the proprietary SoluMatrix™ technology platform, which has been licensed to us by iCeutica for exclusive use in the NSAID market. The SoluMatrix™ technology platform has been shown to fundamentally change the absorption profile of our late-stage NSAID product candidates so that they are quickly dissolved and absorbed to allow rapid onset of pain relief at lower doses and lower systemic exposures than comparable commercially available NSAIDs. These candidates are in the development stage and, therefore, we have not generated any revenues from sales of our product candidates.

 

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Financial Operations Overview

Net Product Sales

Net product sales consist of sales of our two marketed products, Indocin® and Aldomet®. We recognize revenues from product sales when title and risk of loss has passed to our customer, which is typically upon delivery to the customer, and when collectability is reasonably assured. Our net product sales reflect estimates for a variety of deductions such as chargebacks, government rebates, sales incentives, distribution service fees, product returns and other allowances that are recorded in the same period that the corresponding revenue is recorded.

Calculating provisions for these deductions involves significant estimates and judgments. These provisions are estimated based on historical experience, estimated future trends, estimated customer inventory levels, current contract sales terms with our wholesale and indirect customers and estimated payor mix based on third- party market research data. We review our estimates each reporting period and record any necessary adjustments to net product sales in the current period.

Revenues from the launch of a new or significantly unique product, for which we are unable to develop the requisite historical data on which to base estimates of returns and allowances due to the uniqueness of the therapeutic area or delivery technology as compared to other products in our portfolio and in the industry, may be deferred until such time that an estimate can be determined, all of the conditions above are met and the product has achieved market acceptance.

If the assumptions we used to calculate these adjustments do not appropriately reflect future activity, our financial position, results of operations and cash flows could be materially impacted.

Consistent with industry practice, we offer our customers a limited right to return product purchased directly from us, which is principally based upon the product’s expiration date. We will accept returns for six months prior to and up to twelve months after the product expiration date. Product returned is generally not resalable given the nature of our products and method of administration. We develop estimates for product returns based upon historical experience, shelf life and expiration date and other relevant factors.

Royalty Revenues

In December 2007, Iroko Holdings granted a license to Aspen, to be the sole promoter, distributor, marketer and seller of Aldomet® and Indocin®, or the Products, in Africa, Central and South America, Ireland, the United Kingdom, Australia, New Zealand and Asia (excluding China (other than Hong Kong), Japan, Pakistan, South Korea, and Sri Lanka (solely for Aldomet®)), or the Territory. We receive a quarterly royalty payment based upon Aspen’s net sales of the Products less costs incurred in manufacturing, packaging, and distributing the Products and regulatory costs.

Cost of Sales

Cost of sales includes all costs directly related to bringing purchased products to their final selling destination. It includes purchasing and receiving costs, inspection costs, warehousing costs, freight charges, costs to operate equipment and other shipping and handling activity.

Amortization of Intangible Assets

We recognize amortization expense over the useful lives for Indocin® and Aldomet® based on the fair value of those product rights estimated as of the date of the Acquisition.

Selling, General and Administrative Expenses

Selling, general and administrative, or SG&A, expenses consist primarily of salaries and related costs for personnel, including share-based compensation expense, in our executive, finance and business development functions. Other SG&A expenses include facility costs and professional fees for legal, patent, consulting and accounting services.

We anticipate that our SG&A expenses will increase substantially in future periods due to increased research and development, or R&D, commercialization activities, headcount, expanded infrastructure and the implementation of a contract sales force to support the potential commercial launch of Zorvolex and Tiforbex in 2013 and 2014, respectively. While it is currently estimated that the increase related to the implementation of a contract sales force could be as much as $55.0 million annually, these costs are dependent on several factors. Such factors may

 

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include, but are not limited to: the approval by the FDA of our product candidates; market penetration and acceptance of our product candidates, if approved; and the success of competing drugs that are or become available. As a result, our actual expenses and future estimates may vary from our current expectations. To a lesser extent, we also expect to incur increases in legal, compliance, accounting, insurance and investor relations expenses associated with being a public company.

Research and Development and In-Process Research and Development Expenses

R&D expenses consist of costs associated with our research activities and the development and clinical testing of our product candidates. Our R&D expenses include employee-related expenses, including salaries and benefits, as well as external R&D expenses incurred under arrangements with third parties, such as contract research organizations, or CROs, CMOs, and consultants.

We expense R&D costs as incurred. We account for non-refundable advance payments for goods and services that will be used in future R&D activities as expenses when the service has been performed or when the goods have been received. We use our employee and infrastructure resources across multiple R&D projects. We do not allocate employee-related expenses or depreciation to any particular project.

We anticipate that our R&D expenses will increase substantially in connection with completing our ongoing Phase 3 clinical trials and seeking marketing approvals for our product candidates.

The successful development of our product candidates is highly uncertain due to the numerous risks and uncertainties associated with developing drugs, including the uncertainty of:

 

  n  

the scope, rate of progress and expense of our research and development activities;

 

  n  

clinical trial results;

 

  n  

the terms and timing of regulatory approvals; and

 

  n  

the expense of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights.

A change in the outcome of any of these variables with respect to the development of our product candidates could mean a significant change in the costs and timing associated with the development of such product candidates. For example, if the FDA or other regulatory authority were to require us to conduct clinical trials beyond those which we currently anticipate will be required for the completion of clinical development of our product candidates or if we experience significant delays in enrollment in any clinical trials of our product candidates, we could be required to expend significant additional financial resources and time on the completion of the clinical development of our product candidates.

Costs incurred in obtaining compound licenses as well as future milestone payments are immediately expensed as acquired in-process research and development expense provided that the compound has not reached technological feasibility, has not achieved regulatory approval for marketing and has no alternative future use.

Related-Party Management Fee

Beginning in September 2010, under the Iroko Holdings S.A. Shareholders Agreement, dated September 28, 2010, amended and restated on December 23, 2010 and further amended and restated on June 15, 2012, we have paid a $375,000 quarterly management services fee to Phoenix IP Ventures, in connection with its provision of certain management services, including formulating and implementing strategic plans with respect to our products, assisting in hiring of our executive management, assisting in negotiating third-party agreements and assisting in protecting our intellectual property. Since 2011, we have reimbursed Phoenix IP Ventures or its affiliates $0.1 million for expenses incurred in connection with its provision of such management services. This agreement terminates upon the consummation of this offering, at which time a new management services agreement with Phoenix IP Ventures, which also provides for an annual fee of $1.5 million, will take effect. See “Certain Relationships and Related Person Transactions—Management Services Agreement.”

 

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Change in Fair Value of Contingent Consideration

In connection with the Acquisition, we are required to pay 50% of the future net product revenues from the three NSAID product candidates, Zorvolex, Tiforbex and submicron naproxen, that we acquired up to a cumulative amount of $14.5 million and 5% on net product sales thereafter. In the event that we sublicense any of these product candidates prior to their commercialization, we are required to pay, at our election, either 50% of sublicense revenues or $5.0 million plus 5% of sublicensee net sales. The estimated fair value of the $14.5 million and $5.0 million payment obligation was recorded as part of the purchase price for the Acquisition. Each reporting period, we revalue this estimated obligation with changes recognized as a non-cash operating expense or income.

Other Income (Expense)

Related-Party Management Services Revenue

In conjunction with the Acquisition, we entered into a transition service agreement, or the Cardio TSA, with Iroko Cardio, LLC, or Cardio, whereby certain services provided to Cardio by Iroko Holdings would continue pursuant to modified terms of services and pricing. The original contract provided for an August 2012 termination date. In February 2011, we received a cancellation notification from Cardio, and substantially all services provided under the Cardio TSA ceased in May 2011.

In April 2011, Iroko Holdings S.A. acquired iCeutica. In November 2011, we entered into a Services Agreement with iCeutica, which was later replaced by a new Services Agreement in May 2012 with iCeutica pursuant to which we provided administrative and other shared services to iCeutica. This Services Agreement with iCeutica was terminated effective May 7, 2013.

Interest Expense

For the year ended December 31, 2012, we recognized $2.7 million of interest expense in connection with our related-party line of credit because the outstanding balance of our related-party line of credit will be repaid via the issuance our convertible preference shares, which receive a 20% annual compounding dividend.

Foreign Exchange (Loss) Income

The functional currency of our non-U.S. subsidiaries is the local currency. Transaction gains and losses are recorded within our consolidated statements of operations. We recorded foreign exchange income for the years ended December 31, 2012 and 2011 as a result of exchange rate fluctuations.

Future Charges

We will record a $1.2 million non-cash charge related to the immediate vesting of all outstanding options upon the closing of this offering.

Critical Accounting Policies and Use of Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which we have prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP. The preparation of our consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions are required in the determination of revenue recognition, valuation of long-lived assets, contingent consideration and share-based compensation. We consider an accounting estimate to be critical if: (i) the accounting estimate requires us to make assumptions about matters that were highly uncertain at the time the accounting estimate was made, and (ii) changes in the estimate that are reasonably likely to occur from period to period, or use of different estimates that we reasonably could have used in the current period, would have a material impact on our financial condition, results of operations or cash flows.

 

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Although we believe that our estimates and assumptions are reasonable, they are based upon information available at the time the estimates and assumptions were made and actual results may differ significantly from our estimates. Our most critical accounting policies and estimates are described below:

Revenue Recognition

Net Product Sales. Our net product sales consist of revenues from sales of our pharmaceutical products, less estimates for sales deductions. We recognize revenue for product sales when title and risk of loss has passed to the customer, which is typically upon delivery to the customer and when collectability is reasonably assured.

Sales Deductions

As is typical in the pharmaceutical industry, gross product sales are subject to a variety of deductions that are estimated and recorded in the same period that the revenues are recognized. These deductions represent estimates that are based on historical experience, estimated future trends, current contract sales terms with our wholesale and indirect customers and other competitive factors. If the assumptions we use to calculate these adjustments do not appropriately reflect future activity, our financial position, results of operations and cash flows could be materially impacted.

Returns and Allowances

Our provision for returns and allowances consists of our estimates of future product returns and pricing adjustments. Consistent with industry practice, we maintain a return policy that allows our customers to return certain product within a specified period of time both prior and subsequent to the product’s expiration date. Our return policy allows customers to receive credit for expired products within six months prior to expiration and within one year after expiration. The calculation of our provision for returns and allowances is based on historical experience, estimated future trends, estimated customer inventory levels and current contracts with our wholesale and indirect customers. We only offer product return rights on our U.S. marketed product, Indocin®. Our provision for returns and allowances of Indocin® was $0.3 million as of December 31, 2012 and 2011 and to date has not been material to our financial position.

Distribution Fees

We sell our products through a network of distributors throughout the United States and Europe, who charge us a fee for this service. The distribution fee is a set percentage of sales as specified in the distribution agreements. Our provision for distribution fees was $0.1 million and $25,000 as of December 31, 2012 and 2011, respectively, and to date has not been material to our financial position.

Rebates

We establish contracts with wholesalers and indirect customers that provide for rebates and other allowances which are estimated based upon the terms of the contracts with our customers, historical experience, estimated inventory levels of our customers and estimated future trends. Our rebate programs can generally be categorized into the following three types:

 

  n  

direct rebates;

 

  n  

indirect rebates; and

 

  n  

Medicaid and Medicare Part D rebates.

Direct rebates are generally rebates paid to direct purchasing customers based on a percentage applied to a direct customer’s purchases from us. Indirect rebates are rebates paid to “indirect customers” who have purchased our products from a wholesaler under a contract with us.

We are subject to rebates on sales made under governmental programs. In estimating our provisions for these types of rebates, we consider relevant statutes with respect to governmental pricing programs and contractual sales terms with managed-care providers and group purchasing organizations. These rebate reserves are estimated based upon the historical utilization levels, historical payment experience, historical relationship to revenues and estimated future trends. We participate in state government-managed Medicaid programs, as well as certain other qualifying federal and state government programs whereby discounts and rebates are provided to participating government entities. Medicaid rebates are amounts owed based upon contractual agreements or legal requirements with public sector (Medicaid) benefit providers, after the final dispensing of the product by a pharmacy to a benefit plan

 

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participant. Medicaid reserves are based on expected payments, which are driven by patient usage and contract performance. Our provision for rebates was $0.1 million as of December 31, 2012 and 2011 and to date has not been material to our financial position.

Valuation of Long-Lived Assets

Long-lived assets, including property and equipment and intangible assets, are assessed for impairment whenever events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. Recoverability of long-lived assets that will continue to be used in our operations is measured by comparing the carrying amount of the asset to the forecasted undiscounted future cash flows related to that asset. In the event the carrying value of the asset exceeds the undiscounted future cash flows, and the carrying value is not considered recoverable, an impairment loss is measured as the excess of the asset’s carrying value over its fair value, generally based on a discounted future cash flow method. As a result of the significance of our intangible assets, any recognized impairment loss could have a material adverse impact on our financial position and/or results of operations.

Events giving rise to impairment are an inherent risk in the pharmaceutical industry and cannot be predicted. Factors that we consider in deciding when to perform an impairment review include significant under-performance of a product line in relation to expectations, significant negative industry or economic trends and significant changes or planned changes in our use of the assets. We have not recorded any impairment charges for the three months ended March 31, 2013 or the years ended December 31, 2011 and 2012.

Goodwill and Indefinite-Lived Intangible Assets

Goodwill is assessed for impairment on an annual basis or more frequently if impairment indicators exist. The impairment model prescribes a two-step method for determining impairment. In the first step, the fair value of our one reporting unit is estimated using a discounted cash flow analysis. If the net book value of the reporting unit exceeds its estimated fair value, the reporting unit’s fair value would then be allocated to all of its assets and liabilities using the acquisition method with any residual fair value allocated to goodwill. An impairment charge is recognized only if the implied fair value of the reporting unit’s goodwill is less than its carrying amount.

Intangible assets related to our acquired in-process research and development, or IPR&D, assets for our product candidates are considered indefinite-lived intangible assets and are assessed for impairment annually, or more frequently if impairment indicators exist. Similar to the approach for testing goodwill recoverability, we use an income approach using a discounted cash flow model to estimate the fair value of our indefinite-lived assets. Our discounted cash flow models are highly reliant on various assumptions, including estimates of future cash flow, probability of commercial feasibility of our product candidates, discount rates, and expectations about variations in the amount and timing of cash flows and the probability of achieving the estimated cash flows.

No impairment charges related to goodwill or indefinite-lived assets were recorded for the three months ended March 31, 2013 or the years ended December 31, 2012 and 2011.

Acquisition of In-Process Research and Development and Fair Value of Contingent Consideration

Effective January 1, 2009, acquired businesses are accounted for using the acquisition method of accounting, which requires that the purchase price be allocated to the net assets acquired at their respective fair values. Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. In connection with the Acquisition, amounts allocated to intangible assets, and IPR&D related to our product candidates and contingent consideration were recorded at the date of the Acquisition based on their estimated fair values.

We used the “income method” to determine the fair value of our intangible assets, including IPR&D, beginning with our forecast of expected future net cash flows. These cash flows are then adjusted to present value by applying an appropriate discount rate that reflects the risk factors associated with the cash flow streams. Some of the more significant estimates and assumptions inherent in the income method include: the amount and timing of projected future cash flows, the amount and timing of projected costs to develop the IPR&D into commercially viable products and the discount rate selected to measure the risks inherent in the future cash flows.

Costs incurred in obtaining compound licenses as well as future milestone payments are immediately expensed as acquired in-process research and development expense provided that the compound has not reached technological feasibility, has not achieved regulatory approval for marketing and has no alternative future use. During 2012, we

 

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acquired the rights to submicron meloxicam, submicron celecoxib and submicron ibuprofen. As such, we recorded $11.0 million as acquired in-process research and development expense as additional research and development efforts and regulatory approvals are necessary to commercialize these product candidates.

As a result of the Acquisition, we may be required to make additional cash payments upon successful monetization of our IPR&D assets. The potential consideration is 50% of aggregate payments from such monetization up to $14.5 million and 5% of net sales thereafter. In addition, in the event we sublicense any of the IPR&D assets, we will, at our election, pay the sellers 50% of the sublicense revenues or $5.0 million plus 5% of the sublicensee net sales. For accounting purposes, the $14.5 million and $5.0 million future potential payments are considered contingent consideration.

The aggregate fair value of this contingent consideration liability increased from $3.0 million at December 31, 2011 to $6.5 million at December 31, 2012 and remained $6.5 million at March 31, 2013. The contingent consideration liability reflects management’s assessment of the probability that we may be obligated to make contingent consideration payments based on the anticipated timeline for the New Drug Application, or NDA, filings and FDA approvals as well as our estimates of future sublicense income. The most significant assumption used is the probability assigned to the successful monetization of the IPR&D assets. The probability was 40% and 70% as of December 31, 2011 and 2012, respectively, and 70% as of March 31, 2013.

Accrued Research and Development Expenses

We estimate preclinical study and clinical trial expenses based on the services performed pursuant to contracts with CROs and other vendors that conduct these activities on our behalf. In recognizing such expenses, we estimate the time period over which related services will be performed, compare the level of effort expended through the end of each period to the cumulative expenses recorded and payments made for such services and, if appropriate, accrue additional fees. If the actual timing of the performance of services or the level of effort varies from the estimate, we adjust the accrual accordingly.

We make estimates of our accrued expenses as of each balance sheet date in our consolidated financial statements based on facts and circumstances known to us at that time. Although we do not expect our estimates to be materially different from amounts actually incurred, adjustments to these accruals in any particular period may result from differences in our understanding of the status and timing of services performed and the actual status and timing of services performed. To date, we have had no significant adjustments to accrued clinical expenses.

Share-Based Compensation

We use the Black-Scholes option-pricing model to value our option awards. The Black-Scholes option-pricing model requires the input of subjective assumptions, including the expected life of options and share price volatility. As a private company, we do not have sufficient history to estimate the expected life of our options or the volatility of our ordinary share price. We use the “simplified method,” as allowed under the Securities and Exchange Commission’s, or SEC, accounting guidance, to determine the expected life, which is the midpoint between an option’s vesting date and contractual term. We use comparable public companies as a basis for our expected volatility to calculate the fair value of our option grants. We intend to continue to consistently apply this process using comparable companies until a sufficient amount of historical information regarding the volatility of our own share price becomes available. The risk-free interest rate is based on U.S. Treasury instruments with a remaining term equal to the expected term of the option. The assumptions used in calculating the fair value of options represent our best estimate and involve inherent uncertainties and the application of our judgment. As a result, if factors change and we use different assumptions, share-based compensation could be materially different in the future.

Prior to February 2012, all options were granted under the Iroko Holdings S.A. 2010 Option Plan, or the 2010 Plan, pursuant to which the holders of such options were eligible to acquire Class C shares of Iroko Holdings S.A. In January 2012, we adopted the Iroko Intermediate 2012 Stock Option/Stock Issuance Plan, which has since been amended to the 2012 Share Option Plan, or the 2012 Plan. In conjunction with the approval of the 2012 Plan, our board of directors approved an option exchange program pursuant to which option holders agreed to exchange their options held in Iroko Holdings S.A. under the 2010 Plan for options to acquire an equivalent number of shares of common stock of Iroko Intermediate under the 2012 Plan. Awards under the 2012 Plan have identical terms and conditions as the awards under the 2010 Plan.

 

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The following table summarizes the options granted through March 31, 2013:

 

 

 

YEAR OF GRANT

   NUMBER OF SHARES
UNDERLYING OPTIONS
GRANTED
     EXERCISE PRICE PER
SHARE
     ESTIMATED FAIR
VALUE PER SHARE AT
GRANT DATE
 

2010

     905,000       $ 1.52       $ 1.52  (1) 

2011

     25,000       $ 1.52       $ 1.52  (1) 

2012

     123,300       $ 1.52       $ 6.29  (2) 

2013

     12,500       $ 6.29       $ 6.29  (3) 

 

 

(1)  

Estimated fair value of the Iroko Holdings S.A. Class C shares

(2)  

Estimated fair value of Iroko Intermediate common stock

(3)  

Estimated fair value of Iroko Pharmaceuticals Inc. ordinary shares.

The fair value of Iroko Intermediate’s stock underlying grants of stock options is the most important factor in determining the value of our share-based compensation. Please see below for a discussion of these fair value estimates. Shares of Series A preferred stock and common stock of Iroko Intermediate held by Iroko Holdings S.A. are equivalent to the Class A and Class B shares held at the Iroko Holdings S.A. entity level. The 1,000,000 shares of common stock that have been allocated to the 2012 Plan are equivalent to the Class C shares held at the Iroko Holdings S.A. entity level.

2010 Grants

We engaged an independent third-party valuation firm to assist our board of directors in determining the fair value of Iroko Holdings S.A. Class C shares as of August 10, 2010. For purposes of that valuation, Iroko Holdings S.A.’s acquisition of the controlling member interest of Iroko Holdings LLC represented an arms-length equity value of the invested capital of us.

As defined within the Iroko Holdings S.A. Shareholders’ Agreement, there were three classes of equity interests at the time of the 2010 option grants: the Class A shares, the Class B shares, and the Class C shares.

Class A Shares—82,287,000 Class A shares were issued on August 20, 2010 for a purchase price of $72.6 million. The holders of Class A shares are entitled to one vote per share. The Class A shares were entitled to receive distributions after the holders of the Class B shares received their preferred cumulative dividend equal to $0.001 per share per annum. Except for the preferred cumulative return to the Class B shareholders, distributions to the Class A shareholders continued until such shares received an amount equal to the Class A original purchase price plus an internal rate of return of 10%, compounded annually, of the Class A original purchase price, or the First Distribution Hurdle. Upon achievement of the First Distribution Hurdle, the holders of Class A shares were entitled to receive 85% of distributions until each holder of Class A shares received an amount equal an internal rate of return of 10%, compounded annually, of the Class A original purchase price, or the Second Distribution Hurdle. After achievement of the Second Distribution Hurdle, Class A shares were entitled to receive 72% of all distributions.

Class B Shares—100 Class B shares were issued on August 20, 2010 for a purchase price of $0.10 per share. The holders of Class B shares have no voting rights. Distributions to the Class B shares are senior to all other distributions until the Class B shareholders received their preferred and cumulative dividend amount. After the First Distribution Hurdle and until the Second Distribution Hurdle is achieved, holders of Class B shares were entitled to 15% of all distributions. After achievement of the Second Distribution Hurdle, Class B shares were entitled to receive 18% of all distributions.

Class C Shares—1,000,000 Class C shares were authorized and available for issuance under 2010 Plan. Holders of Class C shares were entitled to one vote per share. Class C shares were entitled to participate in 10% of all distributions subsequent to achieving the First Distribution Hurdle and Second Distribution Hurdle.

In allocating Iroko Holdings S.A.’s aggregate equity value of $72.9 million to the Class A shares, Class B shares and Class C shares, we used methodologies and assumptions consistent with the American Institute of Certified Public Accountants Practice Guide, or the AICPA Practice Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation (Practice Aid). We relied on the probability-weighted expected return method, or PWERM,

 

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which models a company’s stock value based on potential future liquidity events and applies probabilities to each scenario. These future liquidity events are then discounted to present value and, after applying the relevant probability for each potential event, result in a single probability-weighted equity value of the various classes of stock of a company.

For our valuation, we used the scenarios described above to generate nine different future enterprise values for our company. In determining the value of the Class C shares in initial public offering and mergers or acquisition scenarios, we assumed that the Class A shares and Class B shares then outstanding would be converted into Class C shares. In allocating value to the Class C shares in continuing operations and liquidation scenarios, we first allocated to Iroko Holdings S.A.’s then outstanding Class A shares and Class B shares the distribution preferences required by Iroko Holdings S.A.’s Shareholders’ Agreement, and then allocated 10% of any remaining value to the Class C shares.

The resulting implied value of Iroko Holdings S.A.’s Class C shares was $1.5 million, or $1.52 per share. The probability weightings utilized in the PWERM analysis took into consideration, among other things, a likelihood that our submicron product candidates would not successfully launch, leaving two products (Indocin® and Aldomet®) as the only assets generating cash flow. This scenario was given a probability weighting of 80% and was based on industry data for drugs entering Phase 3 trials. Additional scenarios were developed that considered various outcomes of success for the submicron product candidates. The probability of success for these scenarios was estimated to be 20%, or one minus the probability of failure (80%).

Based on a set of guideline public companies operating in the generic pharmaceutical industry, we estimated exit multiples of earnings before interest, taxes, depreciation, and amortization, or EBITDA, and applied such multiples to our positive and negative scenarios. For our negative scenarios, a lower multiple was deemed appropriate as our main cash flows from operations would be derived from two products that do not possess patent protection and compete with generic products, and thus would not command a premium in the event of a sale or initial public offering. For our success scenarios, we selected a core exit multiple consistent with the median latest fiscal year EBITDA multiple of the guideline public companies operating in the generic pharmaceutical industry.

The exit values were reduced for debt outstanding and increased for cash and option proceeds. The residual distributed to each class of stock was discounted to a present value over the respective holding period based on a required rate of return selected separately for each class of stock. The discount rates for Class A shares, Class B shares and Class C shares were 47.0%, 67.0%, and 92.0%, respectively. These discount rates reflect the high level of risk that was inherent in our business and address the extraordinary risks that we faced relative to alternative investments in the market.

2011 Grants

During 2011, we did not obtain an update to the August 2010 valuation given that the number of 2011 option grants were not significant as noted in the above table.

2012 Grants

The estimated fair value of Iroko Intermediate’s common stock during 2012 was based on an independent third-party valuation that was performed as of November 30, 2012. The exercise price for options granted during 2012 was based on the initial valuation for Iroko Holdings S.A.’s Class C shares as of August 10, 2010. Since the November 30, 2012 valuation was not available at the time of the grants during 2012, our board of directors based the exercise price on the most recently available valuation, which was the original August 10, 2010 valuation for Iroko Holdings S.A. Class C shares and such other factors considered by our board of directors at the time of grant.

With respect to the November 30, 2012 valuation, we used the income approach to estimate our equity value. The income approach involves applying an appropriate risk-adjusted discount rate to projected cash flows based on forecasted revenue and costs. For the November 30, 2012 valuation, we used a risk-adjusted discount rate of 70.0% to discount the projected cash flows to the valuation date within the income approach. This discount rate is based upon a market-derived weighted average cost of capital, which takes into account the required rate of return for debt and equity investors.

We prepared financial forecasts used in the computation of the equity value for the income approach. The financial forecasts were based on assumed revenue growth rates and operating margin levels that took into account our past experience and future expectations. The risks associated with achieving these forecasts were assessed in selecting the appropriate cost of capital rates.

 

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We then used an option pricing model to allocate the calculated equity value between Iroko Intermediate Series A preferred and common stock outstanding. The holders of Iroko Intermediate Series A preferred stock are entitled to a dividend at an internal rate of return of 20%, compounded annually.

2013 Grants

The estimated fair value of the options granted during the three months ended March 31, 2013 was based on the November 30, 2012 valuation as we had not obtained an updated independent third-party valuation since such date.

We believe the difference between the fair value of our common stock on November 30, 2012, as determined by our Board of Directors, and the preliminary price range, as recommended by the underwriters, is the result of the following factors:

 

  n  

the increased likelihood of consummating our initial public offering since November 30, 2012;

 

  n  

the preliminary price range necessarily assumes that the initial public offering will occur and a public market for our ordinary shares has been created, and therefore excludes any marketability or illiquidity discount for our ordinary shares, which was appropriately taken into account in the Board of Directors’ fair value determination;

 

  n  

the submission of an NDA with the FDA for Zorvolex in December 2012, which was accepted for filing by the FDA in February 2013; and

 

  n  

the submission of an NDA with the FDA for Tiforbex in April 2013, which was accepted for filing in July 2013.

We recorded share-based compensation expense of $0.3 million and $0.2 million during the years ended December 31, 2012 and 2011, respectively, and $0.1 million for each of the three months ended March 31, 2013 and 2012. In future periods, we expect share-based compensation expense to increase as we issue additional share-based awards to continue to attract and retain employees. As of March 31, 2013, we had $1.2 million of unrecognized share-based compensation expense related to equity instruments previously granted, which is expected to be recognized over a weighted average period of 7.2 years.

There is inherent uncertainty in our forecasts and projections and, if we had made different assumptions and estimates than those described above, the amount of our share-based compensation expense, net loss, and net loss per share amounts could have been materially different.

 

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Results of Operations

The following table sets forth, for the period indicated, our results of operations:

 

 

 

     YEAR ENDED DECEMBER 31,     THREE MONTHS ENDED
MARCH 31,
 
           2011                 2012               2012             2013      
                 (unaudited)  
     (amounts in thousands)  

Revenues:

        

Net product sales

   $ 7,443      $ 6,704      $ 1,652      $ 1,879   

Royalty revenues

     3,538        3,176        770        755   
  

 

 

   

 

 

   

 

 

   

 

 

 
     10,981        9,880        2,422        2,634   
  

 

 

   

 

 

   

 

 

   

 

 

 

Costs and expenses:

        

Cost of sales (excluding amortization of intangible assets)

     6,054        3,187        812        747   

Amortization of intangible assets

     1,717        1,717        429        429   

Selling, general and administrative

     18,913        27,017        4,946        10,519   

Research and development

     18,299        33,884        10,112        4,786   

Acquired in-process research and development

            11,000                 

Related-party management fee

     1,500        1,500        375        375   

Change in fair value of contingent consideration

     1,000        3,500                 
  

 

 

   

 

 

   

 

 

   

 

 

 
     47,483        81,805        16,674        16,856   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

     (36,502     (71,925     (14,252     (14,222
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense):

        

Related-party management fee

     1,297        198        22          

Interest expense

            (2,658            (2,455

Foreign exchange (loss) gain

     313        92        132        (451

(Loss) gain on asset disposal

            (324            23   

Other (expense) income, net

     87        (97     (96     (4
  

 

 

   

 

 

   

 

 

   

 

 

 
     1,697        (2,789     58        (2,887
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations before income tax benefit

     (34,805     (74,714     (14,194     (17,109

Income tax benefit

     (1,079                     
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations

     (33,726     (74,714     (14,194     (17,109

Income from discontinued operations, net of tax

     1,877                        
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (31,849   $ (74,714   $ (14,194   $ (17,109
  

 

 

   

 

 

   

 

 

   

 

 

 

 

 

 

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Three Months Ended March 31, 2013 Compared to the Three Months Ended March 31, 2012

Net Product Sales

Total net product sales, which we derive from our sales of Indocin® and Aldomet®, were $1.9 million for three months ended March 31, 2013, an increase of $0.2 million, or 14%, from $1.7 million for the three months ended March 31, 2012. The following table sets forth for the periods indicated, our total net product sales by geography expressed as dollar amounts and the changes in net product sales between the specified periods expressed in dollar amounts and percentages:

 

 

 

     THREE MONTHS ENDED MARCH 31,      CHANGE
2013/2012
 
     2012      2013     
     US      EUROPE      TOTAL      US      EUROPE      TOTAL      TOTAL  
     (unaudited)      $     %  
     (dollar amounts in thousands)  

Gross product sales

   $ 621       $ 1,262       $ 1,883       $ 775       $ 1,585       $ 2,360       $ 477        25
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

Less:

                      

Distribution fees

     51         36         87         63         136         199         112        129

Returns & allowances

     71                 71         65                 65         (6     (8 )% 

Rebates

     73                 73         217                 217         144        197
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

Total sales deductions

     195         36         231         345         136         481         250        108
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

Total net product sales

   $ 426       $ 1,226       $ 1,652       $ 430       $ 1,449       $ 1,879       $ 227        14
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

Gross product sales increased by $0.5 million, or 25%, from $1.9 million for the three months ended March 31, 2012 to $2.4 million for the three months ended March 31, 2013. This increase was primarily the result of lower unit sales in Europe in 2012 following a temporary disruption in sales of Aldomet® as a result of delays in the approval of the required marketing authorizations as a result of our transition to a different manufacturer. The increase also resulted from an increase in the average price of units sold in the United States.

Total sales deductions increased by $0.3 million, or 108%, from $0.2 million for the three months ended at March 31, 2012 to $0.5 million for the three months ended March 31, 2013. The increase was primarily due to an increase in our rebates from our United States sales increased due to changes in our customer mix resulting in higher sales to government entities and an increase in distribution fees in Europe as a result of higher sales.

Indocin®

Total net Indocin® sales were $1.2 million for the three months ended March 31, 2013, an increase of $0.2 million, or 20% from $1.0 million for the three months ended March 31, 2012. The following table sets forth for the periods indicated our net sales of Indocin® by geography:

 

 

 

     THREE MONTHS ENDED MARCH 31,      CHANGE
2013/2012
 
     2012      2013     
     US      EUROPE      TOTAL      US      EUROPE      TOTAL      TOTAL  
     (unaudited)      $     %  
     (dollar amounts in thousands)  

Indocin® revenues

   $ 621       $ 588       $ 1,209       $ 775       $ 832       $ 1,607       $ 398        33
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

Less:

                      

Distribution fees

     51         17         68         63         64         127         59        87

Returns & allowances

     71                 71         65                 65         (6     (8 )% 

Rebates

     73                 73         217                 217         144        197
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

Total sales deductions

     195         17         212         345         64         409         197        93
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

Net Indocin® sales

   $ 426       $ 571       $ 997       $ 430       $ 768       $ 1,198       $ 201        20
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

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Total Indocin® revenues increased due to an increase in the average sales price and overall increase in units sold in the United States and Europe. The increase in European sales is the result of lower unit sales in Europe in 2012 following a temporary disruption in sales of Aldomet® as a result of delays in the approval of the required marketing authorizations as a result of our transition to a different manufacturer. The increase in U.S. sales is due to an increase in units sold for suppositories as well as an increase in the average sales price for suppositories and oral suspension.

The increase in our Indocin® net sales was impacted by an increase in our rebates from our United States sales due to a change in our customer mix resulting in higher sales to government entities.

Aldomet®

Total net Aldomet® sales were $0.7 million for the three months ended March 31, 2013, and for the three months ended March 31, 2012. The following table sets forth for the periods indicated our net sales of Aldomet® in Europe, as we do not currently market Aldomet® in the U.S.:

 

 

 

     THREE MONTHS ENDED MARCH 31,      CHANGE
2013/2012
 
             2012                      2013             
     (unaudited)      $      %  
     (dollar amounts in thousands)  

Aldomet® revenues

   $ 674       $ 753       $ 79         12
  

 

 

    

 

 

    

 

 

    

Less:

           

Distribution fees

     19         72         53         279
  

 

 

    

 

 

    

 

 

    

Net Aldomet® sales

   $ 655       $ 681       $ 26         4
  

 

 

    

 

 

    

 

 

    

 

 

Total Aldomet® revenues increased due to an increase in the average sales price coupled with an increase in units sold in Spain and Portugal. Sales in Spain and Portugal increased as a result of lower unit sales in Europe in 2012 following a temporary disruption in sales of Aldomet® as a result of delays in the approval of the required marketing authorizations as a result of our transition to a different manufacturer.

Royalty Revenues

We recorded royalty revenue of $0.8 million under our license with Aspen for each of the three-month periods ended March 31, 2012, and 2013.

Cost of Sales

Cost of sales for the three months ended March 31, 2013 was $0.7 million, a decrease of $0.1 million, or 8%, from $0.8 million for the three months ended March 31 2012. This decrease was due to a decrease in the cost of bulk product and packaging costs.

Selling, General and Administrative Expenses

SG&A expenses for the three months ended March 31, 2013 were $10.5 million, an increase of $5.6 million, or 113%, from $4.9 million for the three months ended March 31, 2012. This increase was due to increases in personnel expenses ($1.2 million), travel and entertainment expenses ($0.3 million), and facilities expenses ($0.8 million) as a result of increases in headcount, increases in sales and marketing expenses ($1.1 million) and compliance costs ($0.7 million) to support pre-launch activities for our product candidates in Phase 3 development, as well as an increase in professional fees ($0.8 million), and costs related to this offering ($0.7 million).

Research and Development Expenses

Research and development expense for each of projects consist of direct expenses, including raw materials and supplies. We also generally incur third-party costs related to these projects, such as contract research, clinical development, manufacturing and consulting costs. In addition to direct costs, we also incur indirect expenses related to our research and development activities. Such expenses include depreciation, salaries and other costs of personnel.

 

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The following table sets forth, for the periods indicated, our research and development expenses:

 

 

 

     THREE MONTHS
ENDED MARCH 31,
     CHANGE
2013/2012
 
     2012      2013      $     %  
     (unaudited)               
     (dollar amounts in thousands)  

Clinical development, regulatory and manufacturing expense

   $ 7,673       $ 3,524       $ (4,149     (54 %) 

Formulation and process development

     2,031         787         (1,244     (61 %) 

Indirect expenses

     408         475         67        16
  

 

 

    

 

 

    

 

 

   
   $ 10,112       $ 4,786       $ (5,326     (53 %) 
  

 

 

    

 

 

    

 

 

   

 

 

Our research and development expenses for the three months ended March 31, 2013 were $4.8 million, a decrease of $5.3 million, or 53%, from $10.1 million for the three months ended March 31, 2012. The decrease was due to the following:

 

  n  

a decrease in clinical expenses as a result of the completion of three Phase 3 clinical trials of Zorvolex ($4.0 million) and the completion of a Phase 3 clinical trial of Tiforbex ($2.9 million) partially offset by increases in clinical expenses due to the continuation of two Phase 3 clinical trials of submicron meloxicam ($2.1 million) and the continuation of a pharmacokinetic study of Tiforbex ($0.1 million); and

 

  n  

a decrease in formulation and process development expenses as a result of the progression of Zorvolex and Tiforbex through Phase 3 clinical trials ($1.6 million), partially offset by increased formulation and process development expenses related to the Phase 3 trials of submicron meloxicam ($0.2 million) and the initiation of development of submicron naproxen ($0.2 million), partially offset by

 

  n  

an increase in regulatory expenses ($0.3 million) related to the preparation of our NDA submission for Tiforbex; and

 

  n  

an increase in manufacturing expenses ($0.3 million) for commercial scale-up and validation activities for Zorvolex, partially offset by a decrease in expenses related to the commercial scale-up and validation activities for Zorvolex ($0.1 million).

The following table sets forth, for the periods indicated, our research and development expenses by product candidate:

 

 

 

     THREE MONTHS ENDED
MARCH 31,
     CHANGE
2013/2012
 
         2012              2013          $     %  
     (unaudited)               
     (dollar amounts in thousands)  

Zorvolex

   $ 5,031       $ 714       $ (4,317     (86 %) 

Tiforbex

     4,578         968         (3,610     (79 %) 

Submicron meloxicam

             2,294         2,294     

Submicron naproxen

     9         245         236        2622

Cross-program expenses

     494         565         71        14
  

 

 

    

 

 

    

 

 

   
   $ 10,112       $ 4,786       $ (5,326     (53 %) 
  

 

 

    

 

 

    

 

 

   

 

 

The changes by product candidate were as follows:

 

  n  

a $4.3 million decrease in research and development expenses related to Zorvolex due to a decrease in clinical expenses as a result of completion of a Phase 3 clinical trial for acute pain ($1.6 million), the completion of two Phase 3 clinical trials for osteoarthritis pain ($2.4 million), a decrease in regulatory expenses and clinical supply material as a result of the completion of the Phase 3 studies ($0.1 million) and a decrease in manufacturing expenses as a result of decreases in commercial scale-up and validation activities ($0.2 million);

 

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Table of Contents
  n  

a $3.6 million decrease in research and development expenses related to Tiforbex due to a decrease in clinical expenses as a result of the completion of a Phase 3 clinical trial ($2.9 million), a decrease in registration expenses and clinical supply material as a result of the completion of a Phase 3 clinical trial ($0.7 million) and a decrease in formulation and process development activities ($0.7 million) as a result of the progression of Tiforbex into Phase 3 clinical trials. These decreases were partially offset by increases in manufacturing expenses ($0.3 million) for commercial scale-up and validation activities, regulatory expenses ($0.3 million) and clinical expenses ($0.1 million) related to the continuation of a Phase 1 pharmacokinetic study;

 

  n  

a $2.3 million increase in research and development expenses related to submicron meloxicam due to an increase in clinical expenses as a result of the continuation of two Phase 3 clinical trials ($2.1 million) and an increase in expenses related to formulation and process development activities ($0.2 million);

 

  n  

a $0.2 million increase in research and development expenses related to submicron naproxen due to an increase in manufacturing expenses ($0.2 million) for the commencement of non-GMP scale-up work; and

 

  n  

a $0.1 million increase in research and development expenses related to cross-program expenses due to increased employee costs.

Cross-program expenses incurred are not reasonably allocable to specific product candidates as work on one program often supports or enhances another program. We have assembled a cross-functional team to support the development of our product candidates using a platform technology. Employees associated with our research and development function are not dedicated to any given program, but provide their expertise across all of our development programs as the need for such expertise arises.

Related-Party Management Fees

Related-party management fees of $375,000 were paid to Phoenix IP Ventures for both of the three months ended March 31, 2013 and 2012 under the Iroko S.A. Shareholders Agreement, which commenced in August 2010.

Other Income (Expense), net

Other expense was $2.9 million for the three months ended March 31, 2013 compared to other income of $0.1 million for the same period in 2012. During the three months ended March 31, 2013 we recorded $2.5 million of imputed interest in connection with our related-party line of credit and notes payable.

Year Ended December 31, 2012 Compared to the Year Ended December 31, 2011

Net Product Sales

Total net product sales, which we derive from our sales of Indocin® and Aldomet®, were $6.7 million for the year ended December 31, 2012, a decrease of $0.7 million, or 10%, from $7.4 million for the year ended December 31, 2011. The following table sets forth for the periods indicated, our total net product sales by geography expressed as dollar amounts and the changes in net product sales between the specified periods expressed in dollar amounts and percentages:

 

 

 

    YEAR ENDED DECEMBER 31,     CHANGE
2012/2011
 
    2011     2012    
    US     EUROPE     TOTAL     US     EUROPE     TOTAL     TOTAL  
                                              $                 %        
    (dollar amounts in thousands)  

Gross product sales

  $ 2,566      $ 6,963      $ 9,529      $ 3,036      $ 5,158      $ 8,194      $ (1,335     (14 %) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Less:

               

Distribution fees

    216        676        892        241        495        736        (156     (17 %) 

Returns & allowances

    809               809        374               374        (435     (54 %) 

Rebates

    384        1        385        358        22        380        (5     (1 %) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total sales deductions

    1,409        677        2,086        973        517        1,490        (596     (29 %) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total net product sales

  $ 1,157      $ 6,286      $ 7,443      $ 2,063      $ 4,641      $ 6,704      $ (739     (10 %) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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Table of Contents

Gross product sales decreased by $1.3 million, or 14%, from $9.5 million during the year ended December 31, 2011 to $8.2 million during the year ended December 31, 2012. This decrease was a result of decreased unit sales in Europe, primarily due to a temporary disruption in sales of Aldomet® in Spain and France and Indocin® in Portugal and Spain as a result of delays in the approval of the required reauthorization to market in each of these countries following our transition to a different manufacturer of our products. The decreases were partially offset by increases in unit sales of Indocin® suppositories as a result of our effort to disseminate information regarding the increased efficacy of the use of suppositories versus oral administration coupled with an increased average price per unit sold in the United States.

Total sales deductions decreased by $0.6 million, or 29%, from $2.1 million during the year ended December 31, 2011 to $1.5 million during the year ended December 31, 2012. The decrease was due primarily to a decrease in returns and allowances as a result of higher than anticipated returns of expired product in 2011 and a decrease in distribution fees in Europe as a result of decreased European sales.

Indocin®

Total net Indocin® sales were $4.1 million for the year ended December 31, 2012, a decrease of $0.3 million, or 8%, from $4.4 million for the year ended December 31, 2011. The following table sets forth for the periods indicated our net sales of Indocin® by geography:

 

 

 

     YEAR ENDED DECEMBER 31,      CHANGE
2012/2011
 
     2011      2012     
     US      EUROPE      TOTAL      US      EUROPE      TOTAL      TOTAL  
                                                     $                 %        
     (dollar amounts in thousands)  

Indocin® revenues

   $ 2,566       $ 3,760       $ 6,326       $ 3,036       $ 2,306       $ 5,342       $ (984     (16 %) 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

Less:

                      

Distribution fees

     216         448         664         241         216         457         (207     (31 %) 

Returns & allowances

     809                 809         374                 374         (435     (54 %) 

Rebates

     384         1         385         358         22         380         (5     (1 %) 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

Total sales deductions

     1,409         449         1,858         973         238         1,211         (647     (35 %) 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

Net Indocin® sales

   $ 1,157       $ 3,311       $ 4,468       $ 2,063       $ 2,068       $ 4,131       $ (338     (8 %) 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

Total Indocin® revenues decreased as a result of decreased unit sales in Europe, due to a temporary disruption in sales in Spain and Portugal as a result of delays in the approval of the required reauthorization to market in each of these countries following our transition to a different manufacturer of our products, as well as a decrease in the average European price per unit sold. The decrease in Indocin® revenues was partially offset by an increase in unit sales of Indocin® suppositories in the U.S. as a result of our effort to disseminate information regarding the increased efficacy of the use of suppositories versus oral administration coupled with an increase in the U.S. average price per unit sold.

The decrease in Indocin® net sales was partially offset by a decrease in total sales deductions. This decrease was due to a decrease in European distribution fees as a result of decreased unit sales and a decrease in U.S. returns and allowances as a result of higher than anticipated returns of expired product in 2011.

 

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Table of Contents

Aldomet®

Total net Aldomet® sales were $2.6 million for the year ended December 31, 2012, a decrease of $0.4 million, or 14%, from $3.0 million for the year ended December 31, 2011. The following table sets forth for the periods indicated our net sales of Aldomet® in Europe, as we do not currently market Aldomet® in the U.S.:

 

 

 

     YEAR ENDED
DECEMBER 31,
     CHANGE
2012/2011
 
     2011      2012          $             %      
     (dollar amounts in thousands)  

Aldomet® revenues

   $ 3,203       $ 2,852       $ (351     (11 %) 
  

 

 

    

 

 

    

 

 

   

Less:

          

Distribution fees

     228         279         51        22
  

 

 

    

 

 

    

 

 

   

Net Aldomet® sales

   $ 2,975       $ 2,573       $ (402     (14 %) 
  

 

 

    

 

 

    

 

 

   

 

 

Total Aldomet® revenues decreased due primarily to a temporary disruption in sales in Spain and France as a result of delays in the approval of the required reauthorization to market in each of these countries following our transition to a different manufacturer of our products, partially offset by a decrease in the average price per unit sold. In addition, distribution fees decreased as total amounts paid are calculated as a percentage of total revenue.

Royalty Revenues

Under our license with Aspen, for the year ended December 31, 2012 we recorded royalty revenues of $3.2 million, a decrease of $0.4 million, or 10%, from $3.5 million for the year ended December 31, 2011. The decrease was primarily the result of Aspen’s lower net sales of the Products in the Territory. The decline in Aspen’s net sales was primarily due to regulatory delays for approvals of changes in packaging and manufacturing in certain territories.

Cost of Sales

Cost of sales for the year ended December 31, 2012 was $3.2 million, a decrease of $2.9 million, or 47%, from $6.1 million for the year ended December 31, 2011. The decrease was due to a decrease in the cost of bulk product and packaging costs as a result of the transition to a new manufacturer of our products ($2.4 million) and a decrease in total units sold ($0.5 million).

Selling, General and Administrative Expenses

SG&A expenses for the year ended December 31, 2012 were $27.0 million, an increase of $8.1 million, or 43%, from $18.9 million for the year ended December 31, 2011. SG&A costs increased in the year ended December 31, 2012, as compared to the prior period due to increases in personnel expenses ($2.7 million) and facilities expenses ($0.7 million) as a result of increases in headcount, increases in sales and marketing expenses ($2.8 million) and compliance costs ($0.2 million) to support pre-launch activities for our product candidates in Phase 3 development, as well as, an increase in professional fees ($0.6 million), public relations expenses ($0.3 million) and costs related to this offering ($0.8 million).

Research and Development and Acquired In-Process Research and Development Expenses

Research and development expenses for each of our projects consist of direct expenses including raw materials and supplies for each project. We also generally incur third-party costs related to these projects, such as contract research, clinical development and manufacturing costs and consulting costs. In addition to direct costs, we incur indirect expenses related to our research and development activities. Such expenses include salaries and other costs of personnel.

 

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Table of Contents

The following table sets forth, for the periods indicated, our research and development expenses:

 

 

 

     YEAR ENDED
DECEMBER 31,
     CHANGE
2012/2011
 
     2011      2012          $             %      
     (dollars in thousands)  

Clinical development, regulatory and manufacturing expense

   $ 10,432       $ 27,326       $ 16,894        162

Formulation and process development

     6,886         4,749         (2,137     (31 %) 

Indirect expenses

     981         1,809         828        84
  

 

 

    

 

 

    

 

 

   
   $ 18,299       $ 33,884       $ 15,585        85
  

 

 

    

 

 

    

 

 

   

 

 

Our research and development expenses for the year ended December 31, 2012 were $33.9 million, an increase of $15.6 million, or 85%, from $18.3 million for the year ended December 31, 2011. The increase was due to the following:

 

  n  

an increase in clinical expenses as a result of the initiation of two Phase 3 clinical studies of Tiforbex ($11.6 million), the continuation of a Phase 3 clinical trial of Zorvolex for osteoarthritis pain ($3.7 million), the initiation of pharmacokinetic and pediatric studies of both Zorvolex ($1.1 million) and Tiforbex ($0.8 million), partially offset by decreases in clinical expenses as a result of the completion of two Phase 3 trials of Zorvolex ($2.9 million) and Phase 1 ($0.4 million) and Phase 2 ($0.8 million) clinical trials of submicron naproxen;

 

  n  

an increase in regulatory expenses as a result of our NDA submission of Zorvolex for acute pain in December 2012 ($2.9 million) and the preparation of our NDA submission of Tiforbex ($0.3 million);

 

  n  

an increase in manufacturing expenses related to the preparation of Tiforbex ($1.1 million) and Zorvolex ($0.2 million) for commercial manufacturing, partially offset by a decrease in cross-program manufacturing expenses ($0.6 million) as a result of a conversion to product candidate specific manufacturing activities;

 

  n  

an increase in indirect expenses ($0.8 million), including personnel expenses, primarily as a result of increased headcount; offset by

 

  n  

a decrease in formulation and process development expenses as a result of the completion of two Phase 3 clinical trials of Zorvolex ($2.7 million), the progression of Tiforbex into Phase 3 clinical trials ($2.0 million) and the completion of Phase 2 clinical trials of submicron naproxen ($0.2 million), which was partially offset by an increase in formulation and process development expenses related to the support of the Phase 3 trials for Tiforbex ($1.7 million), preliminary development work for ex-U.S. markets for Zorvolex ($0.9 million) and consulting expenses ($0.2 million).

Costs incurred in obtaining compound licenses as well as future milestone payments are immediately expensed as acquired in-process research and development expense provided that the compound has not reached technological feasibility, has not achieved regulatory approval for marketing and has no alternative future use. During 2012, we acquired the rights to submicron meloxicam, submicron celecoxib and submicron ibuprofen. As such, we recorded $11.0 million as acquired in-process research and development expense as additional research and development efforts and regulatory approvals are necessary to commercialize these products.

The following table sets forth, for the periods indicated, our research and development expenses by product candidate:

 

 

 

     YEAR ENDED
DECEMBER 31,
     CHANGE
2012/2011
 
     2011      2012          $             %      
     (dollars in thousands)  

Zorvolex

   $ 12,046       $