S-1/A 1 d80632ds1a.htm AMENDMENT NO. 1 TO FORM S-1 Amendment No. 1 to Form S-1
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As filed with the Securities and Exchange Commission on September 1, 2015.

Registration No. 333-206694

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 1

to

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Sancilio Pharmaceuticals Company, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   2834   47-3943353
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)

2129 N. Congress Avenue

Riviera Beach, FL 33404

(561) 847-2302

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

 

 

Marc Wolff

Executive Vice President and Chief Financial Officer

Sancilio Pharmaceuticals Company, Inc.

2129 N. Congress Avenue

Riviera Beach, FL 33404

(561) 847-2302

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

 

 

Copy to:

 

Kara L. MacCullough, Esq.

Flora R. Perez, Esq.

Greenberg Traurig, P.A.

401 East Las Olas Boulevard, Suite 2000

Fort Lauderdale, FL 33301

Phone: (954) 765-0500/Fax: (954) 765-1477

 

Richard D. Truesdell, Jr.

Byron B. Rooney

Davis Polk & Wardwell LLP

450 Lexington Avenue

New York, NY 10017

 

 

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

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.  ¨

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

 

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

 

 

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the 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 prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

 

PRELIMINARY PROSPECTUS   Subject to completion   dated September 1, 2015

 

            Shares

 

LOGO

Common Stock

 

 

This is the initial public offering of our common stock. We are offering all of the shares offered by this prospectus. We expect the initial public offering price to be between $         and $         per share.

Prior to this offering there has been no public market for the common stock. We intend to apply to list our common stock on The NASDAQ Global Market under the symbol “SPCI.”

We are an “emerging growth company” as defined by the Jumpstart Our Business Startups Act of 2012 and, as such, we have elected to comply with certain reduced public company reporting requirements for this prospectus and future filings.

Investing in our common stock involves a high degree of risk. You should carefully consider the matters discussed under the section entitled “Risk Factors” beginning on page 12 of this prospectus.

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

 

      Per Share    Total
Public offering price    $                            $                
Underwriting discounts and commissions(1)    $                            $                
Proceeds to us, before expenses    $                            $                
(1)   We have agreed to reimburse the underwriters for certain expenses in connection with this offering. See “Underwriting” beginning on page 189 of this prospectus.

We have granted the underwriters an option for a period of 30 days to purchase additional shares of our common stock. If the underwriters exercise the option in full, the total underwriting discounts and commissions payable by us will be $        , and the total proceeds to us, before expenses, will be $        .

The underwriters expect to deliver the shares of common stock on or about                     , 2015.

 

UBS Investment Bank   Piper Jaffray
JMP Securities   FBR


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We have not, and the underwriters have not, authorized anyone to provide you with additional information or information different from that contained in this prospectus or any free writing prospectus. We are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of shares of our common stock.

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Prospectus Summary

     1   

The Offering

     7   

Summary Financial Data

     9   

Risk Factors

     12   

Information Regarding Forward-Looking Statements

     57   

Use of Proceeds

     60   

Dividend Policy

     62   

Capitalization

     63   

Dilution

     66   

Selected Consolidated Financial Data

     68   

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

     70   

Business

     95   

Management and Corporate Governance

     149   

Executive Compensation

     163   

Security Ownership of Certain Beneficial Owners and Management

     171   

Certain Relationships and Related Party Transactions

     174   

Description of Capital Stock

     176   

Shares Eligible for Future Sale

     183   

Material US Federal Income Tax Consequences to Non-US Holders of Our Common Stock

     185   

Underwriting

     189   

Notice To Prospective Investors

     194   

Legal Matters

     198   

Experts

     198   

Where You Can Find More Information

     198   

Glossary of Certain Scientific Terms

     199   

Index to Consolidated Financial Statements

     F-1   

 

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

DEALER PROSPECTUS DELIVERY OBLIGATION

Through and including                     , 2015 (25 days after the commencement of this offering), all dealers that buy, sell or trade shares of our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

TERMS USED IN THIS PROSPECTUS

Unless the context otherwise requires, in this prospectus, the terms “Sancilio,” the “Company,” “we,” “us” and “our” refer to Sancilio Pharmaceuticals Company, Inc. and its consolidated subsidiaries as a combined entity. Please refer to the Glossary of Certain Scientific Terms on page 199 of this prospectus for definitions of certain technical and scientific terms used throughout this prospectus.

 

 

 

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TRADEMARKS AND TRADE NAMES

This prospectus contains some of our trademarks and trade names. All other trademarks or trade names of any other company appearing in this prospectus belong to their respective owners. Solely for convenience, the trademarks and trade names in this prospectus are sometimes referred to without the ® and ™ symbols, but such references should not be construed as any indicator that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto.

INDUSTRY AND MARKET DATA

We obtained the industry, market and competitive position data described or referred to throughout this prospectus from our own internal estimates and research as well as from industry and general publications and research, surveys and studies conducted by third parties. These data involve a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates.

Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties and actual events or circumstances may differ materially from events and circumstances that are assumed in this information. In some cases, we do not expressly refer to the sources from which this data is derived. In that regard, when we refer to one or more sources of this type of data in any paragraph, you should assume that other data of this type appearing in the same paragraph is derived from the same sources, unless otherwise expressly stated or the context otherwise requires.

 

 

 

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Prospectus summary

The following summary highlights information appearing elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully. In particular, you should read the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the notes relating to those statements included elsewhere in this prospectus. Some of the statements in this prospectus constitute forward-looking statements. See “Information Regarding Forward-Looking Statements.”

OVERVIEW

We are an integrated specialty pharmaceutical company focused on developing and, in the future, commercializing products based on our proprietary Advanced Lipid Technologies, or ALT, platform. We intend to utilize our current manufacturing facility to manufacture our proprietary product candidates, if approved. ALT is designed to enhance the bioavailability, reduce the food effect and improve the efficacy of lipids and lipophilic active pharmaceutical ingredients, or APIs. Lipids are hydrophobic or amphipathic molecules and include fatty acids (such as omega-3 fatty acids and omega-6 fatty acids), steroids (including hormones) and fat-soluble vitamins (such as vitamins A, D, E and K). Our business model is to apply our ALT platform to lipids or lipophilic APIs to create unique product candidates that address the disorders and diseases resulting from imbalances of lipids in the body. In addition to our primary focus of developing our proprietary products using our ALT platform, we make use of and license rights to our proprietary ALT platform and our other technologies to third parties as part of our development and manufacture of lipophilic API-based and soft-gelatin products at our facilities.

Our proprietary product pipeline, which has been developed using our proprietary ALT platform, is currently focused on diseases and disorders for which we believe lipids can be used for treatment. We believe that our ALT platform will enable us to utilize our proprietary know-how and expertise in lipids to create unique formulations of clinically proven substances for approved and new indications. Our four lead product candidates are:

 

Ø   SC411—Our proprietary product candidate SC411, which is being developed for the treatment of sickle cell disease, or SCD, has been granted orphan drug designation by the FDA. We held a pre-IND meeting with the US Food and Drug Administration, or FDA, in May 2015, during which the FDA reviewed and provided recommendations for the design of our proposed clinical trial protocol for a pivotal trial of SC411. As agreed with the FDA, we intend to submit the final study protocol and statistical analysis plan to the FDA for its review concurrently with our Investigational New Drug Application, or IND, which we expect to submit prior to the end of 2015.

 

Ø   SC403—Our proprietary product candidate SC403, which is being developed for the treatment of short bowel syndrome, or SBS, has been granted orphan drug designation by the FDA. We held a pre-IND meeting with the FDA in July 2015, during which the FDA reviewed and provided recommendations for the design of our proposed clinical trial protocol. During that meeting, the FDA requested that we conduct additional toxicology studies on juvenile rats. We are in the process of conducting those studies. We expect to submit an IND to the FDA in late 2015 or during the first quarter of 2016.

 

Ø   SC401—Our proprietary product candidate SC401 is being developed for the treatment of severe hypertriglyceridemia. We submitted an IND in July 2015, and we intend to commence two pivotal pharmacokinetic, or PK, studies in late 2015 or during the first quarter of 2016, followed by a pivotal clinical endpoint study.

 

 

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Ø   SC410—Our proprietary product candidate SC410 is being developed for the treatment of non-alcoholic fatty liver disease, or NAFLD. We completed a preclinical study of SC410 in late 2014 and anticipate submitting an IND to the FDA prior to the end of 2015.

Our regulatory strategy is focused on seeking the most efficient pathway to obtain drug approval while seeking the best available protections for our product candidates. To create our proprietary product candidates, we apply our ALT platform to a combination of lipophilic APIs, each of which is composed of active ingredients already approved by the FDA or active ingredients for which clinical proof of safety or efficacy is available in published literature. As a result, we believe that we are able to utilize the regulatory approval pathway provided in Section 505(b)(2) of the Federal Food, Drug, and Cosmetic Act, or FDCA. A New Drug Application, or NDA, submitted under Section 505(b)(2), referred to as a 505(b)(2) NDA, contains full safety and efficacy reports but allows at least some of the information required for NDA approval, such as safety and efficacy information on the active ingredient, to come from studies not conducted by or for the applicant and for which the applicant has not obtained a right of reference. If the 505(b)(2) NDA applicant can establish that reliance on the FDA’s previous approval or relevant published literature is scientifically appropriate, it may eliminate the need to conduct certain preclinical or clinical studies of the new product. We believe that this streamlined approach will reduce the risks, costs and timing of bringing our product candidates to market.

As part of our strategy to seek the best available protections for our product candidates, we have also sought, and been granted, orphan drug designation for both SC411 and SC403. As a result of this orphan drug designation, upon approval of an NDA for such orphan drug, we may be granted seven years of market exclusivity.

In connection with our licensing and related development and manufacturing services, we provide our customers with assistance throughout all phases of pharmaceutical development and product life cycle management activities, from drug design and development through commercialization. For example, we have commercial relationships with Mylan, Inc., TherapeuticsMD, Inc. and several other pharmaceutical companies. We are currently developing seven Abbreviated New Drug Application, or ANDA, drug products for third parties, four of which have been submitted and are awaiting FDA approval. We are also developing an additional four 505(b)(2) NDA drug products for third parties utilizing our proprietary technologies. We have been named as manufacturer in each of the four ANDAs submitted and expect to be named manufacturer in any future ANDA or NDA submitted by our customers.

We also manufacture and market over-the-counter, or OTC, and behind-the-counter lines of dietary supplements. Our dietary supplement portfolio includes highly concentrated omega-3 fatty acid supplements under our brand Ocean Blue®, prenatal vitamins, and dental health products. We market our dietary supplement products internally in the United States; while outside of the United States, we intend to utilize partners for the commercialization of these products.

OUR STRATEGY

We intend to become a leading integrated specialty pharmaceutical company through continued execution and implementation of the following strategies:

 

Ø   Advance our four lead product candidates.    We intend to rely on the 505(b)(2) regulatory pathway for approval of our four lead product candidates. We believe the 505(b)(2) regulatory pathway will provide us the most cost efficient and expeditious pathway to obtain approval of our product candidates. We were granted orphan drug designation for two of our four lead product candidates and for one of our early stage product candidates. This designation could provide us with seven years of market exclusivity for any product candidate that is approved for the orphan indication.

 

 

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Ø   Commercialize any of our product candidates that are FDA-approved.    We intend to leverage our current commercialization experience to create a small, focused sales force to commercialize, upon approval, those product candidates that target a limited, discrete population, such as our SC411 and SC403 product candidates. We may rely on out-licensing or co-promotion arrangements for the marketing of those product candidates that have the potential to treat extensive patient populations such as our SC401 and SC410 product candidates.

 

Ø   Manufacture our proprietary products in our established manufacturing facilities.    We believe our manufacturing facilities and years of manufacturing experience provide us with a competitive advantage. We currently manufacture lines of our commercialized branded and co-branded dietary supplements and dental health products, as well as clinical batches of prescription generic and prescription proprietary drugs for our third-party customers and expect to commence manufacturing commercialized levels of these generic and proprietary drugs within the next six months.

 

Ø   Develop additional proprietary products by applying our ALT platform to lipophilic APIs to address unmet medical needs.    We have several product candidates formulated using our ALT platform under development that target a range of unmet medical needs in the therapeutic areas of lipid disorders, cardiovascular disease and hematology disorders. We also utilize our proprietary ALT platform in connection with the development and manufacture of lipid-based products for our customers in the hormone area. We believe the mechanism of ALT makes it potentially applicable to expansion into other therapeutic categories.

 

Ø   Evaluate internal and external business development opportunities to accelerate and maximize the potential of our product candidates worldwide.    We intend to continue to seek new product candidates that lie within or complement our therapeutic areas of focus to which we can acquire rights through acquisition, in-licensing or co-promotion arrangements. In addition, we currently retain worldwide commercial rights to our product candidates. Consequently, we intend to seek out-licensing or co-promotion opportunities outside of the United States for any of our product candidates.

OUR PROPRIETARY PRODUCT PIPELINE

Our proprietary product pipeline is focused on developing new or improved therapeutics which utilize lipophilic APIs. Lipids are molecules that include fatty acids, steroids (including hormones), fat-soluble vitamins (such as vitamins A, D, E, and K), monoglycerides, diglycerides and triglycerides. The principal roles of lipids in the body are storing energy, intracellular signaling, and acting as structural components of cell membranes. Imbalances of lipids and lipid disorders are currently linked to numerous diseases. However, we believe the ability to treat these imbalances and disorders has been limited based on the fact that lipids, by themselves, are not readily bioavailable and must be taken with food in order to efficiently pass through the intestinal lining.

We believe that, based upon available scientific studies, currently available treatments of lipid disorders and their related diseases are inconsistently absorbed and less bioavailable, and are impacted by the presence or absence of food in the digestive tract, resulting in inconsistent product efficacy. We believe that our product candidates, which are lipid-based APIs formulated using our proprietary ALT platform, will have greater bioavailability and be more consistently absorbed than existing conventional formulations, potentially improving efficacy and lowering effective doses. Furthermore, we believe that increased consistency and bioavailability of the lipophilic APIs may facilitate the use of these lipophilic APIs for the treatment of diseases and disorders for which there is no current treatment or for which the currently available treatments have significant side effects.

 

 

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The following table sets forth information on the status of each of our product candidates, each of which is wholly owned by us:

 

Product

Candidate

  Indication    Regulatory
Strategy
   Current Status    Upcoming Milestones  

Anticipated

Commercialization
Plan

SC411

  Sickle Cell Disease   

Orphan drug designation granted April 2015.

 

Pursuing 505(b)(2) NDA.

  

Relying on published preclinical studies for IND submission.*

 

Bridging toxicity study completed July 2015.*

 

Pre-IND meeting with FDA held May 2015.

   Anticipate submitting IND to FDA prior to the end of 2015 upon completion of manufacture of clinical trial materials (“CTM”).   In-house.

SC403

  Short Bowel Syndrome   

Orphan drug designation granted June 2015.

 

Pursuing 505(b)(2) NDA.

  

Preclinical study completed in early 2015.

 

Bridging toxicity study completed July 2015.*

 

Pre-IND meeting with FDA held July 2015.

   Anticipate submitting IND to FDA in late 2015 or during the first quarter of 2016 pending completion of second toxicity study** and completion of manufacture of CTM.   In-house.

SC401

  Severe Hypertriglyceridemia    Pursuing 505(b)(2) NDA.   

Relying on preclinical studies for current marketed product.

 

Bridging toxicity study completed July 2015.*

 

Pre-IND meeting with FDA held in Oct. 2014.

 

IND submitted

July 2015.

   Anticipate initiating PK studies in late 2015 or during the first quarter of 2016.   Licensing or partnership arrangement with third parties.

SC410

  Non-Alcoholic Fatty Liver Disease    Pursuing 505(b)(2) NDA.    Preclinical study completed in 2014.    Anticipate submitting IND to FDA prior to the end of 2015 upon completion of manufacture of CTM.   Licensing or partnership arrangement with third parties.

 

 

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*   As part of our IND submissions, we conducted a 28-day bridging rat toxicology study using our omega-3-acid ethyl esters formulation and our DHA formulation in direct comparison with an FDA-approved omega-3-acid ethyl ester. The study was completed in early July 2015.
**   As part of our anticipated IND submission for SC403, we are also conducting additional rat toxicology studies on juvenile rats using our omega-3-acid ethyl esters formulation and our DHA formulation in direct comparison with an FDA-approved omega-3-acid ethyl ester. One of these, a 28-day study, will need to be completed before we submit our IND.

RISKS ASSOCIATED WITH OUR BUSINESS

Our business, financial condition, results of operation and prospects are subject to numerous risks. You should carefully consider such risks before deciding to invest in our company. These risks are more fully described in the section entitled “Risk Factors” immediately following this summary and include the following:

 

Ø   Our future growth will depend on our ability to successfully develop, obtain regulatory approval for, and commercialize our product candidates formulated using our ALT platform. Because these processes are complex and costly, we may never obtain regulatory approval for and/or commercialize any of our product candidates.

 

Ø   Clinical trials involve a lengthy and expensive process with uncertain outcomes, and any delays may harm our business, financial condition, results of operations or prospects.

 

Ø   If the FDA does not conclude that our product candidates satisfy the requirements for the 505(b)(2) regulatory approval pathway, or if the requirements for approval of any of our product candidates under Section 505(b)(2) are not as we expect, the approval pathway for our product candidates will likely take significantly longer, cost significantly more and encounter significantly greater complications and risks than anticipated, and in any case may not be successful.

 

Ø   If we are unable to obtain and maintain intellectual property protection for our product candidates, or if the scope of the intellectual property protection obtained is not sufficiently broad, our competitors could develop and commercialize product candidates similar or identical to ours, and our ability to successfully commercialize our product candidates may be impaired.
Ø   We may not obtain the anticipated benefits of the orphan drug designation granted on product candidates.

 

Ø   Our future results are subject to fluctuation in the cost, availability and suitability of the raw material components of our products, particularly fish oils and gelatin, and any disruptions in the supply of these products could have an adverse effect on our business and results of operation.

 

Ø   Our commercial success depends upon attaining significant market acceptance of our product candidates, if approved, by physicians, pharmacists, patients and the medical community.

 

Ø   We have incurred cumulative losses since our inception and we expect to incur losses for the foreseeable future and may never be profitable at all or on a sustained basis.

 

Ø   We rely on the significant experience and specialized expertise of our Chief Executive Officer and other members of our senior management and scientific team, and we need to hire and retain additional qualified scientists and other highly skilled personnel to maintain and grow our business.

 

 

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IMPLICATIONS OF BEING AN EMERGING GROWTH COMPANY

As a company with less than $1.0 billion in revenue during our most recently completed fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. As a result, we are permitted to, and intend to, rely on exemptions from certain disclosure requirements that are applicable to other companies that are not emerging growth companies. These provisions include:

 

Ø   reduced disclosure about our executive compensation arrangements;

 

Ø   exemption from the requirement to have an auditor report on our internal control over financial reporting pursuant to Section 404(b) of Sarbanes-Oxley;

 

Ø   exemption from the requirement to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board, or PCAOB, regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis);

 

Ø   no non-binding stockholder advisory votes on executive compensation or golden parachute arrangements; and

 

Ø   reduced disclosure of financial information in this prospectus, including only two years of audited financial information and two years of selected financial information.

We may take advantage of these exemptions for up to five years or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company as of December 31 of a particular year:

 

Ø   if we had gross revenue of $1.0 billion or more in such year;

 

Ø   if the market value of our common stock that is held by non-affiliates exceeds $700.0 million as of June 30 in such year;

 

Ø   if at any point in such year, we would have issued more than $1.0 billion of non-convertible debt during the three-year period prior thereto; or

 

Ø   on the date on which we are deemed a “large accelerated issuer” as defined under the federal securities laws.

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

CORPORATE INFORMATION

We were originally organized as a corporation in the State of Florida in October 2004. On February 7, 2012, we reincorporated in Delaware through a merger with Sancilio & Company, Inc., a Delaware corporation. On May 13, 2015, we underwent a holding company reorganization resulting in the incorporation of Sancilio Pharmaceuticals Company, Inc. and in Sancilio & Company, Inc. becoming our wholly owned subsidiary. Our principal executive offices are located at 2129 N. Congress Avenue, Riviera Beach, Florida 33404.

 

 

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The offering

 

Common stock offered by us

             shares.

 

Option to purchase additional shares

The underwriters have an option to purchase up to              additional shares of our common stock from us. The underwriters can exercise this option at any time within 30 days from the date of this prospectus.

 

Common stock outstanding after giving effect to this offering

             shares (             shares if the underwriters exercise their option to purchase additional shares in full).

 

Use of proceeds

We estimate that the net proceeds from this offering, without the exercise of the underwriters’ option to purchase additional shares, will be approximately $        , after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, assuming an initial public offering price of $         per share, which represents the midpoint of the price range set forth on the cover page of this prospectus. If the underwriters exercise in full their option to purchase additional shares, the net proceeds to us will be approximately $        .

 

  We intend to use the net proceeds from this offering to fund the cost of clinical trials and related activities of SC411, SC403, SC401 and SC410, and for working capital and other general corporate purposes, including the ramp-up of our senior management team and the continued investment in our research and development pipeline of branded pharmaceutical products.

 

  See “Use of Proceeds” for more information on how we intend to use the net proceeds from this offering.

 

Risk factors

You should carefully read and consider the information set forth under “Risk Factors” beginning on page 12 of this prospectus and all other information set forth in this prospectus before investing in our common stock.

 

Listing

We intend to list the common stock on The NASDAQ Global Market under the symbol “SPCI.”

 

 

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Dividend policy

We currently do not intend to pay dividends following this offering. The credit agreement governing our debt instruments currently limits our ability to pay cash dividends to our stockholders. In addition, any determination to pay dividends in the future will be at the discretion of our board of directors and will depend upon our results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law and other factors that our board of directors deems relevant. See “Dividend Policy.”

The number of shares of our common stock to be outstanding after giving effect to this offering is based on 21,684,798 shares (on an as-adjusted basis) of our common stock outstanding as of June 30, 2015, assuming the anticipated conversion of all then outstanding shares of Series A convertible preferred stock, Series B convertible preferred stock and Series C convertible preferred stock into common stock, and excludes:

 

Ø   2,256,216 shares of common stock issuable upon exercise of stock options outstanding as of June 30, 2015, at a weighted average exercise price of $0.97 per share;

 

Ø   2,129,645 shares of common stock reserved for issuance under our 2015 Plan (including shares of common stock which were reserved for issuance under our 2012 Plan and added to the shares reserved under the 2015 Plan when the 2012 Plan was terminated); and

 

Ø   185,767 shares of common stock issuable upon exercise of warrants to purchase our common stock outstanding as of June 30, 2015, at a weighted average price of $3.64 per share.

Unless otherwise indicated, all information in this prospectus reflects and assumes the following:

 

Ø   the automatic conversion of all outstanding shares of our Series A convertible preferred stock, Series B convertible preferred stock and Series C convertible preferred stock into an aggregate of 17,532,076 shares of our common stock immediately prior to the closing of this offering;

 

Ø   the filing of our amended and restated certificate of incorporation and the adoption of our amended and restated bylaws immediately prior to the closing of this offering;

 

Ø   no exercise of the underwriters’ over-allotment option to purchase additional shares of our common stock; and

 

Ø   a         -for-         reverse split of our common stock to be effected prior to the closing of this offering.

 

 

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Summary financial data

The following table summarizes certain of our financial data. We derived the summary statement of operations data for the years ended December 31, 2013 and 2014 from our audited consolidated financial statements included elsewhere in this prospectus. We derived the summary statement of operations data for the six months ended June 30, 2014 and 2015 and the summary consolidated balance sheet data as of June 30, 2015 from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. We have prepared the unaudited condensed consolidated financial statements on the same basis as our audited consolidated financial statements and, in our opinion, have included all adjustments, which include only normal recurring adjustments, necessary to present fairly in all material respects our financial position and results of operations. The results for any interim period are not necessarily indicative of the results that may be expected for future interim periods or for the full year. Additionally, historical results are not necessarily indicative of the results expected for any future period.

You should read the summary consolidated financial data below together with our consolidated financial statements included elsewhere in this prospectus including the related notes thereto appearing elsewhere in this prospectus, as well as “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the other financial information included elsewhere in this prospectus.

 

    Year Ended
December 31,
    Six Months Ended
June 30,
 
(in thousands, except share and per share data)   2013(1)     2014     2014(1)     2015  
                (unaudited)     (unaudited)  

Statement of Operations Data:

       

Revenue:

       

Net product sales

  $ 4,201      $ 6,362      $ 3,518      $ 4,398   

Technologies and services revenue

    5,274        8,847        3,666        9,144   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    9,475        15,209        7,184        13,542   

Costs and expenses:

       

Direct costs of product sales related to direct material

    1,858        2,541        1,311        1,298   

Direct costs of technologies and services related to direct material and direct laboratory labor

    555        1,051        432        941   

Total unallocated costs

    3,337        6,617        2,343        3,628   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of product sales and technologies and services

    5,750        9,759        4,086        5,867   

Sales and marketing

    2,166        1,799        988        636   

Research and development

    972        2,108        499        1,879   

General and administrative

    2,217        8,298        4,040        5,488   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

    11,105        21,964        9,613        13,870   
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (1,630     (6,755     (2,429     (328

Other income (expense):

       

Interest income

    6        32        7        15   

Interest expense

    (155     (201     (107     (51
 

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense

    (149     (169     (100     (36
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

    (1,779     (6,924     (2,529     (364

Benefit for income taxes

    822        189        293        104   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (957     (6,735     (2,236     (260

Preferred dividends

    (160     (1,142     (255     (873

Accretion of preferred stock to redemption value

    —          (1,016     (178     (862
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stock

  $ (1,117   $ (8,893   $ (2,669   $ (1,995
 

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ (0.46   $ (2.51   $ (0.84   $ (0.49
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average number of shares outstanding:

       

Basic and diluted

    2,438,515        3,549,984        3,195,770        4,076,003   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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     As of
December 31, 2014
    As of June 30, 2015  
(in thousands)      Actual     Pro Forma(2)      Pro Forma As-
Adjusted(3)(4)
 
           (unaudited)     (unaudited)      (unaudited)  

Summary Balance Sheet Data:

         

Cash and cash equivalents

   $ 12,593      $ 8,016      $                        $                    

Working capital

     8,472        4,806        

Total assets

     30,432        33,545        

Long-term debt

     2,702        895        

Redeemable convertible preferred stock

     30,726        32,461        

Total stockholders’ deficit

     (15,285     (13,327     

 

     Year Ended December 31,     Six Months Ended
June 30,
 
(in thousands)    2013(1)     2014     2014(1)     2015  
     (unaudited)     (unaudited)     (unaudited)     (unaudited)  

Other Financial Data:

        

EBITDA(5)

   $ (1,126   $ (6,109   $ (2,130   $ 97   

Adjusted EBITDA(6)

     (1,090     (3,303     (240     443   

Adjusted EBITDA Margin(7)

     (11.5 )%      (21.7 )%      (3.3 )%      3.3

 

(1)   Our statements of operations data and other financial data for the year ended December 31, 2013 and the six months ended June 30, 2014 and the financial statements from which the data was derived which are included in this prospectus reflects the impact of the restatement which followed our discovery of errors in the accounting for certain sales agreements with unilateral rights of return related to our over-the-counter products which were entered into with retailers during the year ended December 31, 2013. As a result of the restatement, previously reported amounts were restated as follows: revenue was reduced by approximately $2.9 million, income from operations was reduced by approximately $3.2 million, and net income was reduced by approximately $1.8 million for the year ended December 31, 2013, while revenue was reduced by approximately $0.4 million, loss from operations was increased by approximately $0.4 million, and net loss was increased by approximately $0.3 million for the six months ended June 30, 2014. See “Risk Factors—During 2014, we identified a material weakness in our internal control over financial reporting that resulted in restatements of our prior consolidated financial statements. If we are unable to implement and maintain effective internal control over financial reporting in the future, the accuracy and timeliness of our financial reporting may be adversely affected.”
(2)   The pro forma column reflects the filing of our amended and restated certificate of incorporation immediately prior to the closing of this offering and the automatic conversion of all outstanding shares of our Series A convertible preferred stock, Series B convertible preferred stock and Series C convertible preferred stock into an aggregate of 17,532,076 shares of our common stock prior to the closing of this offering, assuming an initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus.
(3)   The pro forma as-adjusted column reflects the pro forma adjustments described in footnote (2) above and the sale by us of              shares of common stock by us in this offering at an assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.
(4)   Each $1.00 increase (decrease) in the assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the pro forma as-adjusted amount of each of cash and cash equivalents, total stockholders’ equity

 

 

(footnotes continued on following page)

 

 

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(deficit) and total capitalization by approximately $        , assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of              shares in the number of shares offered by us at the assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the pro forma as-adjusted amount of each of cash and cash equivalents, total stockholders’ equity (deficit) and total capitalization by approximately $        . The pro forma as-adjusted information is illustrative only, and we will adjust this information based on the actual initial public offering price, number of shares offered and other terms of this offering determined at pricing.

(5)   EBITDA is a non-GAAP financial measure. We define EBITDA as net (loss) income before income tax (expense) benefit, interest expense, net, and depreciation and amortization. Please see the section entitled “Non-GAAP Financial Measures” for more information as to the limitations of using non-GAAP measures and for the reconciliation of EBITDA to net loss, the most directly comparable financial measure calculated in accordance with GAAP.
(6)   Adjusted EBITDA is a non-GAAP financial measure. We define Adjusted EBITDA as EBITDA as further adjusted to exclude legal settlements, stock-based compensation expense and abandoned initial public offering related costs. Please see the section entitled “Non-GAAP Financial Measures” for more information as to the limitations of using non-GAAP measures and for the reconciliation of Adjusted EBITDA to net loss, the most directly comparable financial measure calculated in accordance with GAAP.
(7)   Adjusted EBITDA Margin is a non-GAAP financial measure. We define Adjusted EBITDA Margin as Adjusted EBITDA divided by total revenues. Please see the section entitled “Non-GAAP Financial Measures” for more information as to the limitations of using non-GAAP measures and for the reconciliation of Adjusted EBITDA Margin to net loss, the most directly comparable financial measure calculated in accordance with GAAP.

 

 

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Risk factors

Any investment in our common stock involves a high degree of risk, including the risks described below. If any of the following risks actually occur, our business, financial condition and results of operations could suffer. As a result, the trading price of our shares could decline, perhaps significantly, and you could lose all or part of your investment. The risks discussed below also include forward-looking statements and our actual results may differ substantially from those discussed in these forward-looking statements. See the section entitled “Information Regarding Forward-Looking Statements.”

RISKS RELATED TO THE CLINICAL DEVELOPMENT OF OUR PRODUCT CANDIDATES

Our future growth will depend on our ability to successfully develop, obtain regulatory approval for, and commercialize our product candidates formulated using our ALT platform. Because these processes are complex and costly, we may never obtain regulatory approval for and/or commercialize any of our product candidates.

We are actively developing product candidates formulated using our ALT platform. Our future growth depends on our ability to successfully develop, obtain the necessary regulatory approval for and commercialize our product candidates. This process is long, complex and costly. As of the date of this prospectus, none of our product candidates have been approved by the FDA. The clinical trials of our product candidates are, and the manufacturing and marketing of our product candidates will be, subject to extensive and rigorous review and regulation by numerous government authorities in the United States and in other countries where we intend to test and, if approved, market any product candidates. Before obtaining regulatory approval for the commercial sale of any product candidate, we must demonstrate through extensive clinical studies and trials that the product candidate is safe and effective for use in the desired indication. This process can take many years. Of the large number of drugs in development in the United States, only a small percentage successfully complete the FDA regulatory approval process and are commercialized. We do not anticipate generating revenues from sales of our product candidates for the foreseeable future, if ever.

Our ability to generate future revenues from sales of our product candidates depends heavily on our success in:

 

Ø   Being permitted by the FDA to commence clinical trials under INDs for each of our product candidates;

 

Ø   obtaining favorable results for and advancing the development of one or more of our product candidates, including initiating and completing successful preclinical studies and pivotal clinical trials;

 

Ø   obtaining and maintaining compliance with the FDA’s current Good Manufacturing Practices, or cGMPs regulations and completing successful facility inspections by the FDA;

 

Ø   obtaining US regulatory approval for one or more of our product candidates;

 

Ø   developing and expanding our sales, marketing and distribution capabilities and launching commercial sales of our product candidates, if and when approved, whether alone or in collaboration with others, depending on the product candidate;

 

Ø   achieving broad market acceptance of our product candidates, if and when approved, in the medical community and by third-party payors and patients;

 

Ø   maintaining a continued acceptable safety profile of our products following approval; and

 

Ø   obtaining and maintaining coverage and adequate reimbursement from third-party payors.

 

 

 

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In addition, our product candidates, if approved, may not achieve commercial success. Our commercial revenues from our product candidates, if any, will be derived from sales of products or from licensing agreements for products that we do not expect to be commercially available for several years, if at all. Even if one or more of our product candidates is approved for commercial sale, we anticipate incurring significant costs in connection with commercialization. As a result, we cannot assure you that we will be able to generate revenues or profit from sales of any approved product candidates. Furthermore, we face direct competition from various pharmaceutical companies which have developed or are developing products similar to those we are developing based upon our ALT platform. If we fail to successfully commercialize one or more of our product candidates in development, our business and our results of operations will be adversely affected.

Clinical trials involve a lengthy and expensive process with an uncertain outcome.

Clinical trials are expensive, can take many years to complete and have highly uncertain outcomes. A failure can occur at any time during the clinical trial process as a result of inadequate performance of a drug candidate, inadequate adherence by patients or investigators to clinical trial protocols, or other factors. For example, we are developing some of our product candidates for rare diseases with a heterogeneous patient population, which have not been studied extensively in the past. Consequently, for these product candidates, it can be difficult to design clinical trials to show clinical efficacy. Success in preclinical studies, conducted by us or by other parties, may not be predictive of similar results in humans during clinical trials, and successful results from early or small clinical trials may not be replicated in later and larger clinical trials. Companies in the pharmaceutical industry have suffered significant setbacks in advanced clinical trials as a result of a lack of efficacy or adverse safety profiles, despite promising results in earlier trials. For example, the PK data we generated of an earlier formulation of SC401 may not predict the PK performance of our current formulation of SC401 or the performance in a clinical endpoint trial. In addition, the preclinical results we have obtained for SC403 in piglets, and for SC410 in mice, may not be replicated in humans, or the dose-ranging study we are planning to conduct for SC403 may not yield interpretable results or any results that would help us plan a pivotal clinical trial. Further, the clinical studies of DHA and EPA in SCD and NAFLD were single site studies using similar, but not identical, amounts of DHA and EPA as we are proposing in SC411 and SC403. Larger, multi-site studies of our products may not be successful. Our future clinical trials may not be successful or may be more expensive or time-consuming than we currently expect and we may never generate the necessary data required to obtain regulatory approval and achieve product sales. Our anticipated development costs will likely increase if we do not obtain favorable results or if development of our product candidates is delayed. In particular, we would likely incur higher costs than we currently anticipate if development of our product candidates is delayed because we are required by the FDA to perform studies or trials in addition to those that we currently anticipate. Because of the numerous risks and uncertainties associated with pharmaceutical product development, we are unable to predict the timing or amount of any increase in our anticipated development costs.

If clinical trials for any of our product candidates fail to demonstrate safety or efficacy to the satisfaction of the FDA, the FDA will not approve that product candidate and we would not be able to commercialize it, despite spending significant resources on the product candidate’s development and clinical trial process, which will have a material adverse effect on our business, financial condition, results of operations and prospects.

 

 

 

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We may experience delays in clinical studies or clinical trials of our product candidates and we do not know whether currently planned clinical trials will begin on time, need to be redesigned, enroll patients on time or be completed on schedule, if at all.

Clinical trials can be delayed or terminated for a variety of reasons, including:

 

Ø   inability to raise or delays in raising funding necessary to initiate or continue a trial;

 

Ø   delays in obtaining regulatory approval to commence a clinical trial;

 

Ø   delays in reaching agreement with the FDA on final trial design;

 

Ø   imposition of a clinical hold for safety reasons or following submission of an IND or an inspection of our clinical trial operations or sites by the FDA or other regulatory authorities;

 

Ø   delays in obtaining required institutional review board, or IRB, approval prior to commencement of clinical trials and IRB approval at each site;

 

Ø   delays in reaching agreement on acceptable terms with prospective contract research organizations, or CROs, and clinical trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites, or failure by such CROs to carry out the clinical trial at each site in accordance with the terms of our agreements with them;

 

Ø   difficulties or delays in having patients complete participation in a trial or return for post-treatment follow-up;

 

Ø   clinical sites electing to terminate their participation in one of our clinical trials, which would likely have a detrimental effect on subject or patient enrollment;

 

Ø   time required to initiate or add a sufficient number of clinical sites; or

 

Ø   delays to produce and deliver sufficient supply of clinical trial materials.

Our development programs could encounter delays if a clinical trial is suspended or terminated by us, by the relevant IRBs at the sites at which such trials are being conducted or by the FDA or other regulatory authorities. Such authorities may impose such a suspension or termination due to a number of factors, including failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols, inspection of the clinical trial operations or trial site by the FDA or other regulatory authorities resulting in the imposition of a clinical hold, unforeseen safety issues or adverse side effects, changes in laws or regulations, or lack of adequate funding to continue the clinical trial. If we elect or are forced to delay, redesign, suspend or terminate any clinical trial of any product candidate, the commercial prospects of such product candidate will be harmed and our ability to generate product revenue from one or more of our product candidates will be delayed or eliminated. Any of these occurrences may harm our business, financial condition, results of operations and prospects significantly.

We intend to conduct, and may in the future conduct, clinical trials for product candidates at sites outside the United States, and the FDA may not accept data from trials conducted in such locations.

We have conducted, and may in the future choose to conduct, one or more of our clinical trials outside the United States. Although the FDA may accept data from clinical trials conducted outside the United States, acceptance of these data is subject to conditions imposed by the FDA. For example, the clinical trial must be well designed and conducted and performed by qualified investigators in accordance with ethical principles. The trial population must also adequately represent the US population, and the data must be applicable to the US population and US medical practice in ways that the FDA deems clinically

 

 

 

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meaningful. As a result, we currently expect to conduct all of our pivotal trials in support of our 505(b)(2) NDAs for our product candidates in the United States or in Western European countries that the FDA is willing to approve. While clinical trials outside the United States are subject to applicable local laws, the FDA’s acceptance of the data will depend on its determination that the trials also comply with all applicable US laws and regulations and current good clinical practices, or GCPs. The FDA may require on-site inspection of the foreign trial site, or other appropriate means, to validate the data. To the extent we conduct clinical trials outside the United States without prior approval from the FDA, the FDA may not accept the data from these trials. This would likely result in the need for additional trials, which would be costly and time-consuming and delay or permanently halt our development of the applicable product candidates.

Other risks inherent in conducting international clinical trials include:

 

Ø   foreign regulatory requirements that could restrict or limit our ability to conduct our clinical trials;

 

Ø   administrative burdens of conducting clinical trials under multiple sets of foreign regulations;

 

Ø   failure of enrolled patients to adhere to clinical protocols as a result of differences in healthcare services or cultural customs;

 

Ø   foreign exchange fluctuations;

 

Ø   diminished protection of intellectual property in some countries; and

 

Ø   political and economic risks relevant to foreign countries.

We have limited experience conducting clinical trials which may cause a delay in any clinical program and in the obtaining of regulatory approvals.

Although we have recruited a team that has significant experience with clinical trials, as a company we have limited experience in conducting clinical trials and no experience in conducting clinical trials through to regulatory approval of any product candidate. Consequently, we cannot be certain that planned clinical trials will begin or be completed on time, if at all. Large-scale trials would require significant additional financial and management resources, and reliance on third-party clinical investigators, CROs or consultants. Relying on third-party clinical investigators or CROs may cause us to encounter delays that are outside of our control.

We expect to rely on third parties to conduct, supervise and monitor certain of our clinical trials, including our pivotal clinical trials, and if these third parties perform in an unsatisfactory manner, it may negatively impact our ability to get FDA approval of our product candidates.

We expect to rely on CROs and clinical trial sites to ensure certain of our clinical trials, including our pivotal clinical trials, are conducted properly and on time and may engage a CRO to conduct these or certain of our other clinical trials. Foreign clinical studies are required to be conducted in accordance with the FDA’s GCP requirements including review and approval by an independent ethics committee and informed consent from subjects and patients. For our early stage or non-pivotal clinical trials conducted in India, we have previously selected, and in the future intend to select, only well-qualified trial sites that comply with the International Conference on Harmonisation, or ICH, GCP guidelines. Clinical trials conducted in India must comply with regulations imposed by India’s Central Drugs Standard Control Organization and the Drug Controller General of India. However, if there are insufficient well-qualified trial sites to conduct our trials, then the timing of our clinical trials could be delayed.

 

 

 

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Our reliance on these third parties for research and development activities will reduce our control over these activities but will not relieve us of our responsibilities. For example, the FDA and foreign regulatory authorities require compliance with regulations and standards, including GCP requirements, for designing, conducting, monitoring, recording, analyzing, and reporting the results of clinical trials to ensure that the data and results are credible and accurate and that the rights, integrity, and confidentiality of trial participants are protected. Although we rely on third parties to conduct certain of our clinical trials, we are responsible for ensuring that each of these clinical trials is conducted in accordance with its general investigational plan and protocol under legal and regulatory requirements. Regulatory authorities enforce these GCP requirements through periodic inspections of trial sponsors, principal investigators and trial sites. If we or any of our CROs fail to comply with applicable current GCP requirements, the clinical data generated in our clinical trials may be deemed unreliable and the FDA or other regulatory authorities may require us to perform additional clinical trials before approving our regulatory applications. We cannot assure you that upon inspection by a given regulatory authority, such regulatory authority will determine that any of our clinical trials comply with GCP requirements. In addition, our clinical trials must be conducted with clinical trial materials produced under applicable cGMP regulations. Failure to comply with these regulations may require us to repeat clinical trials, which would delay the regulatory approval process and increase the costs of these trials.

Although we have an employee on-site in India who will have the responsibility of overseeing the operations of our clinical testing sites in the country and providing hands-on support, including oversight of quality control and quality assurance, because the employees of the CROs we are working with are not our employees, we will not be able to directly monitor whether or not they devote sufficient time and resources to our clinical and nonclinical programs. These CROs may also have relationships with other commercial entities, including parties developing potentially competitive products, for whom they may also be conducting clinical trials or other drug development activities that could harm our competitive position. If our CROs do not successfully carry out their contractual duties or obligations, if they fail to meet expected deadlines, or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements, or for any other reasons, our clinical trials may be extended, delayed or terminated, and we may not be able to obtain regulatory approval for, or successfully commercialize, our product candidates. As a result, the commercial prospects for our product candidates would be harmed, our costs could increase, and our ability to generate revenues could be delayed.

We may find it difficult to enroll patients in our clinical trials, particularly clinical trials of our product candidates for which there is a limited patient population, which could delay or prevent clinical studies of our product candidates.

Identifying and qualifying patients to participate in clinical studies of our product candidates is critical to our success. The timing of our clinical studies depends, in part, on the speed at which we can recruit patients to participate in the testing of our product candidates. Patient enrollment is affected by factors including: severity of the disease under investigation; size and nature of the patient population; eligibility criteria for and design of the clinical trial in question; perceived risks and benefits of the product candidate under study; proximity and availability of clinical trial sites for prospective patients; availability of competing therapies and clinical trials; and clinicians’ and patients’ perceptions as to the potential advantages of our product candidates in relation to available therapies or other products under development. In particular, it may be difficult to locate patients to participate in the testing of our product candidates for which we are seeking or have obtained orphan drug designation. An orphan drug is a product intended to treat a “rare disease or condition,” which generally is a disease or condition that affects fewer than 200,000 individuals in the United States. Given the small patient population for these diseases, there are unique testing and patient recruitment challenges to overcome. Currently two of our

 

 

 

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four most advanced product candidates target a rare disease or condition and have been designated by the FDA as orphan drugs.

We may not be able to identify, recruit and enroll a sufficient number of patients, or those with the required or desired characteristics to achieve diversity in a trial, to complete our clinical trials in a timely manner. Delays in patient enrollment can result in increased costs, delays in advancing the development of our product candidates or termination of the clinical trials altogether, any of which would have an adverse effect on our business.

If we are not able to use the 505(b)(2) regulatory approval pathway for regulatory approval of our product candidates or if the requirements for approval of any of our product candidates under Section 505(b)(2) are not as we expect, it will likely take significantly longer, cost significantly more and be significantly more complicated to gain FDA approval for our product candidates, and in any case may not be successful.

We intend to seek FDA approval through the 505(b)(2) regulatory pathway for our product candidates, as described in this prospectus. The Drug Price Competition and Patent Term Restoration Act of 1984, also known as the Hatch-Waxman Amendments, added Section 505(b)(2) to the FDCA. Section 505(b)(2) permits the submission of an NDA where at least some of the information required for approval comes from studies that were not conducted by or for the applicant.

If the FDA does not agree that the 505(b)(2) regulatory pathway is appropriate or scientifically justified for one or more of our product candidates, we may need to conduct additional clinical trials, provide additional data and information and meet additional standards for regulatory approval. For example, the FDA (i) has not reviewed or agreed upon the number of patients in the safety database necessary for approval of our product candidates, (ii) has not commented on the adequacy of the non-clinical data relevant to our product candidates, including the excipients in our product candidates and (iii) may not agree that we have provided for formulations of any of our product candidates a scientific bridge, through, for example, comparative bioavailability data, to demonstrate that reliance on the prior findings of safety and/or efficacy for a listed drug is justified. If we are unable to pursue a 505(b)(2) pathway, the time and financial resources required to obtain FDA approval for our product candidates would likely increase substantially. Moreover, the inability to pursue the 505(b)(2) regulatory pathway could result in new competitive products reaching the market faster than our product candidates, which could materially adversely impact our competitive position and prospects. Even if we are allowed to pursue the 505(b)(2) regulatory pathway for a product candidate, we cannot assure you that preclinical studies or clinical trials we currently anticipate conducting will be sufficient for approval or that we will receive the requisite or timely approvals for commercialization of such product candidate. Although the 505(b)(2) pathway allows us to rely in part on the FDA’s prior findings of safety and/or efficacy for approved drugs and/or on published literature, the FDA may determine that prior findings by the FDA and/or the published literature that we believe supports the safety and/or efficacy of one or more of our product candidates is insufficient or not applicable to our application or that additional studies will need to be conducted. For example, the FDA required us to conduct additional rat toxicology studies to demonstrate the safety of certain inactive ingredients that we intend to use in our product candidates. In addition, the FDA told us that the clinical study of DHA and EPA in SCD would provide limited efficacy support but no safety support in a 505(b)(2) NDA for SC411.

To the extent that we are relying on the 505(b)(2) regulatory pathway based on the FDA’s approval of a drug for a similar indication, then the FDA may require that we include in the labeling of our product candidates, if approved, some or all of the safety information that is included in the labeling of the approved drug. For example, unless our clinical studies clearly demonstrate to the contrary, the FDA

 

 

 

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may require that the labeling for SC401 include certain safety information from Lovaza’s approved labeling, including information about Lovaza’s side effects—such as eructation, dyspepsia, and taste perversion—and warnings about atrial fibrillation or use in patients with hepatic impairment.

In addition, we expect that our competitors will file citizen petitions with the FDA in an attempt to persuade the FDA that our product candidates, or the clinical studies that support their approval, contain deficiencies or are otherwise ineligible for approval. Such actions by our competitors could delay or even prevent the FDA from approving any NDA that we submit under Section 505(b)(2).

An NDA submitted under Section 505(b)(2) subjects us to the risk that we may be subject to a patent infringement lawsuit or exclusivity period that would delay or prevent the review or approval of our product candidates.

We plan to develop many of our product candidates for approval under Section 505(b)(2) of the FDCA. Section 505(b)(2) permits the submission of an NDA where at least some of the information required for approval comes from studies that were not conducted by, or for, the applicant and/or for which the applicant has not obtained a right of reference. The product that is the subject of these referenced studies is referred to as the listed drug. The 505(b)(2) application would enable us to reference published literature and/or the FDA’s previous findings of safety and/or effectiveness for the listed drug. For NDAs submitted under Section 505(b)(2) of the FDCA, the patent certification and related provisions of the Hatch-Waxman Amendments apply. In accordance with the Hatch-Waxman Amendments, such NDAs may be required to include certifications, known as paragraph IV certifications, that certify that any patents identified in the Patent and Exclusivity Information Addendum of the FDA’s publication, Approved Drug Products with Therapeutic Equivalence Evaluations, commonly known as the Orange Book, with respect to any listed drug referenced in the 505(b)(2) application, are invalid, unenforceable or will not be infringed by the manufacture, use or sale of the product that is the subject of the 505(b)(2) NDA.

Under the Hatch-Waxman Amendments, the holder of patents for the listed drug that the 505(b)(2) application references may file a patent infringement lawsuit after receiving notice of the paragraph IV certification. Filing of a patent infringement lawsuit against the filer of the 505(b)(2) applicant within 45 days of the patent owner’s receipt of notice triggers a one-time, automatic, 30-month stay of the FDA’s ability to approve the 505(b)(2) NDA, unless the patent litigation is resolved in the favor of the paragraph IV filer or the patent expires before that time. Although we do not currently anticipate being required to file any paragraph IV certifications in connection with our four lead product candidates, if additional patents are listed in the Orange Book, or if in the future we pursue a 505(b)(2) application which does require a paragraph IV certification, we may invest a significant amount of time and expense in the development of one or more product candidates only to be subject to significant delay and patent litigation before such product candidates may be commercialized, if at all. In addition, a 505(b)(2) application will not be approved until any non-patent exclusivity, such as exclusivity for obtaining approval of a new chemical entity, or NCE, for the listed drug has expired. The FDA may also require us to perform one or more additional clinical studies or measurements to support the change from the listed drug, which could be time-consuming and could substantially delay our achievement of regulatory approvals for such product candidates. The FDA may also reject our future 505(b)(2) submissions and require us to file such submissions under Section 505(b)(1) of the FDCA, which would require us to provide extensive data to establish safety and effectiveness of the drug for the proposed use and could cause delay and be considerably more expensive and time-consuming. These factors, among others, may limit our ability to successfully commercialize our product candidates.

Companies that produce listed drugs routinely bring litigation against ANDA or 505(b)(2) applicants that seek regulatory approval to manufacture and market generic and reformulated forms of their

 

 

 

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branded products. These companies often allege patent infringement or other violations of intellectual property rights as the basis for filing suit against an ANDA or 505(b)(2) applicant. In addition, patent holders may bring patent infringement suits against companies that are currently marketing and selling their approved generic or reformulated products.

Litigation to enforce or defend intellectual property rights is often complex and often involves significant expense and could delay or prevent introduction or sale of our products or product candidates. If patents are held to be valid and infringed by our products or product candidates in a particular jurisdiction, we would, unless we could obtain a license from the patent holder, be required to cease selling the relevant product in that jurisdiction and may need to relinquish or destroy existing stock in that jurisdiction. There may also be situations where we use our business judgment and decide to market and sell our approved products, notwithstanding the fact that allegations of patent infringement(s) have not been finally resolved by the courts, which is known as an “at-risk launch.” The risk involved in doing so can be substantial because the remedies available to the owner of a patent for infringement may include, among other things, damages measured by the profits lost by the patent owner and not necessarily by the profits earned by the infringer. In the case of willful infringement, the definition of which is subjective, such damages may be increased up to three times. An adverse decision in any patent litigation could have a material adverse effect on our business, financial position and results of operations and could cause the market value of our common stock to decline.

We may not obtain the anticipated benefits of the orphan drug designation granted for our product candidates.

As part of our development strategy, we sought and were granted orphan drug designation under the Orphan Drug Act for three of our product candidates. Under the Orphan Drug Act, the FDA may grant orphan drug designation to a drug or biological product intended to treat a “rare disease or condition,” which generally is a disease or condition that affects fewer than 200,000 individuals in the United States. The FDA has granted orphan drug designation for two of our four active pipeline products, SC411 targeting sickle cell disease, and SC403 targeting SBS, and for one of our early-stage product candidates. Orphan drug designation neither shortens the development time or regulatory review time of a drug, nor gives the drug any advantage in the regulatory review or approval process.

The FDA may grant orphan drug designation to multiple drugs in development which target the same rare disease or condition. The first company to obtain FDA approval for a designated orphan drug for a given rare disease receives marketing exclusivity for use of that drug for the stated condition for a period of seven years. Consequently, the orphan drug designation granted for our product candidates will not provide us with any marketing exclusivity if another company obtains marketing approval for any particular orphan indication prior to our product candidate obtaining marketing approval. In such case, we could also be potentially blocked from approval until the first product’s orphan drug exclusive marketing period expires. Moreover, even if we obtain orphan drug exclusive marketing rights for a product, that exclusivity may not effectively protect the product from competition because different drugs can be approved for the same condition. Furthermore, after an orphan drug is approved, the FDA can subsequently approve another drug containing the same active moiety for the same orphan condition if the FDA concludes that the later drug is safer, more effective or makes a major contribution to patient care. Finally, orphan drug exclusive marketing rights may be lost if the FDA later determines that the request for designation was materially defective or if the manufacturer is unable to assure sufficient quantity of the drug.

We do not own or license rights to any issued patents for any of our commercialized products or our product candidates at this time. Our pending patent applications may not result in patents being issued

 

 

 

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that protect our products or product candidates, in whole or in part. Because the extent and scope of patent protection for each of our products and product candidates will be uncertain until a patent related to the product or product candidate is issued, if at all, orphan drug designation and subsequent marketing exclusivity upon approval is especially important for those of our product candidates that have been designated orphan drugs. If we do not obtain orphan drug marketing exclusivity for our product candidates that do not have patent protection, our competitors may then sell a drug containing the same active moiety to treat the same condition and our revenues will be reduced.

In response to a recent court decision regarding the plain meaning of the exclusivity provision of the Orphan Drug Act, the FDA may undertake a reevaluation of aspects of its orphan drug regulations and policies. We do not know if, when, or how the FDA may change the orphan drug regulations and policies, and it is uncertain how any changes might affect our business. Depending on what changes the FDA may make to its orphan drug regulations and policies, our business could be harmed.

The fast track designation for our product candidates, if obtained, may not lead to a faster review process and a delay in the review process or in the approval of our products will delay revenue from the sale of the products and will increase the capital necessary to fund these product development programs.

We have not submitted to the FDA any requests for fast track designation. If we do, then even if we receive orphan drug designation from the FDA, our product candidates may not qualify for the FDA fast track designation or priority review. Submitting an NDA and getting through the regulatory process to gain marketing approval is a lengthy process. Under fast track designation, the FDA may initiate review of sections of a fast track drug’s NDA before the application is complete. However, the FDA’s time period goal for reviewing an application does not begin until the last section of the NDA is submitted. Additionally, the fast track designation may be withdrawn by the FDA if the FDA believes that the designation is no longer supported by data emerging in the clinical trial process. Under the FDA policies, a product candidate is eligible for priority review, or review within a six-month time frame from the time a complete NDA is accepted for filing, if the product candidate provides a significant improvement compared to marketed drugs in the treatment, diagnosis or prevention of a disease. A product candidate with fast track designation would ordinarily meet the FDA’s criteria for priority review. However, there is no guarantee that we will obtain the fast track designation for our product candidates, or that it will lead to a faster review process. A delay in the review process or in the approval of our products will delay revenue from the sale of the products and will increase the capital necessary to fund these product development programs.

We may not have the sufficient financial resources or management attention to focus on developing our product candidates while managing our other products and services.

We have very limited financial and human resources. We have invested, and expect to continue to invest, a significant portion of our time and financial resources into the development of our product candidates. Developing pharmaceutical products, including conducting clinical studies and trials, is expensive and time-consuming. Our existing technologies and services activities and our manufacturing for third parties as well as our portfolio of currently marketed products may require dedication of our financial and managerial resources in a manner that could impede our ability to finance and focus on product candidates in our development pipeline, which would have an adverse effect on our business and results of operations.

In addition, we depend on the revenues from technologies and services activities, our manufacturing for third parties and our portfolio of currently marketed products to partially offset our overhead costs. If

 

 

 

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we dedicate resources away from the portions of our businesses that generate revenues, we may have less financial resources available to fund our research and development activities and product pipeline.

RISKS RELATED TO OUR BUSINESS AND OUR FINANCIAL CONDITION

We have incurred cumulative losses since our inception and we expect to incur losses for the foreseeable future and may never be profitable on a sustained basis.

We have experienced cumulative losses since our inception. All of our product candidates will require substantial additional development time and resources before we would be able to receive regulatory approvals, if any, implement our commercialization strategies and begin generating revenue from product sales. We may not generate significant revenue from sales of our product candidates in the near-term, if ever. We incurred net losses of $6.7 million and $1.0 million for the years ended December 31, 2014 and 2013, respectively, and approximately $364,000 for the six months ended June 30, 2015. We expect to incur losses for the foreseeable future.

We have devoted a significant portion of our financial resources to development of our product candidates and our ALT platform. To date, we have financed our operations with cash generated through our net product sales and technologies and services activities and issuance of preferred stock. The size of our future net losses will depend, in part, on the rate of future expenditures and our ability to generate revenues. To date, none of our product candidates have been commercialized, and if our product candidates are not successfully developed or commercialized, or if revenues are insufficient following marketing approval, we may not achieve profitability and our business may fail.

Because of the numerous risks and uncertainties associated with pharmaceutical product development, we are unable to fully predict the timing or amount of our expenses, but do expect to continue to incur substantial and increased expenses as we expand our development and research activities and product portfolio. As a result of the foregoing, we expect to incur increasing net losses and negative cash flows for the foreseeable future.

Our debt agreement contains restrictions that limit our flexibility in operating our business.

As of June 30, 2015, there was approximately $0.9 million principal amount outstanding under our term loan. Our term loan is governed by a credit and security agreement, as amended, or the Credit Agreement, that we originally entered into with Capital Bank, N.A., in August 2013. Our Credit Agreement contains various covenants that limit our ability to engage in specified types of transactions. These covenants limit our ability to, among other things:

 

Ø   incur additional indebtedness;

 

Ø   create certain liens on our assets;

 

Ø   engage in mergers, consolidations, liquidation or dispositions of our assets;

 

Ø   make certain loans, advancements, guarantees or investments;

 

Ø   pay dividends and distributions;

 

Ø   repurchase capital stock;

 

Ø   enter into certain transactions with affiliates;

 

Ø   engage in sale and leaseback transactions; and

 

Ø   engage in transactions that would result in a change of control of our company.

 

 

 

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Our Credit Agreement previously required that we maintain certain debt-to-net worth and debt service coverage ratios. However, on August 7, 2015, we entered into an amendment to the Credit Agreement which deleted the debt service coverage ratio and replaced it with a covenant to retain deposits with our bank of no less than two times the principal amount outstanding of loan(s) under the Credit Agreement and/or loan documents at all times. The debt-to-net worth ratio was not changed. As of August 7, 2015, the outstanding principal amount of loans under the Credit Agreement was $0.8 million and our deposits in the bank equaled $6.8 million.

These covenants may limit our ability to finance our operations, product development initiatives and other strategic activities, and as a result, may have an adverse effect on our ability to grow and on our financial condition. A breach of any of these covenants could result in a default of the term loan and an acceleration of the maturity of the principal. The term loan is secured by substantially all our assets. Consequently, if we were unable to repay the loan upon acceleration, the lender could foreclose on this collateral. We received waivers from the lender with respect to our debt service coverage ratio as of December 31, 2014 and March 31, 2015 as we were not in compliance due to our losses in 2014. Based upon the amendment to the Credit Agreement, as of August 7, 2015, we were in compliance with each of our covenants under the Credit Agreement. As of June 30, 2015, absent the amendment to Credit Agreement, we would not have been in compliance with a financial covenant contained in the original Credit Agreement. If we are unable to comply with these covenants, or receive a waiver upon noncompliance, and the term loan were to be accelerated in 2015, we believe that we would have sufficient working capital to satisfy the amounts due, but we cannot provide assurance of the sufficiency thereof. Any failure to maintain sufficient working capital would have a material adverse effect on our business, financial condition and prospects.

If we are not able to maintain compliance with the financial covenants in our Credit Agreement, our lender could declare our debt obligations in default.

Our borrowings under our Credit Agreement are secured by substantially all of our assets. As amended, the Credit Agreement requires us to meet certain financial covenants on a consolidated basis, including (i) maintaining a total liabilities to tangible net worth ratio not to exceed 2.0 to 1.0, measured each fiscal quarter; (ii) maintaining a tangible net worth equal to at least $3.5 million, measured each fiscal quarter and (iii) retaining deposits with our bank of no less than two times the principal amount outstanding of loan(s) under the Credit Agreement and/or loan documents at all times.

Due to our losses in 2014, as of each of December 31, 2014 and March 31, 2015 we were not in compliance with the debt service coverage ratio previously required by the Credit Agreement. On May 11, 2015, our lender provided us with a limited waiver of this event of default as of December 31, 2014 and on July 15, 2015, we obtained limited waivers of this event of default as of March 31, 2015. This noncompliance would have constituted an event of default under the Credit Agreement, but for the waivers that we received. In the event of default under the Credit Agreement, our lender may exercise certain remedies, including acceleration of our debt obligations and foreclosure on our assets pledged as collateral under the Credit Agreement. Each of these waivers was limited and therefore did not apply to any subsequent defaults by us relative to the financial covenants and did not constitute a waiver of default relative to any of our other obligations under the Credit Agreement. There was no consideration paid for any of the limited waivers. As a result of our noncompliance with this covenant, all amounts due under the Credit Agreement were classified as current in the December 31, 2014 and March 31, 2015 balance sheets. Consequently, as of each of December 31, 2014 and March 31, 2015, we classified $2.7 million and $1.0 million, respectively, as current.

 

 

 

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On August 7, 2015, we entered into an amendment to the Credit Agreement which deleted the debt service coverage ratio and replaced it with a covenant to retain deposits with our bank of no less than to two times the principal amount outstanding of loan(s) under the Credit Agreement and/or loan documents at all times. The debt-to-net worth ratio was not changed. Based upon the amendment to the Credit Agreement, as of August 7, 2015, we were in compliance with each of our covenants of the Credit Agreement. As a result of the amendment, (i) the $0.6 million due under the Credit Agreement which was not due within one year, was reclassified as long-term in the June 30, 2015 balance sheet and (ii) we were in compliance with all of the Credit Agreement covenants. As of June 30, 2015, absent the amendment to Credit Agreement, we would not have been in compliance with a financial covenant contained in the original Credit Agreement. While we believe we will continue to be in compliance with our covenants, we cannot guarantee such compliance. Any failure to comply with our covenants will have a material adverse effect on our financial condition.

Our customer base is highly concentrated, and a loss of any of our major customers would have an adverse effect on our business, financial condition and results of operations.

A significant part of our business is providing technologies and services to, and manufacturing products for, third-party pharmaceutical companies. However, this customer base is highly concentrated. A substantial portion of our technologies and services revenue is derived from two customers. For the year ended December 31, 2014, TherapeuticsMD, Inc. and Mylan, Inc. accounted for 79% and 16%, respectively, of our technologies and services revenue. In addition, sales of our commercial products are concentrated and comprise a large percentage of our accounts receivable. For the year ended December 31, 2014, 33%, 12%, 11% and 11% of our net product sales came from McKesson Corporation, Cypress Pharmaceuticals, Inc., AmerisourceBergen, and Publix Super Markets, respectively. As of December 31, 2014, McKesson Corporation and TherapeuticsMD, Inc. accounted for 33% and 24%, respectively, of accounts receivable. A reduction in, or loss of business with, any of these customers, or our failure to collect on our accounts receivable, would adversely affect our business, financial condition and results of operations.

A substantial portion of our net product sales revenue is derived from sales of a limited number of products, and a decrease in demand for these products would adversely affect our business and results of operations.

We currently have a limited number of commercialized products from which we derive a substantial portion of our product sales revenue. For the year ended December 31, 2014, our Ocean Blue® brand of omega-3 products accounted for 30% of our net product sales revenue and our prenatal vitamins and dental health products accounted for 56% of our net product sales revenue. A reduction in demand for these products or the loss of business with any significant customers would adversely affect our business and results of operations. For example, in the second half of 2014, two large retail chains notified us that they would remove certain of our OTC lines of Ocean Blue® omega-3 products from their shelves, but would continue carrying our behind-the-counter Ocean Blue® product. These retailers comprised approximately $466,000 of our over-the-counter net product sales for the year ended December 31, 2014 and approximately $569,000 for the six months ended June 30, 2015.

The sale of our products can be significantly influenced by market conditions. Actions that could be taken by our competitors, which may materially and adversely affect our business, results of operations and financial condition, may include pricing changes and entering or exiting the market for specific products, and we have no control over these actions.

 

 

 

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During 2014, we identified a material weakness in our internal control over financial reporting that resulted in restatements of our prior consolidated financial statements. If we are unable to implement and maintain effective internal control over financial reporting in the future, the accuracy and timeliness of our financial reporting may be adversely affected.

Our board of directors, in consultation with management, made the determination to restate our audited financial statements for the year ended December 31, 2013 and our unaudited financial statements for the first two quarters of 2014. The restatements followed our discovery of errors in the accounting for certain sales agreements with unilateral rights of return related to our over-the-counter products which were entered into with retailers during the year ended December 31, 2013. Revenues related to sales to those retailers were recognized upon delivery, consistent with the terms of most of our other product sales agreements, rather than upon sale to the ultimate customer consistent with the terms of such sales agreements with unilateral rights of return. Given the unilateral rights of return and our limited history for our OTC product line, we were unable to reliably estimate expected returns at the time of delivery. In addition, an error in accounting for income taxes for other comprehensive income was discovered. As a result of the restatement, previously reported amounts were restated as follows: revenue was reduced by approximately $2.9 million, income from operations was reduced by approximately $3.2 million, and net income was reduced by approximately $1.8 million for the year ended December 31, 2013, while revenue was reduced by approximately $0.4 million, loss from operations was increased by approximately $0.4 million, and net loss was increased by approximately $0.3 million for the six months ended June 30, 2014. We believe that these errors were due to a material weakness in our controls with respect to the preparation of our financial statements. We believe that this material weakness has been remediated by the retention of additional internal and external resources in our accounting department. If we are unable to maintain adequate internal controls over financial reporting in the future, the accuracy and timeliness of our financial reporting may be adversely affected, investor confidence in the accuracy of our financial reports may be impacted or the market price of our common stock could be negatively impacted.

We may experience difficulties or delays in the development and commercialization of new products, which could have a negative impact on our business and results of operations.

Developing and commercializing new products includes inherent risks and uncertainties, such as:

 

Ø   compounds or products may appear promising in development but may fail to reach the market at all, fail to reach market within the expected or optimal time frame, or fail to be approved for product extensions or initial/additional indications for many reasons, including due to efficacy or safety concerns, the delay or denial of regulatory approvals, delays or difficulties with producing products at a commercial scale or excessive costs to manufacture them;

 

Ø   failure to enter into or successfully implement optimal alliances for the development or commercialization of new products;

 

Ø   failure to maintain a consistent scope and variety of promising late-stage products;

 

Ø   failure of one or more of our products to achieve or maintain commercial viability after we have invested significant resources and time into product development;

 

Ø   changes in regulatory approval processes that may cause delays or denials of new product approvals;

 

Ø   seizure or recalls of products or forced closing of our manufacturing facility;

 

Ø  

disruptions in supply chain continuity including from natural or man-made disasters at our facility or at a critical supplier, as well as our failure or the failure of any of our suppliers to comply with cGMPs

 

 

 

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  and other applicable regulations or quality assurance guidelines that could lead to manufacturing shutdowns, product shortages and delays in product manufacturing;

 

Ø   manufacturing and quality assurance/quality control issues, supply problems or governmental approval delays;

 

Ø   failure of a sole source or single-source supplier to provide us with necessary raw materials, supplies or finished goods for an extended period of time;

 

Ø   other manufacturing or distribution issues, including limits to manufacturing capacity due to regulatory requirements, and changes in the types of products produced;

 

Ø   failure to qualify our products and product candidates, if approved, for reimbursement by third-party payors; and

 

Ø   failure to maintain, or out-license to, a commercial organization that can effectively sell and market our products and product candidates, if approved.

The occurrence of one or any number of these risks and uncertainties could negatively impact our ability to develop and commercialize our existing commercialized products, product candidates in our development pipeline, and products for third-party pharmaceutical companies, which may result in an adverse effect on our business and results of operations.

If we underestimate the required amount of labor and overhead costs when negotiating agreements with our customers and they refuse to pay for any additional expenses, our income from operations may be negatively impacted.

In our technologies and services arrangements, we typically enter into master development agreements with our third-party pharmaceutical company customers. These agreements govern our relationship with these customers by providing standardized terms and conditions and contemplate various formulation, development and manufacturing projects and services to be undertaken by us for these customers. These projects take the form of statements of work, which are agreements we enter into with the customers. These statements of work describe the terms and pricing for the formulation, product development and manufacture of generic or proprietary pharmaceutical products. When negotiating these statements of work, we estimate in advance the number of hours and other labor and overhead costs we believe will be necessary to complete a project and agree to a fixed fee, based in part on these projections, for our services as set forth in the statements of work. We are typically paid in installments of the total fixed fee upon the completion of certain milestones pursuant to the payment schedules set forth in the statements of work, or in monthly payments based on a fixed number of hours per month. If we underestimate the amount of labor and overhead costs required to complete each project, we would typically issue to the customer an additional statement of work covering the additional expenses we incurred in the project. In some cases, however, we are not able to bill the customer for these excess hours. If a customer was to dispute or refuse to pay these additional expenses, or by the terms of a statement of work we were unable to bill the customer for such expenses, the result would have an adverse effect on our results of operations.

Product liability lawsuits could divert our resources, result in substantial liabilities and reduce the commercial potential of our products.

The design, testing, development, manufacture, and marketing of our product candidates, as well as our currently marketed products, involve an inherent risk of exposure to product liability claims and related adverse publicity. For example, we may be sued if any product we develop or currently market allegedly causes injury or is found to be otherwise unsuitable during clinical testing, manufacturing, marketing, or sale. Any such product liability claims may include allegations of defects in manufacturing, defects in

 

 

 

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design, a failure to warn of dangers inherent in the product, negligence, strict liability, or a breach of warranties. Claims could also be asserted under state consumer protection acts. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our existing products and product candidates. Even a successful defense would require significant financial and management resources. Regardless of the merits or eventual outcome, product liability claims may result in any of the following:

 

Ø   inability to commercialize our products and product candidates;

 

Ø   difficulty recruiting subjects for clinical trials or withdrawal of subjects before a trial is completed;

 

Ø   labeling, marketing, or promotional restrictions;

 

Ø   product recalls or withdrawals;

 

Ø   decreased demand for our products or products that we may develop in the future;

 

Ø   loss of revenue;

 

Ø   injury to our reputation;

 

Ø   initiation of investigations by regulators;

 

Ø   costs to defend the related litigation;

 

Ø   a diversion of management’s time and our resources;

 

Ø   exhaustion of any available insurance and our capital resources; and

 

Ø   a decline in our stock price.

In addition, we develop, formulate, manufacture and sell products to third-party pharmaceutical company customers who, in turn, resell the products in our end use markets. If a person were to bring a product liability suit against one of our customers, this customer may attempt to seek contribution from us. A person may also bring a product liability claim directly against us. While we endeavor to protect ourselves from such claims and exposures in our contractual negotiations, we cannot assure you that our efforts will ultimately protect us from any such claims.

We maintain general liability insurance of up to $5.0 million in the aggregate and excess liability of up to an additional $5.0 million in the aggregate; however, this insurance may not fully cover potential liabilities. The cost of any product liability litigation or other proceeding, even if resolved in our favor, could be substantial. In addition, our inability to obtain or maintain sufficient insurance coverage at an acceptable cost or to otherwise protect against potential product liability claims could prevent or inhibit the development and commercial production and sale of our products, which could adversely affect our business, financial condition, results of operations and prospects.

The continuing trend towards consolidation of certain customer groups could result in declines in the sales volume and prices of our products, and increased fees charged by customers, each of which would have an adverse effect on our results of operations.

A significant amount of our net product sales is to a relatively small number of drug wholesalers and national and regional retail chain pharmacies. These customers represent an integral part of the distribution chain of our products. Drug wholesalers and retail chain pharmacies have undergone, and are continuing to undergo, significant consolidation. This consolidation may result in these groups gaining additional purchasing leverage and, consequently, increasing the product pricing pressures facing our business. Additionally, the emergence of large buying groups representing independent retail

 

 

 

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pharmacies and the prevalence and influence of managed care organizations and similar institutions potentially enable those groups to attempt to extract price discounts on our products. The occurrence of any of the above risks could adversely affect our results of operations.

If our currently marketed products fail to achieve certain target sales numbers, our retail customers may, in their sole discretion, decide to discontinue the sale of our products, which could have an adverse impact on our results of operations.

Our ability to sell our currently marketed products in quantities sufficient to sustain our operations and achieve profitability will depend upon our retail customers agreeing to stock our products. Many retail pharmacies make annual decisions as to which products they will sell. They primarily base their decisions on whether a product is performing against its target sales numbers. If any of our products underperforms and fails to reach its target sales numbers, a retail pharmacy may decide to discontinue the sale of our product or products. In the second half of 2014, two large retail chains notified us that they would remove certain of our over-the-counter line of Ocean Blue® omega-3 products from their shelves, but would continue carrying our behind-the-counter Ocean Blue® product. These retailers comprised approximately $466,000 of our over-the-counter net product sales for the year ended December 31, 2014 and approximately $569,000 for the six months ended June 30, 2015.

Our future sales of products could also be affected by information released about real or perceived side effects or uncertainty regarding efficacy of omega-3 fatty acids and, in some cases, could result in product withdrawal or recall. If a retailer removes one of our products from its shelves or our products are withdrawn or recalled, our sales and revenue will be negatively affected, which could have an adverse effect on our results of operations.

Our future results of operations are subject to fluctuations in the costs, availability, and suitability of the components of our current products and our product candidates, including active pharmaceutical ingredients, purchased components, compounds and raw materials.

We depend on various active pharmaceutical ingredients, components, compounds and raw materials supplied primarily by others for our current products and our product candidates, including fish oil. Also, our customers frequently negotiate and contract for the supply of their active pharmaceutical or biologic ingredient for formulation or incorporation in the finished product which we develop and manufacture. We endeavor to geographically diversify our suppliers of raw materials, such as fish oil, for our current products and our product candidates and participate with our customers in the qualification process for all suppliers of active pharmaceutical ingredients for the products we develop and manufacture for them; however, it is possible that any of our or our customers’ supplier relationships could be interrupted due to circumstances beyond our control, such as natural disasters, international supply disruptions caused by pandemics, geopolitical issues or other events or could be terminated in the future.

Any sustained interruption in our receipt of adequate supplies, whether based on our or our customers’ supplier relationships, could have an adverse effect on our business and our results of operations. In addition, while we have processes intended to reduce volatility in component and material pricing, we may not be able to successfully manage price fluctuations and future price fluctuations or shortages may have an adverse effect on our results of operations. In addition, our suppliers or our customers’ suppliers may determine to terminate or unfavorably alter their contracts or relationships with us or our customers. We and our customers may be unable to enter into new supply arrangements on favorable terms or at all.

 

 

 

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Our current business and our ability to commercialize our product candidates is dependent on our ability to obtain a consistent quality and volume of omega-3 fatty acids from fish oil.

We rely on our third-party suppliers for fish oil, which is a necessary ingredient of our products and product candidates. These suppliers may not sell us these raw materials at the times we need them or on commercially reasonable terms. Although we believe that there are several potential alternative suppliers who could meet our fish oil requirements, we may incur added costs and delays in identifying and qualifying any such replacement. In addition, many of these suppliers are located in foreign countries, including China and South Korea. We may have difficulty in obtaining fish oil from international markets due, for example, to regulatory barriers, the necessity of adapting to new regulatory systems and problems related to different cultural biases and political systems and strict adherence to all anti-corruption laws, including the United States Foreign Corrupt Practices Act. Foreign fish oil purchases expose us to a number of risks including unexpected changes in regulatory requirements, possible difficulties in enforcing agreements, longer shipping lead-times, inefficient port operations, difficulties obtaining import licenses, the imposition of withholding or other taxes, economic or political instability, embargoes, military hostilities or exchange controls.

In addition, we require a consistent supply of fish oil in sufficient quantities and at required levels of purity. Fish oil is a natural resource, the supply of which may be subject to fluctuations due to natural conditions relating to fish biology or environmental conditions. Fish oil yields may be influenced by multiple factors, including but not limited to, fish diet, weather, water temperature, fish population and age of fish, but such possible relationships and interrelationships are not generally well understood. Should downward fluctuations in fish oil supply occur, we may not be able to obtain fish oil in sufficient quantities and at the required levels of purity to meet the increased production demands of commercial-scale manufacturing of our product candidates, if approved. Any significant delay or decrease in the supply or quality of fish oil could considerably delay or impair the production of our products and product candidates, which could have a material adverse effect on our business.

We rely on the significant experience and specialized expertise of our Chief Executive Officer and other members of our senior management and scientific team, and we need to hire and retain additional qualified scientists and other highly skilled personnel to maintain and grow our business.

Our ability to be successful in the highly competitive biotechnology and pharmaceutical industries depends in large part upon our ability to attract and retain highly qualified managerial, scientific, medical, sales and other personnel. Our performance is substantially dependent on the research and development and business development expertise of Dr Frederick Sancilio, our President and Chief Executive Officer, and on the continued services and performance of our senior management and scientific team, who have extensive experience and specialized expertise in our business. Dr Sancilio has over 35 years of experience in the pharmaceutical research, development, manufacturing and distribution industries. Our Executive Vice President, Marc Wolff, has over 16 years of experience in our industry, serving in global finance leadership roles. Our Vice President of Research and Development, Dr Thorsteinn Thorsteinsson, is highly experienced in specialized soft gelatin capsule manufacturing methods and has over 20 years of experience in our industry.

The loss of the services of Dr Sancilio, Mr Wolff or Dr Thorsteinsson, or the increased demands placed on our key executives and personnel by our continued growth, could adversely affect our financial performance and our ability to execute our strategies. Our continued success also depends on our ability to attract and retain qualified team members to meet our future growth needs. We may not be able to attract and retain necessary team members to operate our business.

 

 

 

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In addition, our future success depends on our ability to identify, attract, hire, train, retain and motivate highly skilled technical, managerial and research personnel in all areas within our organization. We plan to continue to grow our business and will need to hire additional personnel to support this growth. We believe that there are only a limited number of individuals with the requisite skills to serve in many of our key positions, and we compete for key personnel with other pharmaceutical companies, as well as universities and research institutions. It is often difficult to hire and retain these persons, and we may be unable to timely replace key persons if they leave or be unable to fill new positions requiring key persons with appropriate experience. If we fail to attract, integrate and retain the necessary personnel, our ability to maintain and grow our business could suffer significantly.

Adverse outcomes in legal matters could negatively affect our business, results of operations and financial condition.

Current or future lawsuits, claims, proceedings and government investigations could preclude or delay the commercialization of our products or could adversely affect our operations, profitability, liquidity or financial condition, after any possible insurance recoveries, where available. We could experience adverse outcomes concerning: (i) intellectual property disputes; (ii) litigation, including product liability and commercial cases; (iii) antibribery regulations such as the US Foreign Corrupt Practices Act; (iv) recalls or withdrawals of pharmaceutical products or forced closings of manufacturing plants; (v) product pricing and promotional matters; (vi) environmental, health and safety matters; (vii) disputes with our customers, suppliers or other third parties with whom we have contractual relationships or other arrangements; (viii) employment-related disputes; and (ix) tax liabilities. If we are not successful in defending against lawsuits that may arise, or even if we are successful but our reputation is nevertheless impacted, our business, results of operation and financial condition could be negatively affected.

Our business may be adversely affected by unfavorable publicity or lack of consumer acceptance.

We are highly dependent upon consumer acceptance of the safety and quality of our currently marketed products and, if and when we obtain marketing approval, our product candidates. Consumer acceptance of a product can be significantly influenced by scientific research or findings, national media attention and other publicity about product use. A product may be received favorably, resulting in high sales associated with that product that may not be sustainable as consumer preferences change.

Future scientific research or publicity could be unfavorable to our industry or any of our particular products and may not be consistent with earlier favorable research or publicity. A future research report or publicity that is perceived by our consumers as less than favorable or that may question earlier favorable research or publicity could have a material adverse effect on our ability to generate revenue. Adverse publicity in the form of published scientific research, statements by regulatory authorities or otherwise, whether or not accurate, that associates consumption of our product or any other similar product with illness or other adverse effects, or that questions the benefits of our product or a similar product, or that claims that such products do not have the effect intended, could have a material adverse effect on our business, reputation, financial condition or results of operations.

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

We will need to substantially expand our managerial, commercial, financial, legal, regulatory, compliance, manufacturing and other personnel resources to manage our operations, manufacture our products and prepare for the commercialization of our product candidates. This may include, but is not limited to, hiring a new chief legal officer, expanding the team in charge of anti-corruption and economic sanctions, specifically in relation to contracts we may enter into with third parties in China and India,

 

 

 

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expanding the environmental, health and safety function, and eventually, increasing the size of our regulatory team to handle FDA issues.

Our need to effectively manage our operations, growth and various projects requires that we:

 

Ø   establish appropriate systems, policies and infrastructure to support our operations;

 

Ø   hire a sufficient number of qualified employees to support our production capabilities and our contract research and development services; and

 

Ø   continue to improve our operational, financial and management controls, reporting systems and procedures.

We may be unable to successfully implement these tasks on a larger scale and, accordingly, may not achieve our development and commercialization goals. Any inability to manage growth could delay the execution of our business plans or disrupt our operations.

We may acquire other assets or businesses, or form collaborations or make investments in other companies or technologies, which could harm our operating results, dilute our stockholders’ ownership, increase our debt or cause us to incur significant expense.

As part of our business strategy, we may pursue acquisitions of assets, including preclinical, clinical or commercial stage products or product candidates, or businesses, or strategic alliances and collaborations, to expand our existing product portfolio and operations. We may not identify or complete these transactions in a timely manner, on a cost-effective basis, or at all, and we may not realize the anticipated benefits of any such transaction, any of which could have a detrimental effect on our financial condition, results of operations and cash flows. We have no experience with acquiring other companies, and limited experience with forming strategic alliances and collaborations and acquiring products or product candidates. We may not be able to find suitable acquisition candidates, and if we make any acquisitions, we may not be able to integrate these acquisitions successfully into our existing business and we may incur additional debt or assume unknown or contingent liabilities in connection therewith. Integration of an acquired company or assets may also disrupt ongoing operations, and require the hiring of additional personnel and the implementation of additional internal systems and infrastructure, especially the acquisition of commercial assets, and require management resources that would otherwise be focused on developing our existing business. We may not be able to find suitable strategic alliance or collaboration partners or identify other investment opportunities, and we may experience losses related to any such investments.

To finance any acquisitions or collaborations, we may choose to issue debt or shares of our common stock as consideration. Any such issuance of shares would dilute the ownership of our existing stockholders. If the price of our common stock is low or volatile, we may not be able to acquire other assets or companies or fund a transaction using our stock as consideration. Alternatively, it may be necessary for us to raise additional funds for acquisitions through public or private financings. Additional funds may not be available on terms that are favorable to us, or at all.

Our business is geographically concentrated and if a catastrophic event, such as a hurricane, were to impact our facilities, our business may be disrupted which could result in serious harm to our business, results of operations and financial condition.

The buildings containing our manufacturing operations, laboratory space, warehouse and corporate headquarters are all located in close proximity in Riviera Beach, Florida, a coastal south Florida city located in a region known for and susceptible to damage caused by hurricane activity. We conduct all of

 

 

 

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our technologies and services and our manufacturing activities in this facility and there are no backup facilities for any of these operations. If a hurricane or other natural disaster were to impact our facilities, we may be unable to manufacture our products or provide development or manufacturing services to our customers, which would have a serious disruptive impact on our business and a material adverse effect on our results of operations and financial condition. While we carry business interruption and personal property insurance, such insurance may not be adequate to compensate us for losses from any damage or interruption of our business operations resulting from a hurricane or other catastrophic event.

We rely significantly upon information technology and any failure, inadequacy, interruption or security lapse of that technology, including any cyber security incidents, could harm our ability to operate our business effectively.

Our internal computer systems and those of third parties with which we contract are vulnerable to damage from cyber-attacks, computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. System failures, accidents or security breaches could cause interruptions in our operations, and could result in a material disruption of our development and commercialization activities and business operations, in addition to possibly requiring substantial expenditures of resources to remedy. To the extent that any disruption or security breach were to result in a loss of, or damage to, our data or applications, or inappropriate public disclosure of confidential or proprietary information, we could incur liability, our competitive position could be harmed, and our product research, development and commercialization efforts could be delayed.

RISKS RELATED TO COMMERCIALIZATION OF OUR PRODUCTS AND PRODUCT CANDIDATES

Our commercial success depends upon attaining significant market acceptance of our products and product candidates, if approved, among physicians, dentists, nurses, pharmacists, patients and the medical community.

Our success depends on the commercialization of our products and product candidates. Our current commercialized products are OTC and behind-the-counter lines of highly concentrated omega-3 fatty acid dietary supplements designed to support cardiovascular and metabolic health under our brand Ocean Blue®, and branded and co-branded dietary supplements in the dental and women’s health markets.

In addition, we are seeking to advance multiple product candidates through the research and clinical development process, and ultimately, seek regulatory approval for our product candidates. Even if we obtain such approval and launch commercial sales of any of our product candidates, the product candidates may not gain market acceptance among physicians, nurses, pharmacists, patients, the medical community or third-party payors, which is critical to commercial success. Market acceptance of our current products and any product candidate for which we receive approval depends on a number of factors, including:

 

Ø   the timing of market introduction of the product as well as competitive products;

 

Ø   the clinical indications for which the product is approved;

 

Ø   the convenience and ease of administration to patients of the product;

 

Ø   the potential and perceived advantages of such product over alternative treatments;

 

Ø   the cost of treatment in relation to alternative treatments;

 

 

 

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Ø   the availability of coverage and adequate reimbursement and pricing by third-party payors and government authorities;

 

Ø   any negative publicity related to our or our competitors’ products that include the same active ingredients;

 

Ø   the prevalence and severity of adverse side effects, including limitations or warnings contained in a product’s FDA-approved labeling; and

 

Ø   the effectiveness of sales and marketing efforts.

Even if a potential product displays a favorable efficacy and safety profile in initial clinical studies and trials, market acceptance of the product candidate will not be known until after it is approved and launched. In addition, even if our products or product candidates achieve an adequate level of acceptance by physicians, dentists, nurses, pharmacists and the medical community, they may recommend that patients purchase non-prescription versions of our products instead of our prescription versions, which would negatively affect our ability to generate significant revenues. If our products or product candidates, if approved, fail to achieve an adequate level of acceptance by physicians, dentists, nurses, pharmacists, patients and the medical community, we will be unable to generate significant revenues, and this may have a material impact on our business and operations.

Our product candidates are formulations of lipophilic APIs and the failure to gain, or a decline in, market acceptance by physicians and patients for this API as an effective treatment for the targeted indication will adversely impact demand for our product candidates, if approved.

Our products and product candidates are based on formulations of lipophilic APIs. While the lipophilic API contained in SC401 is the same as that contained in Lovaza, which has been accepted by physicians, patients and third-party insurers for the treatment of severe hypertriglyceridemia, the formulation of SC401 contemplates reduced dosage. If we are unable to gain market acceptance by physicians, patients and third-party insurers for this new formulation it will adversely affect our growth prospects. With respect to SC411, SC403 and SC410, there are currently no available drugs to treat the targeted indications that include the lipophilic APIs contained in the formulations of our product candidates. Consequently, our ability to successfully commercialize these products, once approved, will depend on our ability to achieve acceptance by physicians, patients and third-party insurers for the treatment of the diseases and disorders for which they are indicated. Furthermore, clinical trials and nonclinical studies performed by research organizations and other independent third parties on the same lipophilic API, even though not with the same formulation, may yield negative results regarding the effectiveness and could have a negative impact on consumer perception and market acceptance of our products. This would adversely impact demand for our product candidates, if approved.

If our product candidates formulated using our proprietary ALT platform do not gain acceptance by physicians and patients, we will not be able to successfully commercialize our products and product candidates.

Our ALT platform is designed to enhance the bioavailability, reduce the food effect and improve product efficacy of lipids and lipophilic APIs. Our business ultimately depends on patient and physician acceptance that our ALT platform achieves the pharmacological effects that we believe and that the lipophilic APIs included in our product candidates are superior to the lipophilic APIs otherwise available

 

 

 

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on the market. Physicians will prescribe our products and product candidates only if they determine, based on experience, clinical data, side effect profiles or other factors, that our products and product candidates are more appropriate for managing the particular disease or disorder. Physicians may refuse to prescribe products incorporating our drug delivery technologies if they believe that the active ingredient is better administered to a patient using alternative drug delivery technologies, that the time required to explain use of the technologies to the patient would not be offset by advantages, or they believe that the delivery method would result in patient noncompliance or reduced compliance. Similarly, patients could be reluctant to move to products based on our ALT platform particularly if they are satisfied with their current drug regimen. If physicians and patients do not accept products based on our ALT platform as a more appropriate method for treating the disease or disorder our product candidates are designed to treat, we will not be able to successfully commercialize our products.

Our industry and the market we compete in are highly competitive and our failure to compete effectively could adversely affect our sales and growth prospects.

The pharmaceutical products industry and, in particular, the emerging field of lipidomics is subject to rapid and intense technological change. In addition, competition in our industry in general is intense among manufacturers of nutritional, non-prescription, and prescription pharmaceuticals. We face, and will continue to face, competition from pharmaceutical, biopharmaceutical, biotechnology and dietary supplement companies developing similar products and technologies, as well as numerous academic and research institutions, governmental agencies and private organizations engaged in drug funding or research and discovery activities. Many of these competitors have substantially greater name recognition, commercial infrastructures and financial, technical and personal resources than we have.

Potential competitors to our product candidates include large, well-established pharmaceutical companies, specialty pharmaceutical sales and marketing companies and specialized cardiovascular treatment companies. For additional information regarding potential competitors to our product candidates, see the section entitled “Business—Competition.”

Other forms of competition may include (i) new products developed by competitors that have lower prices, real or perceived superior effectiveness or safety, or that are otherwise competitive with our products, including generic versions of our lines of Ocean Blue® products and other branded and co-branded products; (ii) technological advances and patents attained by our competitors; (iii) clinical study results from our product candidates or a competitor’s products; and (iv) business combinations among our competitors and major customers. We could also experience limited or no market access due to real or perceived differences in value propositions for our products compared with competitors. We may not be able to compete effectively, and any of the factors listed above may cause price reductions, reduced margins and losses of our market share.

Many of our competitors have substantially greater financial, product development, marketing, personnel and other resources than we do, such as larger research and development staff and experienced marketing and manufacturing organizations. Mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources being concentrated in our competitors. As a result, these companies may obtain regulatory approval more rapidly than we are able to and may be more effective in selling and marketing their products as well. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large, established companies. Competition may increase further as a result of advances in the commercial applicability of technologies and greater availability of capital for investment in these industries. Our competitors may succeed in developing, acquiring or licensing on an exclusive basis drug products or drug delivery technologies that are more effective or less costly than any product candidate that we are

 

 

 

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currently developing or that we may develop. In addition, our competitors may file citizens’ petitions with the FDA in an attempt to persuade the FDA that our product candidates, or the clinical studies that support their approval, contain deficiencies or are otherwise ineligible for approval. Such actions by our competitors could delay or even prevent the FDA from approving any NDA that we submit under Section 505(b)(2) of the FDCA.

We believe that our ability to successfully compete will depend on, among other things:

 

Ø   the efficacy and safety of our products and product candidates, including as relative to marketed products and product candidates in development by third parties;

 

Ø   the time it takes for our product candidates to complete clinical development and receive marketing approval if at all;

 

Ø   our ability to maintain a good relationship with regulatory authorities;

 

Ø   our ability to commercialize and market any of our product candidates that receive regulatory approval;

 

Ø   the price of our products, including in comparison to our competitors;

 

Ø   whether coverage and adequate levels of reimbursement are available under private and governmental health insurance plans, including Medicare;

 

Ø   our ability to successfully utilize the 505(b)(2) regulatory pathway;

 

Ø   the ability to obtain, maintain and enforce intellectual property rights related to our products and product candidates and marketing exclusivity for our orphan drugs;

 

Ø   the ability to manufacture on a cost-effective basis and sell commercial quantities of our products and product candidates that receive regulatory approval; and

 

Ø   acceptance of any of our products and product candidates that receive regulatory approval by physicians, dentists, other healthcare providers and patients.

If our competitors market products that are more effective, safer or less expensive than our product candidates, if any, or that reach the market sooner than our product candidates, if any, we may enter the market too late in the cycle and may not achieve commercial success.

We may not be able to successfully scale up manufacturing for our customers’ product candidates which could adversely affect our relationship with our customers and harm our reputation.

Although we currently manufacture a commercial line of dietary supplements and provide manufacturing of clinical batches to our customers, we are in the process of scaling up to meet increased production demand due to expected commercialization of our customers’ product candidates and, to the extent that our product candidates receive FDA approval, our proprietary products. We may not be able to successfully increase our manufacturing capacity to commercially manufacture such product candidates in a timely or cost-effective manner or at all. Pharmaceutical companies often encounter difficulties in scaling up production of products beyond clinical batches. These problems include manufacturing difficulties relating to production costs and yields, quality control, including stability of the product and quality assurance testing, shortages of qualified personnel, cost of additional equipment and materials, as well as compliance with federal, state and foreign regulations. Furthermore, as all our manufacturing facilities and warehouse are located in one location, we do not have any back-up or alternative locations

 

 

 

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to use to resolve any of these scaling-up issues. If we are unable to successfully scale up manufacturing of any of our customers’ product candidates or our product candidates in sufficient quality and quantity, the development of such product candidates and regulatory approval or commercial launch for any resulting products may be delayed or there may be a shortage in supply, which could result in the loss of business and harm to our reputation.

Because the target patient populations for some of our product candidates is small, we will have to achieve significant market share and obtain high per-patient prices for our product candidates, if approved, to achieve profitability.

Our clinical development of SC403 and SC411 targets rare diseases, which are diseases that affect a small percentage of the population and, accordingly, have small patient populations. We have obtained orphan drug designation for SC403 for the treatment of SBS and SC411 for the treatment of SCD. If we are successful in developing either of those product candidates and receiving regulatory approval to market such product candidate for an orphan disease with a small patient population, the per-patient prices at which we could sell the product for these indications will likely be relatively high in order for us to recover our development costs and achieve profitability. Consequently, our failure to achieve significant market share and obtain high per-patient prices for our product candidates could have a material adverse effect on our financial condition and results of operations.

We have limited selling, marketing and distributing capabilities. We will need to establish sales and marketing capabilities or enter into agreements with third parties to market and sell some of our product candidates if and when they obtain regulatory approval.

We currently have limited sales, marketing and distribution capabilities established for our commercialized products. Our anticipated commercialization strategy of our product portfolio depends on the product candidate. Our goal is to retain significant control over the commercialization of our product candidates which have been granted an orphan drug designation. Because orphan drugs target the treatment of rare diseases, the additional staff needed for the sales, marketing and distribution of those product candidates is less than that required for drugs to treat more common conditions due to the small patient markets. However, this marketing and distribution strategy may not be effective.

We currently have sales, marketing and distribution capabilities established for our other commercialized products. If and when SC403 and SC411 are approved by the FDA for commercialization, we will expand our capabilities to sell into the approved product’s specific therapeutic category.

For each of SC401 and SC410, we intend to out-license the commercial rights for the product, if approved, while retaining control over the manufacturing and development process, but we may be unable to enter into marketing agreements on favorable terms, if at all. We have not entered into an agreement with any partner for commercialization of any of our product candidates. If we fail to reach an agreement with any such commercialization partner or upon reaching such an agreement such partner fails to sell a sufficient volume of our products or commit sufficient resources to commercialize our products, then our business, financial condition and results of operations may be adversely affected and we may be unable to compete successfully against more-established companies or successfully commercialize any of our product candidates.

 

 

 

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If we do not obtain and maintain adequate levels of coverage and reimbursement for our products or product candidates from third-party payors, if approved, the commercial success of our products or product candidates may be severely hindered.

Successful sales and market acceptance of our products and any other approved product candidates depend on the availability of adequate coverage and reimbursement from third-party payors. Patients who use prescribed medications for the treatment of their conditions generally rely on third-party payors to reimburse all or part of the costs associated with their prescription drugs. Adequate coverage and reimbursement from governmental healthcare programs, such as Medicare and Medicaid, and commercial payors is critical to new product acceptance. Coverage decisions may depend upon clinical and economic standards that disfavor new drug products when more-established or lower-cost therapeutic alternatives are already available or subsequently become available. Assuming we obtain coverage for a given product, the resulting reimbursement payment rates might not be adequate or may require co-payments that patients find unacceptably high. Patients are unlikely to use our products unless coverage is provided and reimbursement is adequate to cover a significant portion of the cost of our products.

In addition, the market for our product candidates will depend significantly on access to third-party payors’ drug formularies, or lists of medications for which third-party payors provide coverage and reimbursement. The industry competition to be included in such formularies often leads to downward pricing pressures on pharmaceutical companies. Also, third-party payors may refuse to include a particular branded drug in their formularies or otherwise restrict patient access through formulary controls or otherwise to a branded drug when a less costly generic equivalent or other alternative is available.

Third-party payors, whether foreign or domestic, governmental or commercial, are developing increasingly sophisticated methods of controlling healthcare costs. In addition, in the United States, no uniform policy requirement for coverage and reimbursement for drug products exists among third-party payors. Therefore, coverage and reimbursement for drug products can differ significantly from payor to payor. As a result, the coverage determination process is often a time-consuming and costly process that will require us to provide scientific and clinical support for the use of our products to each payor separately, with no assurance that coverage and adequate reimbursement will be applied consistently or obtained in the first instance.

Further, we believe that future coverage and reimbursement will likely be subject to increased restrictions both in the United States and in international markets. Third party coverage and reimbursement for our product candidates for which we may receive regulatory approval may not be available or adequate in either the United States or international markets, which could have a material adverse effect on our business, results of operations, financial condition and prospects.

Recently enacted and future legislation may increase the difficulty and cost for us to commercialize our product candidates and affect the prices we may obtain.

The United States and some foreign jurisdictions are considering, or have enacted, a number of legislative and regulatory proposals to change the healthcare system in ways that could affect our ability to sell our products and our product candidates, if approved, profitably. Among policy makers and payors in the United States 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. In the United States, the pharmaceutical industry has been a particular focus of these efforts and has been significantly

 

 

 

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affected by major legislative initiatives. In March 2010, the Affordable Care Act was enacted, which includes measures that have changed or will significantly change the way healthcare is financed by both governmental and private insurers.

In addition, other legislative changes have been proposed and adopted since the Affordable Care Act was enacted. For example, in January 2013, President Obama signed into law the American Taxpayer Relief Act of 2012, which, among other things, further reduced Medicare payments to several providers and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. The full impact of these new laws, as well as laws and other reform measures that may be proposed and adopted in the future, remains uncertain, but may result in additional reductions in Medicare and other healthcare funding and other changes to our business, which could have a material adverse effect on our customers and, accordingly, our financial operations.

Our policies regarding returns, discounts, allowances and chargebacks, and marketing programs adopted by retail pharmacy chains and wholesalers may reduce our revenue in the future.

Consistent with industry practices, we maintain a return policy that allows customers to return products within a specified period prior to and subsequent to the expiration date of the product and in the event of certain circumstances, such as a product recall. Generally, a product may be returned for a period beginning six months prior to its expiration date up to one year after its expiration date. We also provide shelf stock allowances which are credits issued to reflect changes in the selling price of a product and are based upon consideration of a variety of factors, including actual return and historical experience by product type. Therefore, if new competitors enter the marketplace and significantly lower the prices of any of their competing products, we may reduce the price of our product, which would have a negative impact on our product sales revenue.

Certain of our OTC products are sold under sales agreements which provide for unilateral rights of return. Given the limited history of our OTC products, we currently cannot reliably estimate expected returns at time of shipment. Accordingly, for sales to these retailers, we defer recognition of revenue and continue to record the products as inventory until the product is sold to the ultimate customer.

In addition, we provide chargeback credits to wholesalers for any difference between the contracted price with an indirect customer and the wholesaler’s invoice price. Although we establish reserves based on our prior experience and our best estimates of the impact that these policies may have in subsequent periods, we cannot ensure that our reserves are adequate or that actual product returns, allowances and chargebacks will not exceed our estimates, which could have a material adverse effect on our business, financial condition, results of operations and the market price of our stock.

We may experience product recalls, withdrawals or seizures which could reduce our sales and adversely affect our results of operations.

Our current commercialized products include our OTC and behind-the-counter lines of Ocean Blue® omega-3 dietary supplements and branded and co-branded dietary supplements in the dental and women’s health markets. These products and our product candidates, if approved and commercialized, may be subject to recalls, withdrawals or seizures if any of the products we sell is believed to cause injury or illness, or if we are alleged to have violated governmental regulations in the labeling, promotion, sale or distribution of those products. A significant recall, withdrawal or seizure of any of the products we sell may require significant management attention, would likely result in substantial and unexpected costs and may adversely affect our business, financial condition or results of operations. Furthermore, a

 

 

 

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recall, withdrawal or seizure of any of our products may adversely affect consumer confidence in our brands and thus decrease consumer demand for our products. In addition, the failure of those products to comply with applicable regulatory and legislative requirements could prevent us from marketing the products or require us to recall or remove such products from the market, which in certain cases could materially and adversely affect our business, financial condition and results of operations.

RISKS RELATED TO REGULATORY MATTERS

The FDA approval process is time-consuming and expensive and we may not obtain FDA approval required to commercialize our product candidates.

The development, testing, manufacturing and approval of our product candidates are subject to extensive federal, state and local regulation in the United States and other countries. Satisfaction of all regulatory requirements typically takes years, is dependent upon the type, complexity and novelty of the product candidate, and requires the expenditure of substantial resources for research, development and testing. Substantially all of our operations are subject to compliance with FDA regulations. Failure to adhere to applicable FDA regulations by us or our licensees, if any, would have a material adverse effect on our operations and financial condition.

We may encounter delays or rejections during any stage of the regulatory review and approval process based upon the failure of clinical or laboratory data to demonstrate compliance with, or upon the failure of the product candidates to meet, the FDA’s requirements for safety, efficacy and quality; and those requirements may become more stringent due to changes in regulatory agency policy or the adoption of new regulations.

In addition, the FDA may delay, limit or deny approval of a product candidate for many reasons, including: disagreement with the design or implementation of our clinical trials; we may be unable to demonstrate to the satisfaction of the FDA that a product candidate is safe and effective for any indication; the FDA may not accept clinical data from trials which are conducted at clinical facilities or in countries where the standard of care is potentially different from that of the United States or the patient population is not sufficiently representative of that in the United States; we may be unable to demonstrate that a product candidate’s clinical and other benefits outweigh its safety risks; the FDA may disagree with our interpretation of data from clinical studies or trials; the results of our clinical trials may not demonstrate the safety or efficacy required by the FDA for approval; the FDA may find deficiencies in our manufacturing processes or facilities; and the FDA’s approval policies or regulations may significantly change in a manner rendering our clinical data insufficient for approval.

After submission of an NDA, the FDA may refuse to file the application, deny approval of the application, require additional testing or data or—if the NDA is filed and later approved—require post-marketing testing and surveillance to monitor the safety or efficacy of a product. Under the Prescription Drug User Fee Act, or PDUFA, the FDA has agreed to certain performance goals in the review of NDAs. The FDA’s timelines are flexible and subject to change based on workload and other potential review issues and may delay the FDA’s review of an NDA. Further, the terms of approval of any NDA, including the product labeling, may be more restrictive than we or our licensees, if any, desire and could affect the marketability of any product candidate, if approved.

Even if we comply with all the FDA regulatory requirements, we may not obtain regulatory approval for any of our product candidates in development. If we fail to obtain regulatory approval for any of our product candidates in development, we will have fewer commercialized products than we anticipate and

 

 

 

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correspondingly lower revenue. Even if regulatory approval of our products in development is received, we are only permitted to market our products for the indication(s) approved by the FDA, and such approval may involve limitations on the indicated uses or promotional claims we may make for our products, or otherwise not permit labeling that sufficiently differentiates our product candidates from competitive products with comparable therapeutic profiles. For example, we will not be able to claim that our products have fewer side effects, or improve compliance or efficacy, unless we can demonstrate those attributes to the FDA in comparative clinical trials. Such events would have a material adverse effect on our operations and financial condition.

The FDA also has the authority to revoke or suspend approvals of previously approved products for cause, to debar companies and individuals from participating in the drug-approval process, to request recalls of allegedly violative products, to seize allegedly violative products, to obtain injunctions to close manufacturing facilities allegedly not operating in conformity with cGMPs and to stop shipments of allegedly violative products. In the event the FDA takes any such action relating to our commercialized products or our product candidates, if approved, such action would have a material adverse effect on our operations and financial condition.

We could incur substantial costs and disruption to our business and delays in the launch of our product candidates if our competitors bring legal actions against us, which could harm our business and operating results.

We cannot predict whether our competitors or potential competitors, some of whom we provide technologies and development services to, may bring legal actions against us based on our research, development and commercialization activities, as well as any product candidates or products resulting from these activities, claiming, among other things, infringement of their intellectual property rights, breach of contract or other legal theories. If we are forced to defend any such lawsuits, regardless of whether they are with or without merit or are ultimately determined in our favor, we may face costly litigation and diversion of technical and management personnel. These lawsuits could hinder or delay our ability to enter the market with our product candidates and thereby hinder our ability to influence usage patterns, which could adversely impact our potential revenue from such product candidates. Some of our competitors have substantially greater resources than we do and could be able to sustain the cost of litigation to a greater extent and for longer periods of time than we could. Furthermore, an adverse outcome of a dispute may: require us to pay damages, potentially including treble damages and attorneys’ fees, if we are found to have willfully infringed a third party’s patent or other intellectual property rights; require us to cease selling, making, licensing or using products that are alleged to incorporate or make use of the intellectual property of others; require us to expend additional development resources to reformulate our products; prevent us from marketing and otherwise commercializing a product; and require us to enter into potentially unfavorable royalty or license agreements in order to obtain the rights to use necessary technologies. Royalty or licensing agreements, if required, may be unavailable on terms acceptable to us, or at all. If any of the foregoing occur, it could have a material adverse effect on our business, financial position and results of operations and the market value of our common stock could decline.

We are subject to numerous governmental regulations and it can be costly to comply with these regulations and to develop compliant products and processes.

The processing, formulation, manufacturing, packaging, recordkeeping, reporting, labeling, advertising, promotion, marketing, sale, distribution, import and export of our product candidates and currently marketed products are subject to federal laws and regulation by one or more federal agencies, including the FDA, the US Department of Health and Human Services, or HHS, the Drug Enforcement

 

 

 

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Administration, or DEA, the Federal Trade Commission, or FTC, the US Department of Agriculture, or USDA, and the Environmental Protection Agency, or EPA. These activities are also regulated by various state and local and international laws and agencies of the states and localities in which our products are sold or will be sold. Failure to comply with applicable laws and regulations could result in a warning or untitled letter, recall or seizure of products, imposition of civil penalties, disgorgement of profits, unanticipated compliance expenditures, rejection or delay in approval of applications, total or partial suspension of production or distribution, suspension of the FDA’s review of drug applications and other submissions, injunctions and criminal prosecution. Under certain circumstances, the FDA may also have the authority to revoke previously granted drug approvals. Although we have internal regulatory compliance programs and policies, there can be no assurance that our current or future programs will meet legal and regulatory requirements. If we were deemed to be deficient in any significant way, or if any of the noted risks occur, our business, financial position and results of operations could be materially affected and the market value of our common stock could decline.

Prescription products that are marketed without approved applications must meet certain manufacturing and labeling standards established by the FDA. The FDA has stated in guidance that its policy with respect to the marketing of products without approved applications is that any unapproved drug product on the market prior to September 19, 2011 is subject to the FDA’s risk-based enforcement priorities identified in its compliance policy guide. Under the FDA’s risk-based enforcement approach, the FDA evaluates whether to initiate enforcement action on a case-by-case basis, but gives higher priority to enforcement action against products in certain categories, such as those marketed as unapproved drugs with potential safety risks or that lack evidence of effectiveness. Unapproved drugs introduced to the market after September 19, 2011, however, are subject to immediate enforcement action at any time, without prior notice and without regard to the stated enforcement priorities.

The FDA closely regulates the post-approval marketing and promotion of drugs, including direct-to-consumer advertising, industry-sponsored scientific and educational activities and promotional activities, including those activities involving the Internet. Drugs may be marketed only for the approved indications and in accordance with the provisions of the approved labeling. If the FDA were to take the position that we are promoting our product candidates, if approved, outside their approved indications or fail to provide adequate safety information, we could be subject to enforcement action by the FDA. This could include untitled letters as well as Warning Letters, the response to which may include cessation of dissemination of the promotional materials at issue and corrective actions. Undertaking such actions can be time-consuming and costly.

In addition, the FDA regulates dietary supplements, such as our Ocean Blue® brand of omega-3 products, our prenatal vitamins and our dental health supplements. Although dietary supplements may generally be marketed without FDA premarket review and approval, the manufacturing of such products is subject to dietary supplement cGMPs, and the FDA regulates the advertising and promotion of such products. We cannot expressly or implicitly represent that a dietary supplement will diagnose, cure, mitigate, treat or prevent a disease, or such products will be considered drugs. We make certain statements of nutritional support in labeling for our omega-3 dietary supplements for which we have not notified the FDA. We believe that such notification is not required, but the FDA could take a contrary view. In addition, the FDA could allege that our fluoride rinse product cannot be marketed as a dietary supplement as it is not intended to be ingested. If the FDA determines that a particular statement of nutritional support has not been properly submitted, or is an unacceptable drug claim or the product is otherwise misbranded and/or adulterated or can not be marketed as a dietary supplement, the product could be subject to regulatory action including issuing an untitled letter or a Warning Letter, or prohibiting the use of the claim. Furthermore, claims on labeling and promotional materials for our

 

 

 

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dietary supplements could be challenged by the FDA, the FTC, competitors or consumers and if the FDA or the FTC determines that particular claims relating to our products are not adequately supported by available scientific evidence, we could be subject to regulatory action. Enforcement action by the FDA or the FTC could have a material adverse effect on our business, financial position and results of operations and could cause the market value of our common stock to decline.

If we are found in violation of federal or state “fraud and abuse” laws or other healthcare laws, we may face penalties, which may adversely affect our business, financial condition and results of operation.

In addition to the FDA restrictions on marketing of pharmaceutical products, several other types of federal, state and foreign healthcare laws have been applied in recent years to restrict certain marketing practices in the pharmaceutical industry. These laws include, among others, anti-kickback laws, false claims laws, false statement laws, civil monetary penalties laws, privacy and security laws, and transparency laws.

Federal false claims, false statements and civil monetary penalties laws prohibit, among other things, any person from knowingly presenting, or causing to be presented, a false claim for payment to the federal government or knowingly making, or causing to be made, a false statement to get a false claim paid. For example, cases have been brought under the false claims laws alleging that off-label promotion of pharmaceutical products or the provision of kickbacks have resulted in the submission of false claims to governmental healthcare programs. The federal Anti-Kickback Statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration to induce, or in return for, purchasing, leasing, ordering or arranging for the purchase, lease or order of any healthcare item or service reimbursable under Medicare, Medicaid or other federally financed healthcare programs.

In addition, we and our customers may be subject to data privacy and security regulation, including the Health Insurance Portability and Accountability Act of 1996, or HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH, and their respective implementing regulations, which impose specified requirements relating to the privacy, security and transmission of individually identifiable health information.

Additionally, the federal Physician Payments Sunshine Act within the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, and its implementing regulations, require certain manufacturers of drugs, devices, biologics and medical supplies to report annually information related to certain payments or other transfers of value provided to physicians and teaching hospitals, and certain ownership and investment interests held by physicians and their immediate family members.

Most states also have statutes or regulations similar to these federal laws, which may be broader in scope and apply to items such as pharmaceutical products and services reimbursed by private insurers, as well as government payors. If we are found in violation of any of these laws, we could be subject to significant civil, criminal and administrative penalties, damages, fines, disgorgement, individual imprisonment, exclusion from governmental funded federal or state healthcare programs, contractual damages, reputational harm, diminished profits and future earnings, and the curtailment or restructuring of our operations.

 

 

 

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Our technologies and services activities are regulated by federal, state and local governmental authorities subjecting us to compliance costs.

Our operations in Riviera Beach, Florida provide technologies and services and pre-commercial and commercial manufacturing to third-party pharmaceutical companies and are intended for use in the manufacture of our product candidates, if approved. The manufacturing, distribution, processing, formulation, packaging, storage, tracking, reporting, quality control and disposal functions are subject to numerous and complex federal, state and local governmental regulations including, but not limited to, Good Laboratory Practices, or GLPs, GCPs and cGMPs in the United States. In the United States, we must maintain our facility’s licenses and other approvals, including its DEA and FDA registrations, which includes the successful completion of unannounced inspections. Failure to maintain our facility licenses and registrations would require new testing and compliance inspections. Compliance with all federal, state and local requirements is difficult and expensive. Manufacturers and their facilities are subject to continual review and periodic inspections. For example, before approving a drug marketing application, the FDA conducts a pre-approval inspection of the manufacturing facility listed in the application; the FDA has not yet conducted a pre-approval inspection of our facility for any of the drugs we plan to manufacture for customers under our agreements, but we anticipate such an FDA inspection to occur in 2015. We submitted a pre-registration filing package with the DEA in December 2014 and the DEA has completed its inspection of our facility. However, if we do not receive DEA registration or, if once registered, we fail to comply with the DEA requirements it could result in penalties, suspension of manufacturing or testing, implementation of costly compliance measures, loss of permits or licenses or closure of our facility. Each of the above-listed occurrences could have a material and adverse effect on our business, financial condition and current operations, and could negatively affect our ability to service our third-party customers or meet our contractual commitments, as well as significantly delay or prevent us from developing and commercializing our own product candidates.

If our third-party customers file complaints about our services or our facility, we could be subject to lawsuits and governmental agencies, including the DEA or FDA, may impose restrictions or limitations on our activities or potentially close our facility. We are subject to ongoing periodic unannounced inspection by the FDA, DEA and non-US regulatory authorities to ensure strict compliance with GLP, GCP and cGMPs and other applicable government regulations and corresponding standards. There can be no assurance that the FDA, DEA or other regulatory agencies will find our manufacturing activities to be in compliance with GLP, GCP and cGMP requirements or other applicable requirements. The FDA last inspected our facility in August 2013 for compliance with the dietary supplement cGMP requirements and found four minor instances of noncompliance. These issues have been remediated and we believe our facility is now in material compliance with all applicable government regulations. For more details, see “Business—Manufacturing and Quality Control.”

If we fail to achieve and maintain high laboratory testing standards, clinical research standards or manufacturing standards in compliance with GLP, GCP and cGMP regulations, we may experience testing, research or manufacturing errors or results leading to problems that could seriously harm our business, financial condition and reputation and could result in significant legal liability and may also result in: restrictions on the marketing or manufacturing of any product, withdrawal of a product from the market, or voluntary or mandatory product recalls; fines, warning or untitled letters or holds on clinical trials; refusal by the FDA to approve pending applications or supplements to approved applications filed, or suspension or revocation of product approvals; product seizure or detention, or refusal to permit the import or export of products; and injunctions, the imposition of civil penalties or criminal prosecution.

 

 

 

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We expect to generate a significant component of our future revenue from the sale of products we develop for our customers. However, these products have not been approved by the FDA and our customers are currently waiting for approval on several ANDAs in which we are named as manufacturer. We may experience delays or fail to comply with regulatory guidelines. These guidelines and compliance issues could range from product approval rejection to failure of our facility to pass an FDA preapproval inspection for the given products. Additionally, once these products are approved, there is a risk that the market potential may decline and demands for generic drugs in these therapeutic areas may be significantly reduced. Such a decline in demand could reduce the volume of the products that we manufacture for third parties and could have a negative impact to our revenue and results of operations.

Significant safety concerns could arise for our products, which could have a material adverse effect on our sales and results of operations.

Investigational drugs typically receive regulatory approval based on data obtained in controlled clinical trials of limited duration. Following regulatory approval, these products will be used over longer periods of time in many patients. Even if we succeed in our clinical trials and in gaining FDA approval for one or more of our product candidates, once commercialized, investigators may conduct additional, and perhaps more extensive, studies on its safety. If new safety issues are reported, we may be required to amend the conditions of use for any product candidate we develop and commercialize.

For example, we may be required to provide additional warnings in a product’s labeling, narrow its approved intended use or conduct post-marketing studies of any of our products that obtain FDA approval, any of which could reduce the product’s market acceptance. If serious safety issues arise with a product, sales of the product could be halted by us or by regulatory authorities and the FDA may withdraw its approval of any NDAs for which we obtain approval. Safety issues affecting suppliers’ or competitors’ products also may reduce the market acceptance of our products.

We deal with hazardous materials and must comply with environmental, health and safety laws and regulations, which can be expensive and can restrict how we do business and/or give rise to significant liabilities.

We are subject to various environmental, health and safety laws and regulations, including those governing air emissions, water and wastewater discharges, noise emissions, the generation, use, storage, management, transportation and disposal of our products and hazardous materials and wastes, the cleanup of contaminated sites and the health and safety of our employees. The cost of compliance with these laws and regulations could be significant. In connection with these requirements, including as a result of any accidental contamination or injury, we could be held liable for damages exceeding our available financial resources. We could be subject to monetary fines, penalties, corrective actions or third-party claims as a result of violations of such laws and regulations or noncompliance with applicable environmental permits. As an operator of real property and a generator of hazardous materials and wastes, we also could be subject to environmental cleanup liability, in some cases without regard to fault or whether we were aware of the conditions giving rise to such liability. In addition, we may be subject to liability and may be required to comply with new or existing environmental laws regulating pharmaceuticals in the environment. Environmental, health and safety laws or regulations (or their interpretation) may become more stringent in the future. If any such future revisions require significant changes in our operations, or if we engage in the development and manufacturing of new products or otherwise expand our operations requiring new or different environmental controls, we will have to dedicate additional management resources and incur additional expenses to comply with such laws and regulations.

 

 

 

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In the event of an accident, applicable authorities may curtail our use of hazardous materials and interrupt our business operations. In addition, particularly with respect to our manufacturing facility, we may incur substantial costs to comply with environmental, health and safety regulations and may become subject to the risk of accidental contamination or injury from the use of hazardous materials in our manufacturing process. Our costs, liabilities and obligations pursuant to such environmental, health and safety laws and regulations could have a material adverse effect on our business, financial position and results of operation.

RISKS RELATED TO OUR INTELLECTUAL PROPERTY

If we are unable to obtain and maintain intellectual property protection for our product candidates, or if the scope of the intellectual property protection obtained is not sufficiently broad, our competitors could develop and commercialize product candidates similar or identical to ours, and our ability to successfully commercialize our product candidates may be impaired.

Our success and ability to maintain our competitive position depends on our ability to obtain intellectual property protection for our products and product candidates, including by obtaining patent protection in the United States and other countries or through protection of our trade secrets, including unpatented know-how, technology and other proprietary information. We seek to protect our proprietary position by filing patent applications in the United States and abroad as we deem it appropriate. If we are unable to obtain intellectual property protection for our products and product candidates, whether by obtaining patents or through trade secret protection, our competitors could develop and commercialize products similar or identical to ours, and our ability to successfully commercialize our products and product candidates may be impaired.

We do not own or license rights to any issued patents for any of our commercialized products or our product candidates at this time; however, as of July 31, 2015, our patent portfolio included a total of nineteen pending US patent applications related generally to pharmaceutical compositions and related methods of use, as well as methods of making lipid-based formulations and the compositions therefrom. Included within these pending patent applications are seven pending US provisional patent applications relating to formulations for solubilizing hormones or to certain omega-3-acid ethyl ester compositions and a variety of methods of use. We believe that each of our currently pending patent applications, if issued in their currently pending form, would cover elements of one or more of our product candidates. However, our pending patent applications and any future patent applications that we may file may not result in patents being issued that protect our products or product candidates, in whole or in part, or which effectively prevent others from commercializing competitive products. The patent prosecution process is expensive and time-consuming, and we may not be able to file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner.

It is also possible that we will fail to identify patentable aspects of inventions made in the course of development and commercialization activities in time to obtain patent protection on them. In addition, our patents and patent applications may not be prosecuted and enforced in a manner consistent with the best interests of our business. It is possible that defects of form in the preparation or filing of our patents or patent applications may exist, or may arise in the future, for example, with respect to proper priority claims, inventorship, claim scope or patent term adjustments. Moreover, in some circumstances, we may not have the right to control the preparation, filing and prosecution of patent applications, or to maintain any patents, covering any technology we may license from third parties. Even if our patent applications do result in issued patents with adequate scope to cover our products, third parties may

 

 

 

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challenge their validity, enforceability or scope, which may result in such patents being narrowed, invalidated or held unenforceable. Furthermore, even if they are unchallenged, our patents, if issued, may not be issued 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. Our competitors may thus be able to circumvent our patent rights by developing similar or alternative product candidates in a non-infringing manner.

The patent position of pharmaceutical companies is generally highly uncertain. The degree of patent protection we require may be unavailable or severely limited in some cases and we may not be able to obtain patent protection to adequately protect our rights or permit us sufficient exclusivity, or to allow us to gain or keep a competitive advantage. For example:

 

Ø   we might not have been the first to invent or the first to file, as applicable, patent applications on the inventions covered by each of our pending patent applications;

 

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

 

Ø   the patents of others may have an adverse effect on our business;

 

Ø   any patents we obtain or license from others in the future may not provide us with any competitive advantages or may be challenged or invalidated by third parties;

 

Ø   any patents we obtain or license from others in the future may not be valid or enforceable; and

 

Ø   we may not develop additional proprietary technologies that are patentable.

In the United States, the natural expiration of a utility patent is generally 20 years from the earliest claimed filing date of a non-provisional patent application. Various extensions may be available; however, the life of a patent, and the protection it affords, is limited. Without patent protection for our products, we may be open to competition from similar products or generic versions of such products.

In addition, some of our technologies are not covered by any pending patent application and we rely instead on confidentiality agreements and trade secret law to protect our rights in such technologies. We require all of our employees and consultants to sign confidentiality agreements. The agreements also oblige our employees, and to the extent practicable, our consultants, advisors and collaborators, to assign to us ideas, developments, discoveries and inventions made by such persons in connection with their work with us. We cannot be sure that these agreements will maintain confidentiality, prevent disclosure, or protect our proprietary information or intellectual property; that we have executed such agreements with each party that may have or have had access to our trade secrets; that these agreements will not be breached; or that others will not independently develop substantially equivalent proprietary information or intellectual property.

If our pending patent applications fail to issue as patents, or if applicable intellectual property laws or our confidentiality agreements fail to provide us with sufficient protections for our intellectual property rights and other proprietary information, including our trade secrets, it could have a material adverse effect on our competitive position and our ability to commercialize our product candidates.

Changes in patent law could diminish the value of patents in general, thereby impairing our ability to protect our products and our technologies.

Recent patent reform legislation could increase the uncertainties and costs surrounding the prosecution of any patent applications and the enforcement or defense of any patents that issue. On September 16, 2011, the Leahy-Smith America Invents Act, or the Leahy-Smith Act, was signed into law. The Leahy-

 

 

 

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Smith Act includes a number of significant changes to US patent law. These include provisions that affect the way patent applications are prosecuted, redefine prior art, may affect patent litigation, and switch the US patent system from a “first-to-invent” system to a “first-to-file” system. Under a “first-to-file” system, assuming the other requirements for patentability are met, the first inventor to file a patent application generally will be entitled to the patent on an invention regardless of whether another inventor had made the invention earlier. The United States Patent and Trademark Office, or USPTO, has developed new regulations and procedures to govern administration of the Leahy-Smith Act, and many of the substantive changes to patent law associated with the Leahy-Smith Act, and in particular, the first-to-file provisions, became effective on March 16, 2013. Among some of the other changes to the patent laws are changes that limit where a patentee may file a patent infringement suit and that provide opportunities for third parties to challenge any issued patent in the USPTO. The Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of any patents that issue, all of which could harm our business and financial condition.

In addition, patent reform legislation may pass in the future that could lead to additional uncertainties and increased costs surrounding the prosecution, enforcement and defense of patent applications and any patents we may obtain. Furthermore, the US Supreme Court and the US Court of Appeals for the Federal Circuit have made, and will likely continue to make, changes in how the patent laws of the United States are interpreted. Similarly, foreign courts have made, and will likely continue to make, changes in how the patent laws in their respective jurisdictions are interpreted. We cannot predict future changes in the interpretation of patent laws or changes to patent laws that might be enacted into law by United States and foreign legislative bodies. Those changes may materially affect our patent applications or any patents we may obtain rights to in the future and our ability to obtain and enforce or defend additional patent protection in the future.

Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and our patent protection, if any, could be reduced or eliminated for noncompliance with these requirements.

If we are issued any patents as a result of our current or future patent applications, we will be subject to periodic maintenance and annuity fees on any issued patent, which fees are due to be paid to the USPTO and foreign patent agencies in several stages over the lifetime of the patent. The USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent prosecution process. While an inadvertent lapse can in many cases be cured by payment of a late fee or by other means in accordance with the applicable rules, there are situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. Noncompliance events that could result in abandonment or lapse of a patent or patent application include failure to respond to official actions within prescribed time limits, non-payment of fees and failure to properly legalize and submit formal documents. If we, or in the case of any patents or patent applications that we may in-license in the future, our licensors, fail to maintain any patents and patent applications covering our products or our product candidates, our competitors might be able to enter the market, which would harm our business.

We may not be able to adequately protect our intellectual property rights throughout the world.

Filing, prosecuting and defending patents on all of our products, product candidates and technologies in all countries throughout the world would be prohibitively expensive. As a result, we seek to protect our

 

 

 

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proprietary position by filing patent applications in the United States and in select foreign jurisdictions and cannot guarantee that we will obtain patent protection necessary to protect our competitive position in all major markets. The requirements for patentability may differ in certain countries, particularly developing countries, and the breadth of patent claims allowed can be inconsistent. In addition, the laws of some foreign countries may not protect our intellectual property rights to the same extent as laws in the United States. Consequently, we may not be able to prevent third parties from practicing our inventions in all countries outside the United States. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and, further, may export otherwise infringing products to territories where we obtain patent protection, but enforcement against infringing activities is inadequate.

We do not own or license rights to any patents in any foreign countries; however, we have filed an international Patent Cooperation Treaty patent application directed to various pharmaceutical compositions of omega-3 fatty acid esters. Moreover, when appropriate, we plan to file other international patent applications directed to patentable features of our products and technologies. If patent rights are obtained in foreign jurisdictions, proceedings to enforce such rights could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our future patents, if issued, at risk of being invalidated or interpreted narrowly, could put our pending patent applications at risk of not issuing, and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate and even if we do prevail in any such lawsuits, the damages or other remedies awarded, if any, may not be commercially meaningful. Thus, we may not be able to stop a competitor from marketing and selling in foreign countries products that are the same as or similar to our products or product candidates.

We may become involved in lawsuits to protect or enforce our patent applications, any patents that may be issued to us or other intellectual property rights, which could be expensive, time-consuming and unsuccessful.

Competitors may infringe any patents that may issue to us, or misappropriate or otherwise violate our intellectual property. To counter infringement or unauthorized use, we may be required to file infringement or misappropriation claims, which can be expensive and time-consuming. Any claims we assert against perceived infringers could provoke these parties to assert counterclaims against us alleging that we infringe their patents or claiming that any patents we may obtain rights to are invalid or unenforceable. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, including assertions of lack of novelty, obviousness, non-enablement or lack of statutory subject matter. Grounds for an unenforceability assertion could be an allegation that someone connected with prosecution of the patent withheld relevant material information from the USPTO, or made a materially misleading statement, during prosecution. Third parties may also raise similar validity claims before the USPTO in post-grant proceedings such as ex parte reexaminations, inter partes review or post-grant review, or oppositions or similar proceedings outside the United States, in parallel with litigation or even outside the context of litigation. The outcome following legal assertions of invalidity and unenforceability is unpredictable. We cannot be certain that there is no invalidating prior art, of which we and the patent examiner were unaware during prosecution. For any patents and patent applications we may license, we may have limited rights or no right to participate in the defense of any such patents against challenge by a third party. If a defendant were to prevail on a legal assertion of invalidity or unenforceability, we would lose at least part, and perhaps all, of any future patent protection on our current or future product candidates. Such a loss of patent protection could harm our business. In addition, in a patent infringement proceeding, a court may decide that our patent applications or patents, if issued, are invalid or unenforceable, in whole or in part, construe the patent’s claims narrowly, or refuse to stop the other party from using the technology at issue on the grounds that

 

 

 

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our patent applications do not cover the technology. An adverse result in any litigation proceeding could put one or more of our patents at risk of being invalidated or interpreted narrowly. In addition, if there is any unauthorized use or disclosure of our proprietary information, including our trade secrets, we may not be able to obtain adequate remedies for such breaches. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and the outcome is unpredictable. If any of our trade secrets were to be lawfully obtained or independently developed by a competitor, we would have no right to prevent them, or those to whom they communicate it, from using that technology or information to compete with us. If any of our trade secrets were to be disclosed to or independently developed by a competitor, our competitive position could be harmed.

We may become involved in disputes relating to our intellectual property rights and third parties may initiate legal proceedings alleging that we are infringing their intellectual property rights, the outcome of which would be uncertain and could have a material adverse effect on the success of our business.

Our success will also depend on our ability to operate without infringing the patents and other proprietary intellectual property rights of third parties. This is generally referred to as having the “freedom to operate.” The pharmaceutical industry is characterized by extensive litigation regarding patents and other intellectual property rights. The defense and prosecution of intellectual property claims, interference proceedings and other legal and administrative proceedings relating to intellectual property rights, both in the United States and internationally, involve complex legal and factual questions. As a result, such proceedings are lengthy, costly and time-consuming, and their outcome is highly uncertain. We may become involved in protracted and expensive litigation in order to determine the enforceability, scope and validity of the proprietary rights of others, or to determine whether we have the freedom to operate with respect to the intellectual property rights of others. We may not be aware of all such intellectual property rights that relate to our products or product candidates. Third parties may assert infringement claims against us based on existing or future intellectual property rights. These infringement claims may be asserted by third parties in response to any paragraph IV certifications that we may make in connection with NDAs under Section 505(b)(2). For more information regarding such paragraph IV certifications and the risks related to such infringement claims, see “An NDA submitted under Section 505(b)(2) subjects us to the risk that we may be subject to a patent infringement lawsuit that would delay or prevent the review or approval of our product candidates” in this section.

Patent applications in the United States are, in most cases, not published until approximately 18 months after the patent application is filed. The publication of discoveries in the scientific or patent literature frequently occurs substantially later than the date on which the underlying discoveries were made. Therefore, patent applications relating to product candidates similar to ours may have already been filed by others without our knowledge. In the event that a third party has also filed a patent application covering our product candidates or that contains other relevant claims, we may have to participate in an adversarial proceeding, such as an interference or derivation proceeding in the USPTO or similar proceedings in other countries, to determine the priority of invention. In the event an infringement claim is brought against us, we may be required to pay substantial legal fees and other expenses to defend such a claim and, if we are unsuccessful in defending the claim, we may be prevented from pursuing the development and commercialization of a product or product candidate and may be subject to injunctions or damage awards. If it is determined that we have infringed an issued patent and do not have the freedom to operate, we could be subject to injunctions, and compelled to pay significant damages, including punitive damages, and attorneys’ fees if such infringement is determined to be willful.

In the future, the USPTO or a foreign patent office may grant patent rights that may relate to our products or product candidates or other relevant claims to third parties. Subject to the possible issuance

 

 

 

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of these future patents, the claims of which will be unknown until issued, we may need to obtain a license or sublicense to these rights in order to have the appropriate freedom to further develop or commercialize our product candidates. Any required licenses may not be available to us on acceptable terms, if at all. If we need to obtain such licenses or sublicenses, but are unable to do so, we could encounter delays in the development of our product candidates, or be prevented from developing, manufacturing and commercializing our products or product candidates at all.

It is becoming common for third parties to challenge patent claims on any successfully developed product candidate or approved drug. Third-party preissuance submission of prior art to the USPTO, or post grant opposition, derivation, reexamination, inter partes review or interference proceedings, or other preissuance or post grant proceedings in the United States or other jurisdictions provoked by third parties may be necessary to determine the enforceability, scope or validity of certain intellectual property rights or the priority of inventions with respect to our patent applications or future issued patents. An unfavorable outcome could result in our patent rights being narrowed or held invalid and unenforceable or could require us to cease using our technology or commercializing our product candidates, or require us to attempt to license rights to the implicated products or product candidates from the prevailing party in the event that such third party owns or controls relevant rights relating to such products or product candidates. Our business could be harmed if the prevailing party does not offer us a license on commercially reasonable terms or at all. Even if we obtain a license, it may be non-exclusive, thereby giving our competitors access to the same technologies. In any cases where we in-license intellectual property, our failure to comply with the terms and conditions of the applicable license agreements could result in a loss of our rights to use such intellectual property, which could harm our business.

If we or our collaborators become involved in any patent litigation or other legal proceedings, regardless of outcome, we could incur substantial expense, and the efforts of our technical and management personnel could be significantly diverted. A negative outcome of such litigation or proceedings may expose us to the loss of our proprietary position or to significant liabilities, or require us to seek licenses that may not be available from third parties on commercially acceptable terms, if at all.

We may be subject to claims that our employees, consultants or independent contractors have wrongfully used or disclosed confidential information of third parties.

We employ individuals previously employed at other biotechnology or pharmaceutical companies. We may be subject to claims that we or our employees, consultants or independent contractors have inadvertently or otherwise improperly used or disclosed confidential information of these third parties or our employees’ former employers. Further, we may be subject to ownership disputes in the future arising, for example, from conflicting obligations of consultants or others who are involved in developing our product candidates. We may also be subject to claims that former employees, consultants, independent contractors or other third parties have an ownership interest in any patents we may obtain rights to or our other intellectual property. Litigation may be necessary to defend against these and other claims challenging our right to and use of confidential and proprietary information. If we fail in defending any such claims, we may lose our rights to such intellectual property or confidential information, in addition to paying monetary damages. Such an outcome could have a material adverse effect on our business. Even if we are successful in defending against these claims, litigation could result in substantial cost and be a distraction to our management and employees.

 

 

 

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RISKS RELATED TO THIS OFFERING AND OUR COMMON STOCK

An active trading market for our common stock may not develop, and you may not be able to resell your shares of our common stock at or above the initial public offering price.

Prior to this offering, there has been no public market for shares of our common stock. Although we anticipate our common stock being approved for listing on The NASDAQ Global Market, an active trading market for our shares may never develop or be sustained following this offering. The initial public offering price of our common stock will be determined through negotiations between us and the underwriters. This initial public offering price may not be indicative of the market price of our common stock after this offering. In the absence of an active trading market for our common stock, investors may not be able to sell their common stock at or above the initial public offering price or at the time that they would like to sell.

Even if an active trading market were to develop for our common stock, fluctuations in our financial results may cause our stock price to fall.

Forecasting our future revenue is difficult. We are devoting most of our financial resources to the clinical development of our product candidates formulated using our ALT platform. We are also in various stages of clinical development with respect to our product candidates. There can be no assurance that clinical studies related to any of our product candidates will be successful and, even if successful, when, if at all, we would receive FDA approval to commercialize such product candidate. The level of market acceptance of our product candidates may change rapidly. Further, even if we successfully obtain regulatory approval to market our product candidates in the United States, our revenue is also dependent upon the size of the markets outside of the United States, as well as our ability to obtain market approval and achieve commercial success in those jurisdictions. We may in the future incur losses and experience negative cash flow, either or both of which may be significant and may cause our quarterly revenue and operating results to fluctuate significantly.

In addition, our technologies and services customer base is highly concentrated with two customers accounting for most of such revenue. Fluctuations in the buying patterns of these customers, which may result from seasonality, wholesaler buying decisions or other factors outside of our control, could significantly affect the level of our net sales on a period-to-period basis. As a result, it is reasonably likely that our financial results will fluctuate to an extent that may not meet with market expectations and that also may adversely affect our stock price. There are a number of other factors that could cause our financial results to fluctuate unexpectedly, including:

 

Ø   product sales;

 

Ø   cost of product sales;

 

Ø   achievement and timing of research and development milestones;

 

Ø   cost and timing of clinical trials, regulatory approvals and product launches;

 

Ø   marketing and other expenses;

 

Ø   manufacturing or supply issues; and

 

Ø   potential acquisitions of businesses, technologies and ANDAs, and our ability to successfully integrate any such acquisitions into our existing business.

 

 

 

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Because of the numerous risks and uncertainties associated with pharmaceutical product development, we are unable to fully predict the timing or amount of our expenses, but we expect to continue to incur substantial expenses related to the development of our product candidates, and for these expenses to continue to increase as we expand our development activities and product portfolio. Our ability to achieve and maintain profitability and positive cash flow is dependent upon the completion of this offering and our ability to generate revenues through sales of our product candidates. We cannot guarantee that we will be successful in generating revenues related to sales of our product candidates in the future.

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our share price and trading volume could decline.

Assuming we are approved for listing on The NASDAQ Global Market, the trading market for our common stock will depend on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. There can be no assurance that analysts will cover us or provide favorable coverage. If one or more of the analysts who cover us downgrade our stock or change their opinion of our stock, our share price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.

Stockholders may suffer substantial dilution related to issued common stock warrants and options, and our outstanding common stock warrants and options may have an adverse effect on the market price of our common stock.

As of June 30, 2015, we had a number of agreements or obligations that may result in dilution to investors. These include:

 

Ø   options to purchase 2,256,216 shares of our common stock at a current weighted average exercise price of approximately $0.97; and

 

Ø   warrants to purchase a total of 185,767 shares of our common stock at a current weighted average exercise price of approximately $3.64.

We also established an equity incentive compensation plan for our management, employees and consultants. Pursuant to this plan, up to 2,129,645 shares of our common stock are available for issuance as of June 30, 2015. We have granted, and expect to grant in the future, options to purchase shares of our common stock to our directors, employees and consultants. To the extent that warrants or options are exercised, our stockholders will experience dilution and our stock price may decrease.

Additionally, the sale, or even the possibility of the sale, of the shares of common stock underlying these warrants and options could have an adverse effect on the market price for our securities or on our ability to obtain future financing.

Our Chief Executive Officer, Dr Sancilio, will continue to have substantial control over us after this offering and could delay or prevent a change in control of our company.

After the completion of this offering, Dr Sancilio, our Chairman, President and Chief Executive Officer, will beneficially own, in the aggregate,     % of our outstanding common stock. As a result, he will have the ability to control the outcome of matters submitted to our stockholders for approval, including the election of directors and any merger, consolidation or sale of all or substantially all of our assets. In

 

 

 

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addition, Dr Sancilio will have substantial influence over the management and affairs of our company. Accordingly, this concentration of ownership might harm the market price of our common stock by:

 

Ø   delaying, deferring or preventing our change in control;

 

Ø   impeding a merger, consolidation, takeover or other business combination involving us; or

 

Ø   discouraging a potential acquiror from making a tender offer or otherwise attempting to obtain control of us.

Our management has broad discretion in the use of the net proceeds from this offering and may not use them effectively.

Although we currently intend to use the net proceeds from this offering in the manner described in the section entitled “Use of Proceeds,” our management will have broad discretion in the application of the balance of the net proceeds from this offering and could spend the proceeds in ways that you do not agree with or that do not improve our results of operations or enhance the value of our common stock. The failure by our management to apply these funds effectively could result in financial losses that could have a material adverse effect on our business, cause the price of our common stock to decline and delay the commercialization of any of our product candidates. Pending their use, we may invest the net proceeds from this offering in a manner that does not produce income or that loses value.

Even if there is no immediate need for capital, we may choose to issue debt or shares of our common stock in the future and such issuances, if any, could have a dilutive effect on your investment.

We may choose to issue debt or shares of our common stock for investment, acquisition or other business purposes. Even if there is not an immediate need for capital, we may choose to issue securities to sell in public or private equity markets if and when conditions are favorable. Raising funds by issuing securities would dilute the ownership interests of our existing stockholders. Additionally, certain types of equity securities we may issue in the future could have rights, preferences or privileges senior to the rights of existing holders of our common stock.

We cannot assure you that we will declare dividends or have the available cash to make dividend payments, and as a result you may not receive any return on investment unless you sell your common stock for a price greater than that which you paid for it.

Although we do not currently intend to pay dividends, to the extent we decide in the future to pay dividends on our common stock, we will pay such dividends at such times and in such amounts as the board of directors determines appropriate and in accordance with applicable law. Our board of directors may take into account general and economic conditions, our financial condition and results of operations, our available cash and current and anticipated cash needs, capital requirements, contractual, legal, tax and regulatory restrictions and implications on the payment of dividends by us to our stockholders or by our subsidiaries to us and such other factors as our board of directors may deem relevant. In addition, our ability to pay dividends is limited by covenants of our existing and outstanding indebtedness and may be limited by covenants of any future indebtedness we or our subsidiaries incur. There can be no assurance that we will pay dividends going forward or as to the amount of such dividends. As a result, you may not receive any return on an investment in our common stock unless you sell our common stock for a price greater than that which you paid for it.

 

 

 

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We are a holding company that depends on cash flow from our wholly owned subsidiary to meet our obligations, and any inability of our subsidiary to pay us dividends or make other payments to us when needed could disrupt or have a negative impact on our business.

We are a holding company with no business operations of our own. Our only significant assets are the outstanding capital stock of our subsidiary, Sancilio & Company, Inc., which will conduct all of our operations and own all of our operating assets. Accordingly, our ability to pay our obligations is dependent upon dividends and other distributions from our subsidiary to us. The ability of our subsidiary to pay dividends or make other payments or distributions to us will depend on its respective operating results, and the terms of our current and future financing agreements, which may preclude dividends, distributions or other payments.

In addition, because we are a holding company, claims of our security holders will be structurally subordinated to all existing and future liabilities and obligations (whether or not for borrowed money) of our subsidiary. Therefore, in the event of our bankruptcy, liquidation or reorganization, our assets and those of our subsidiary will be able to satisfy the claims of our security holders only after all of our and our subsidiary’s liabilities and obligations have been paid in full.

Anti-takeover provisions in our charter documents and under Delaware law could discourage, delay or prevent a change in control of the Company and may affect the trading price of our common stock.

We are a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation Law may discourage, delay or prevent certain changes in control unless such change in control is approved by a majority of our disinterested stockholders. In addition, the terms of our amended and restated certificate of incorporation and amended and restated bylaws, each of which will become effective, subject to stockholder approval, upon the effectiveness of the registration statement of which this prospectus is a part, may discourage, delay or prevent a change in our management or control over us that stockholders may consider favorable.

Specifically, our amended and restated certificate of incorporation and amended and restated bylaws will:

 

Ø   provide for a classified board of directors with staggered three-year terms;

 

Ø   authorize the issuance of “blank check” preferred stock by our board of directors without any need for action by stockholders;

 

Ø   not permit cumulative voting in the election of directors, which would otherwise allow less than a majority of stockholders to elect director candidates;

 

Ø   provide that vacancies on the board of directors, including newly created directorships, may be filled by the board of directors;

 

Ø   provide that removal of directors be only for cause and only upon the affirmative vote of at least 66 23% of the shares of common stock entitled to vote generally in the election of directors;

 

Ø   provide that certain provisions may be amended only by the affirmative vote of at least 66 23% of the shares of common stock;

 

Ø   delegate the sole power to a majority of the board of directors to fix the number of directors;

 

 

 

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Ø   eliminate the ability of stockholders to call special meetings of stockholders;

 

Ø   establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings; and

 

Ø   eliminate the ability of stockholders to act by written consent in lieu of a meeting.

Moreover, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner. This could discourage, delay or prevent someone from acquiring us or merging with us, whether or not it is desired by, or beneficial to, our stockholders.

Our common stock is and will be subordinate to all of our existing and future indebtedness and any preferred stock.

Shares of our common stock are common equity interests in us and, as such, will rank junior to all of our existing and future indebtedness and other liabilities. Additionally, holders of our common stock may become subject to the prior dividend and liquidation rights of holders of any classes or series of preferred stock that our board of directors may designate and issue without any action on the part of the holders of our common stock. Furthermore, our right to participate in a distribution of assets upon any of our subsidiaries’ liquidation or reorganization is subject to the prior claims of that subsidiary’s creditors and preferred stockholders.

RISKS RELATED TO AN EMERGING GROWTH COMPANY

We will face new challenges, increased costs and administrative responsibilities as a public company, particularly after we are no longer an “emerging growth company.”

As a publicly traded company with listed equity securities, we will need to comply with certain laws, regulations and requirements, including certain provisions of the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley, certain regulations of the Securities and Exchange Commission, or SEC, and certain of the NASDAQ listing rules applicable to public companies. Complying with these statutes, regulations and requirements will occupy a significant amount of the time of our board of directors and management and will significantly increase our costs and expenses.

We will need to:

 

Ø   institute a more comprehensive compliance framework;

 

Ø   update, evaluate and maintain a system of internal controls over financial reporting in compliance with the requirements of Section 404 of Sarbanes-Oxley and the related rules and regulations of the SEC;

 

Ø   prepare and distribute periodic public reports in compliance with our obligations under the federal securities laws;

 

Ø   revise our existing internal policies, such as those relating to disclosure controls and procedures and insider trading;

 

Ø   comply with SEC rules and guidelines including a requirement to provide our consolidated financial statements in interactive data format using eXtensible Business Reporting Language;

 

 

 

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Ø   involve and retain to a greater degree outside counsel and accountants in the above activities; and

 

Ø   enhance our investor relations function.

However, for as long as we are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or JOBS Act, we are permitted to, and intend to, take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. We will remain an emerging growth company for up to five years, although we would cease to be an emerging growth company as of December 31 of a particular year (i) if we had gross revenue of $1 billion or more in such year, (ii) if the market value of our common stock that is held by non-affiliates exceeds $700 million as of June 30 in such year, (iii) if at any point in such year, we would have issued more than $1 billion of non-convertible debt during the three-year period prior thereto or (iv) on the date on which we are deemed a “large accelerated issuer” as defined under the federal securities laws. For so long as we remain an emerging growth company, we will not be required to:

 

Ø   have an auditor report on our internal control over financial reporting pursuant to Section 404(b) of Sarbanes-Oxley;

 

Ø   comply with any requirement that may be adopted by the Public Company Accounting Oversight Board, or PCAOB, regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis);

 

Ø   submit certain executive compensation matters to shareholder advisory votes pursuant to the “say on frequency” and “say on pay” provisions (requiring a non-binding shareholder vote to approve compensation of certain executive officers) and the “say on golden parachute” provisions (requiring a non-binding shareholder vote to approve golden parachute arrangements for certain executive officers in connection with mergers and certain other business combinations) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010; and

 

Ø   include detailed compensation discussion and analysis in our filings under the Securities Exchange Act of 1934, as amended, or Exchange Act, and instead may provide a reduced level of disclosure concerning executive compensation.

Although we intend to rely on the exemptions provided in the JOBS Act, the exact implications of the JOBS Act for us are still subject to interpretations and guidance by the SEC and other regulatory agencies. In addition, as our business grows, we may no longer satisfy the conditions of an emerging growth company. We are currently evaluating and monitoring developments with respect to these new rules, and we cannot assure you that we will be able to take advantage of all of the benefits from the JOBS Act. In addition, we also expect that being a public company subject to these rules and regulations will make it more expensive for us to maintain adequate director and officer liability insurance. These factors could also make it more difficult for us to attract and retain qualified executive officers and members of our board of directors, particularly to serve on our audit committee.

Failure to establish and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 could have a material adverse effect on our business and share price.

As a publicly traded company, we will be required to document and test our internal control procedures in order to satisfy the requirements of Section 404 of Sarbanes-Oxley, which will require, beginning with the filing of our second annual report with the SEC, annual management assessments of the effectiveness

 

 

 

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of our internal control over financial reporting. However, as an emerging growth company, our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 until the later of the year following our first annual report required to be filed with the SEC or the date we are no longer an emerging growth company. During the course of our testing, we may identify material weaknesses that we may not be able to remediate in time to meet our deadline for compliance with Section 404.

Testing and maintaining internal control can divert our management’s attention from other matters that are important to the operation of our business. We also expect the regulations to increase our legal and financial compliance costs, make it more difficult to attract and retain qualified executive officers and members of our board of directors, particularly to serve on our audit committee, and make some activities more difficult, time-consuming and costly. We may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 and, when applicable to us, our independent registered public accounting firm may not be able or willing to issue an unqualified report on the effectiveness of our internal control over financial reporting. If we conclude that our internal control over financial reporting is not effective, it could have a material adverse effect on our financial condition, results of operations and market for our common stock, and could subject us to regulatory scrutiny.

 

 

 

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Information regarding forward-looking statements

This prospectus contains “forward-looking statements.” These statements concern expectations, beliefs, projections, plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. All statements, other than statements of historical facts, contained in this prospectus, including statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans and objectives of management and expected market growth are forward-looking statements. The words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Forward-looking statements included in this prospectus include statements regarding:

 

Ø   our ability to develop and commercialize products formulated using our ALT platform to address lipid diseases and disorders and our ability to seek new product candidates that lie within or complement our therapeutic areas of focus that we can develop through acquisition, in-licensing or co-promotion arrangements;

 

Ø   our anticipated filings with the FDA and the timing of such filings;

 

Ø   our ability to rely on the 505(b)(2) regulatory pathway for approval of our lead product candidates;

 

Ø   the potential effects and efficacy of our product candidates on the lipid disorders and related diseases they aim to treat;

 

Ø   the effectiveness of currently available treatments for lipid disorders and related diseases;

 

Ø   the cost-effectiveness of our vertical integration of in-house formulation development, packaging, clinical study services and manufacturing;

 

Ø   estimates of the size of the markets for lipid disorders and related diseases;

 

Ø   our ability to obtain market exclusivity under the Orphan Drug Act for our product candidates that have been granted orphan drug designation and the associated benefits of such designation;

 

Ø   the preclinical and clinical trials that will be necessary to conduct in order to obtain approval of our product candidates;

 

Ø   the expected completion dates and results of our clinical trials and our reliance on CROs and clinical trial sites for the conduct of such trials;

 

Ø   our being named manufacturer in NDAs submitted by our third-party pharmaceutical company customers;

 

Ø   the efficacy of our soft gelatin encapsulation manufacturing methods;

 

Ø   our ability to leverage our operations to generate sufficient cash flows to support our internal research and development efforts;

 

Ø   the expected increases in costs in connection with the continued development and anticipated commercialization of our proprietary product candidates;

 

Ø   our intent to commercialize certain product candidates in-house and out-license the commercial rights for others;

 

Ø   our intent to commercialize future dietary supplements internally in the United States and externally through partners outside the United States;

 

 

 

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Ø   the cost, availability and suitability of the raw material components of our products and product candidates;

 

Ø   our ability to successfully compete in the markets in which we participate;

 

Ø   the condition of our facility and equipment and the ability of both to operate at or above present levels;

 

Ø   the accuracy of our estimates regarding expenses, future revenue, capital requirements and needs for additional financing;

 

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

 

Ø   the anticipated market opportunities, including ability to gain market share, for our product candidates;

 

Ø   our use of the net proceeds from this offering;

 

Ø   the expected increase in costs associated with maintaining compliance with requirements of being a public company;

 

Ø   our beliefs regarding our internal controls with respect to the preparation of our financial statements; and

 

Ø   our expectations regarding the impact of new accounting pronouncements.

These forward-looking statements reflect our current views about future events and are subject to risks, uncertainties and assumptions. We wish to caution readers that certain important factors may have affected and could in the future affect our actual results and could cause actual results to differ significantly from those expressed in any forward-looking statement. The most important factors that could prevent us from achieving our goals, and cause the assumptions underlying forward-looking statements and the actual results to differ materially from those expressed in or implied by those forward-looking statements include, but are not limited to, the following:

 

Ø   our ability to develop and successfully commercialize products formulated using our ALT platform;

 

Ø   our ability to maintain sufficient resources to develop one or more of our product candidates while managing our business;

 

Ø   the loss of any major customers;

 

Ø   a decrease in demand for our products;

 

Ø   our ability to develop commercially successful products and technologies;

 

Ø   our ability to effectively compete in our markets;

 

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

 

Ø   our ability to realize the anticipated market exclusivity and other benefits provided under the Orphan Drug Act for those product candidates that have been granted orphan drug designation;

 

Ø   our ability to obtain licenses for intellectual property from third parties, as needed;

 

Ø   allegations by third parties that we are infringing their intellectual property rights;

 

Ø   difficulties or delays in the development and commercialization of our product candidates;

 

Ø   our ability to estimate the required amount of labor and overhead costs when negotiating agreements with our customers;

 

Ø   diversion of our resources to address product liability lawsuits;

 

Ø   declines in sales volumes and prices of our products resulting from the continuing trend towards consolidation of certain customer groups;

 

 

 

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Ø   our ability to achieve certain target sales numbers, and any discontinuation of the sale of our products by our retail pharmacy customers;

 

Ø   the costs, availability and suitability of the components of the products we manufacture, including active pharmaceutical ingredients, purchased components, compounds and raw materials;

 

Ø   the loss of our Chief Executive Officer and other members of our senior management team, scientific team or other key employees;

 

Ø   adverse outcomes in legal matters;

 

Ø   our ability to obtain and maintain coverage and adequate reimbursement from third-party payors for our products;

 

Ø   the effect on our business of unfavorable publicity or lack of consumer acceptance;

 

Ø   our ability to obtain the FDA approval required to commercialize our product candidates and the FDA’s acceptance of our anticipated regulatory pathway;

 

Ø   product recalls, withdrawals or seizures of our products or products that we manufacture;

 

Ø   significant safety concerns that arise for our products or our product candidates, if approved;

 

Ø   compliance with, and liabilities related to, environmental, health and safety laws and regulations;

 

Ø   lack of development of an active trading market for our common stock;

 

Ø   the effect on our stock price of fluctuations in our financial results;

 

Ø   the substantial control that our Chief Executive Officer, Dr Sancilio, will continue to have over us after this offering;

 

Ø   our broad discretion in the use of the net proceeds from this offering;

 

Ø   anti-takeover provisions in our charter documents and under Delaware law that could discourage, delay or prevent a change in control of the company and may affect the trading price of our common stock; and

 

Ø   our failure to establish and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act of 2002.

Many of these risks are discussed in greater detail under the heading “Risk Factors” in this prospectus. Each of the forward-looking statements included in this prospectus speak only as of the date on which that statement is made. We will not update any forward-looking statement to reflect events or circumstances that occur after the date on which the statement was made.

 

 

 

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Use of proceeds

We estimate that the net proceeds from this offering will be approximately $            , after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, assuming an initial public offering price of $             per share, which represents the midpoint of the price range set forth on the cover page of this prospectus. If the underwriters exercise in full their option to purchase additional shares, the net proceeds to us will be approximately $            , after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

Based upon the number of shares of common stock offered by us in this offering as set forth on the cover page of this prospectus (assuming no exercise of the option to purchase additional shares by the underwriters), a $1.00 increase (decrease) in the assumed initial public offering price of $         per share would increase (decrease) the net proceeds to us from this offering by approximately $         ($        ), if the underwriters exercise in full their option to purchase additional shares, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

The principal purposes of this offering are to obtain additional capital to support our operations, to create a public market for our common stock and to facilitate our future access to the public equity markets. We intend to use the net proceeds of this offering as follows:

 

Ø   approximately $         million to fund the cost of one or more pivotal clinical trials and related activities for SC411;

 

Ø   approximately $         million to fund the cost of one or more pivotal clinical trials and related activities for SC403;

 

Ø   approximately $         million to fund the cost of two PK studies and two Phase II/III clinical trials and related activities for SC401;

 

Ø   approximately $         million to fund the cost of the preclinical and clinical trials and related activities for SC410; and

 

Ø   the remainder for working capital and other general corporate purposes, including the ramp-up of our senior management team and the continued investment in our research and development pipeline of branded pharmaceutical products.

We believe that these amounts will be sufficient to fully fund the development of SC411, SC403, SC401 and SC410 through NDA submission. As we are at earlier stages of research and development for our other product candidates, we cannot anticipate the amount of additional funding that will be necessary to complete the clinical trials and related activities required for these product candidates. Our expected use of net proceeds from this offering represents our current intentions based upon our present plans and business condition. As of the date of this prospectus, we cannot predict with certainty all of the particular uses for the net proceeds to be received upon the completion of this offering, or the amounts that we will actually spend on the uses set forth above. The amounts and timing of our actual use of the net proceeds will vary depending on numerous factors, including our ability to obtain additional financing, the progress, cost and results of our product candidate development programs, including our planned clinical trials, and whether we are able to enter into future collaboration arrangements. As a result, our management will have broad discretion in the application of the net proceeds, and investors will be relying on our judgment regarding the application of the net proceeds from this offering.

 

 

 

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We may also use a portion of the net proceeds from this offering to in-license, acquire or invest in complementary businesses, technologies, products or assets. However, we have no current plans, commitments or obligations to do so.

Pending their use, we plan to invest the net proceeds from this offering in short- and intermediate-term, interest-bearing obligations, investment-grade instruments, certificates of deposit or direct or guaranteed obligations of the US government.

 

 

 

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Dividend policy

We have no current plans to pay dividends on our common stock. The Credit Agreement currently limits our ability to, among other things, pay cash dividends to our stockholders. Our future dividend policy will also depend on the requirements of any future financing agreements to which we may be a party and other factors considered relevant by our board of directors. In addition, any determination to pay dividends in the future will be at the discretion of our board of directors and will depend upon our results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law and other factors that our board of directors deems relevant.

We did not declare or pay any dividends on our common stock in 2015, 2014 or 2013.

 

 

 

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Capitalization

The following table sets forth our capitalization as of June 30, 2015 on:

 

Ø   an actual basis;

 

Ø   a pro forma basis to reflect (i) the automatic conversion of all outstanding shares of our Series A convertible preferred stock, Series B convertible preferred stock and Series C convertible preferred stock into an aggregate of 17,532,076 shares of our common stock prior to the closing of this offering, assuming an initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, and (ii) the filing of our amended and restated certificate of incorporation immediately prior to the closing of this offering; and

 

Ø   a pro forma as-adjusted basis after giving effect to the sale of         shares of common stock by us in this offering at an assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

 

 

 

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You should read this table in conjunction with “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Use of Proceeds” and our consolidated financial statements and the related notes included elsewhere in this prospectus.

 

     As of June 30, 2015  
(in thousands, except share and per share data)    Actual     Pro
Forma
     Pro Forma
As-Adjusted(1)
 
     (unaudited)     (unaudited)      (unaudited)  

Cash and cash equivalents

   $ 8,016      $                    $                
  

 

 

   

 

 

    

 

 

 

Debt:

       

Term loan

     895        

Redeemable preferred stock:

       

Series A redeemable convertible preferred stock, par value $0.01 per share, 106,964 shares authorized, issued and outstanding (Liquidation preference of $0.72 for 90,000 shares and $1.11 for 16,964 shares) actual; no shares authorized, no shares issued and outstanding pro forma and pro forma as-adjusted

     8,345        

Series B redeemable convertible preferred stock, par value $0.01 per share, 15,404 shares authorized, issued and outstanding (Liquidation preference of $1.30) actual; no shares authorized, no shares issued and outstanding pro forma and pro forma as-adjusted

     2,178        

Series C redeemable convertible preferred stock, par value $0.01 per share, 5,295,276 shares authorized, issued and outstanding (Liquidation preference of $5.67) actual; no shares authorized, no shares issued and outstanding pro forma and pro forma as-adjusted

     21,938        

Stockholders’ equity (deficit)

       

Common stock, par value $0.01 per share; 25,000,000 shares authorized, 4,152,722 issued and outstanding, actual; shares authorized,             shares issued and outstanding, pro forma;             shares authorized,             shares issued and outstanding, pro forma as-adjusted

     42        

Additional paid-in capital

     —          

Accumulated other comprehensive income, net

     4,965        

Accumulated deficit

     (18,334     
  

 

 

   

 

 

    

Total stockholders’ equity (deficit)

     (13,327     
  

 

 

   

 

 

    

 

 

 

Total capitalization

   $ 20,029        
  

 

 

   

 

 

    

 

 

 

 

(1)   Each $1.00 increase (decrease) in the assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the pro forma as-adjusted amount of each of cash and cash equivalents, total stockholders’ equity (deficit) and total capitalization by approximately $            , assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of             shares in the number of shares offered by us at the assumed initial public offering price of $             per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the pro forma as-adjusted amount of each of cash and cash equivalents, total stockholders’ equity (deficit) and total capitalization by approximately $            .

 

 

 

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The number of shares of our common stock in the table above excludes:

 

Ø   2,256,216 shares of common stock issuable upon exercise of stock options outstanding as of June 30, 2015, at a weighted average exercise price of $0.97 per share;

 

Ø   2,129,645 shares of common stock reserved for issuance under our 2015 Plan (including shares of common stock which were reserved for issuance under our 2012 Plan and added to the shares reserved under the 2015 Plan when the 2012 Plan was terminated); and

 

Ø   185,767 shares of common stock issuable upon exercise of warrants to purchase our common stock outstanding as of June 30, 2015, at a weighted average price of $3.64 per share.

Unless otherwise indicated, all information in this prospectus reflects and assumes the following:

 

Ø   the automatic conversion of all outstanding shares of our Series A convertible preferred stock, Series B convertible preferred stock and Series C convertible preferred stock into an aggregate of 17,532,076 shares of our common stock immediately prior to the closing of this offering;

 

Ø   the issuance of an aggregate of 185,767 shares of our common stock upon exercise of outstanding warrants to purchase and options exercisable for our common stock as of June 30, 2015;

 

Ø   the filing of our amended and restated certificate of incorporation and the adoption of our amended and restated bylaws immediately prior to the closing of this offering;

 

Ø   no exercise of the underwriters’ over-allotment option to purchase additional shares of our common stock; and

 

Ø   a     -for-     reverse split of our common stock to be effected prior to the closing of this offering.

 

 

 

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Dilution

If you invest in shares of our common stock in this offering, your investment will be immediately diluted to the extent of the difference between the initial public offering price per share of common stock and the net tangible book value per share of common stock after this offering.

Dilution results from the fact that the per share offering price of the shares of common stock is substantially in excess of the net tangible book value per share attributable to the shares of common stock held by existing owners.

Our net tangible book value as of June 30, 2015 was $(13.3) million, or $(3.28) per share of common stock. We calculate net tangible book value per share by taking the amount of our total assets, reduced by the amount of our total liabilities and redeemable convertible preferred stock, and then dividing that amount by the number of shares of common stock outstanding.

After giving effect to our sale of the shares in this offering at an assumed initial public offering price of $             per share, the midpoint range described on the cover of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us, our net tangible book value as of June 30, 2015 would have been $            , or $             per share of common stock. This represents an immediate increase in net tangible book value of $             per share of common stock to our existing owners and an immediate and substantial dilution in net tangible book value of $             per share of common stock to investors in this offering at the assumed initial public offering price.

The following unaudited table illustrates this dilution on a per share of common stock basis assuming the underwriters do not exercise their option to purchase additional shares of common stock:

 

Assumed initial public offering price per share of common stock

     $                

Net tangible book value per share of common stock as of June 30, 2015

   $ (3.28  

Increase in net tangible book value per share of common stock attributable to investors in this offering

   $       
  

 

 

   

 

 

 

As-adjusted net tangible book value per share of common stock after the offering

     $     
  

 

 

   

 

 

 

Dilution per share of common stock to investors in this offering

     $     
  

 

 

   

 

 

 

Each $1.00 increase in the assumed initial public offering price of $             per share of our common stock would increase our net tangible book value after giving effect to the offering by $            , or by $             per share of our common stock, assuming the number of shares offered by us remains the same and after deducting the underwriting discounts and commissions and the estimated offering expenses payable by us. A $1.00 decrease in the assumed initial public offering price per share would result in equal changes in the opposite direction.

 

 

 

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Dilution

 

 

The following table summarizes, as of June 30, 2015, the total number of shares of common stock purchased from us, the total cash consideration paid to us, and the average price per share paid by existing owners and by new investors. As the table shows, new investors purchasing shares in this offering will pay an average price per share substantially higher than our existing owners paid. The table below assumes an initial public offering price of $             per share, the midpoint of the price range set forth on the cover page of this prospectus, for shares purchased in this offering and excludes the estimated underwriting discounts and commissions and estimated offering expenses payable by us:

 

     Shares of Common
Stock Purchased
    Total
Consideration
    Average Price
Per Share of
Common Stock
 
      Number    Percent     Amount      Percent    
     (Dollar amounts in thousands, except per share amounts)  

Existing owners

               $                             $                

Investors in this offering

               $                             $                
  

 

  

 

 

   

 

 

    

 

 

   

Total

        100.0   $                      100.0   $                
  

 

  

 

 

   

 

 

    

 

 

   

Each $1.00 increase in the assumed offering price of $             per share would increase total consideration paid by investors in this offering and total consideration paid by all stockholders by $            , assuming the number of shares offered by us remains the same and after deducting the underwriting discounts and commissions and the estimated offering expenses payable by us. A $1.00 decrease in the assumed initial public offering price per share would result in equal changes in the opposite direction.

The dilution information above is for illustration purposes only. Our net tangible book value following the consummation of this offering is subject to adjustment based on the actual initial public offering price of our shares and other terms of this offering determined at pricing.

 

 

 

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Selected consolidated financial data

The following table sets forth selected consolidated financial and other data as of and for the periods indicated. We derived the selected statement of operations data for the years ended December 31, 2013 and 2014 and the selected balance sheet data as of December 31, 2013 and 2014 from our audited consolidated financial statements included elsewhere in this prospectus. We derived the summary statement of operations data for the six months ended June 30, 2014 and 2015 and the summary consolidated balance sheet data as of June 30, 2015 from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. We have prepared the unaudited condensed consolidated financial statements on the same basis as our audited consolidated financial statements and, in our opinion, have included all adjustments, which include only normal recurring adjustments, necessary to present fairly in all material respects our financial position and results of operations. The results for any interim period are not necessarily indicative of the results that may be expected for future interim periods or for the full year. Additionally, our historical results are not necessarily indicative of the results expected for any future period.

You should read the selected consolidated financial data below together with our consolidated financial statements included elsewhere in this prospectus including the related notes thereto appearing elsewhere in this prospectus, as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the other financial information included elsewhere in this prospectus.

 

    Year Ended
December 31,
    Six Months
Ended June 30,
 
(in thousands, except share and per share data)   2013(1)     2014     2014(1)     2015  
                (unaudited)     (unaudited)  

Statement of Operations Data:

       

Revenue:

       

Net product sales

  $ 4,201      $ 6,362      $ 3,518      $ 4,398   

Technologies and services revenue

    5,274        8,847        3,666        9,144   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    9,475        15,209        7,184        13,542   

Costs and expenses:

       

Direct costs of product sales related to direct material

    1,858        2,541        1,311        1,298   

Direct costs of technologies and services related to direct material and direct laboratory labor

    555        1,051        432        941   

Total unallocated costs

    3,337        6,617        2,343        3,628   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of product sales and technologies and services

    5,750        9,759        4,086        5,867   

Sales and marketing

    2,166        1,799        988        636   

Research and development

    972        2,108        499        1,879   

General and administrative

    2,217        8,298        4,040        5,488   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

    11,105        21,964        9,613        13,870   
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (1,630     (6,755     (2,429     (328

Other income (expense):

       

Interest income

    6        32        7        15   

Interest expense

    (155     (201     (107     (51
 

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense

    (149     (169     (100     (36
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

    (1,779     (6,924     (2,529     (364

Benefit for income taxes

    822        189        293        104   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (957     (6,735     (2,236     (260

Preferred dividends

    (160     (1,142     (255     (873

Accretion of preferred stock to redemption value

    —          (1,016     (178     (862
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stock

  $ (1,117   $ (8,893   $ (2,669   $ (1,995
 

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ (0.46   $ (2.51   $ (0.84   $ (0.49
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average number of shares outstanding:

       

Basic and diluted

    2,438,515        3,549,984        3,195,770        4,076,003   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

 

 

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Selected consolidated financial data

 

 

 

     As of December 31,     As of June 30,  
(in thousands)    2013     2014     2015  
                 (unaudited)  

Selected Balance Sheet Data:

      

Cash and cash equivalents

   $ 1,071      $ 12,593      $ 8,016   

Working (deficit) capital

     (607     8,472        4,806   

Total assets

     16,919        30,432        33,545   

Long-term debt

     2,423        2,702        895   

Redeemable convertible preferred stock

     10,644        30,726        32,461   

Total stockholders’ deficit

     (6,810     (15,285     (13,327

 

     Year Ended
December 31,
    Six Months
Ended June 30,
 
(in thousands)    2013     2014     2014     2015  
                 (unaudited)     (unaudited)  

Cash Flow Data:

        

Net cash provided by (used in) operating activities

   $ 833      $ (5,720   $ (1,961   $ (633

Net cash used in investing activities

     (1,241     (1,774     (680     (2,218

Net cash provided by (used in) financing activities

     1,423        19,015        18,921        (1,726

 

     Year Ended
December 31,
    Six Months
Ended June 30,
 
(in thousands)    2013(1)     2014     2014(1)     2015  
     (unaudited)     (unaudited)     (unaudited)     (unaudited)  

Other Financial Data:

        

EBITDA(2)

   $ (1,126   $ (6,109   $ (2,130   $ 97   

Adjusted EBITDA(3)

     (1,090     (3,303     (240     443   

Adjusted EBITDA Margin(4)

     (11.5 )%      (21.7 )%      (3.3 )%      3.3

 

(1)   Our statements of operations data and other financial data for the year ended December 31, 2013 and the six months ended June 30, 2014 and the financial statements from which the data was derived which are included in this prospectus reflects the impact of the restatement which followed our discovery of errors in the accounting for certain sales agreements with unilateral rights of return related to our OTC products which were entered into with retailers during the year ended December 31, 2013. As a result of the restatement, previously reported amounts were restated as follows: revenue was reduced by approximately $2.9 million, income from operations was reduced by approximately $3.2 million, and net income was reduced by approximately $1.8 million for the year ended December 31, 2013, while revenue was reduced by approximately $0.4 million, loss from operations was increased by approximately $0.4 million, and net loss was increased by approximately $0.3 million for the six months ended June 30, 2014. See “Risk Factors—During 2014, we identified a material weakness in our internal control over financial reporting that resulted in restatements of our prior consolidated financial statements. If we are unable to implement and maintain effective internal control over financial reporting in the future, the accuracy and timeliness of our financial reporting may be adversely affected.”
(2)   EBITDA is a non-GAAP financial measure. We define EBITDA as net (loss) income before income tax (expense) benefit, interest expense, net, and depreciation and amortization. Please see the section entitled “Non-GAAP Financial Measures” for more information as to the limitations of using non-GAAP measures and for the reconciliation of EBITDA to net loss, the most directly comparable financial measure calculated in accordance with GAAP.
(3)   Adjusted EBITDA is a non-GAAP financial measure. We define Adjusted EBITDA as EBITDA as further adjusted to exclude legal settlements, stock-based compensation expense and abandoned initial public offering related costs. Please see the section entitled “Non-GAAP Financial Measures” for more information as to the limitations of using non-GAAP measures and for the reconciliation of Adjusted EBITDA to net loss, the most directly comparable financial measure calculated in accordance with GAAP.
(4)   Adjusted EBITDA Margin is a non-GAAP financial measure. We define Adjusted EBITDA Margin as adjusted EBITDA divided by total revenues. Please see the section entitled “Non-GAAP Financial Measures” for more information as to the limitations of using non-GAAP measures and for the reconciliation of Adjusted EBITDA Margin to net loss, the most directly comparable financial measure calculated in accordance with GAAP.

 

 

 

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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 in conjunction with the “Selected Consolidated Financial Data” and our consolidated financial statements and notes thereto appearing elsewhere in this prospectus. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results could differ materially from those anticipated by these forward-looking statements as a result of many factors. We discuss factors that we believe could cause or contribute to these differences below and elsewhere in this prospectus, including those set forth under “Risk Factors” and “Information Regarding Forward-Looking Statements.”

OVERVIEW

We are an integrated specialty pharmaceutical company focused on developing and, in the future, commercializing products based on our proprietary Advanced Lipid Technologies, or ALT, platform. We intend to utilize our current manufacturing facility to manufacture our proprietary product candidates, if approved. ALT is designed to enhance the bioavailability, reduce the food effect and improve the efficacy of lipids and lipophilic APIs. Lipids are hydrophobic or amphipathic molecules, including fatty acids (such as omega-3 fatty acids and omega-6 fatty acids), steroids (including hormones) and fat-soluble vitamins (such as vitamins A, D, E and K). Our business model is to apply our ALT platform to lipids or lipophilic APIs to create unique product candidates that address the disorders and diseases resulting from imbalances of lipids in the body. In addition to our primary focus of developing our proprietary products using our ALT platform, we make use of and license rights to our proprietary ALT platform and our other technologies to third parties as part of our development and manufacture of lipophilic API-based and soft-gelatin products at our facilities.

Our proprietary product pipeline, which has been developed using our proprietary ALT platform, is currently focused on diseases and disorders for which we believe lipids can be used for treatment. Our four lead product candidates are SC411, which targets sickle cell disease, SC403, which targets short bowel syndrome, SC401, which targets severe hypertriglyceridemia, and SC410, which targets non-alcoholic fatty liver disease.

In connection with our licensing and related development and manufacturing services, we provide our customers with assistance throughout all phases of pharmaceutical development and product life cycle management activities from drug design and development through commercialization. These service activities provide us with near-term revenue and operating leverage, allowing us to offset a portion of our overhead related to the development of our own products and product candidates.

We also manufacture and market over-the-counter, or OTC, and behind-the-counter lines of dietary supplements. Our dietary supplement portfolio includes highly concentrated omega-3 fatty acid supplements under our brand Ocean Blue®, prenatal vitamins and dental health products. We market our dietary supplements internally in the United States; while outside of the United States, we intend to utilize partners for the commercialization of these products. We believe that these activities help us defray the costs of building out our manufacturing infrastructure in anticipation of the launch of our proprietary products, if approved.

For the six months ended June 30, 2015, we generated total revenues of $13.5 million, an increase of 89% from $7.2 million for the six months ended June 30, 2014. For the six months ended June 30, 2015, we generated a net loss of $0.3 million, a decrease from a net loss of $2.2 million for the six

 

 

 

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months ended June 30, 2014. For the six months ended June 30, 2015, we generated Adjusted EBITDA of $0.4 million, an increase of $0.7 million from a negative Adjusted EBITDA of $0.2 million for the six months ended June 30, 2014. Adjusted EBITDA is a non-GAAP financial measure discussed below under “Non-GAAP Financial Measures.”

For the year ended December 31, 2014, we generated total revenues of $15.2 million, an increase of 61% from $9.5 million for the year ended December 31, 2013. For the year ended December 31, 2014, we generated a net loss of $6.7 million, an increase from a net loss of $1.0 million for the year ended December 31, 2013. For the year ended December 31, 2014, we generated negative Adjusted EBITDA of $(3.3) million.

We operate our business using one reportable segment: the development, commercialization and manufacture of branded and co-branded prescription, OTC and generic prescription pharmaceutical products.

COMPONENTS OF OUR RESULTS OF OPERATIONS

Revenues

Our revenues are derived from our net products sales and our technologies and services activities. For the six months ended June 30, 2014 and 2015, net product sales represented 49% and 32%, respectively, of our total revenue and technologies and services revenue represented 51% and 68%, respectively, of our total revenue.

For the years ended December 31, 2013 and 2014, net product sales represented 44% and 42%, respectively, of our total revenue and technologies and services revenue represented 56% and 58%, respectively, of our total revenue.

Net Product Sales

Our net product sales revenue is generated from sales of (1) our two prescription dietary supplement product lines of prenatal vitamins and fluoride rinse, drops and tablets as well as co-branded versions of these dietary supplement product lines and (2) our OTC and behind-the-counter lines of Ocean Blue® omega-3 products. Our prescription nutritional products are primarily sold under private label to other pharmaceutical companies, through drug wholesalers, such as McKesson Corporation, Cardinal Health Inc. and AmerisourceBergen Corporation, and directly to physicians.

The chart below summarizes the net product sales for each product category for the six months ended June 30, 2014 and 2015 and for the years ended December 31, 2013 and 2014:

 

(in thousands)

   Year Ended
December 31,
     Six Months Ended
June 30,
 
   2013      2014      2014      2015  
Product Category                  (unaudited)      (unaudited)  

Prenatal Vitamins and Dental Health Products— Proprietary

   $ 2,161       $ 3,545       $ 1,666       $ 2,813   

Prenatal Vitamins and Dental Health Products— Co-Branded

     513         887         622         19   

Ocean Blue® Products

     1,527         1,930         1,230         1,566   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Net Product Sales

   $ 4,201       $ 6,362       $ 3,518       $ 4,398   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

 

 

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The increase in revenue from Prenatal Vitamins and Dental Health Products – Proprietary and the corresponding decrease in revenue of Co-Branded for the six months ended June 30, 2015 as compared to the six months ended June 30, 2014 is primarily the result of an increase in price and, to a lesser degree, an increase in volume from one of our Co-Branded customers transferring their customers directly to us.

Our increase in revenue from our Ocean Blue® Products from December 31, 2013 to 2014 was primarily the result of an increase in the number of products that we offer in the Ocean Blue® line. In mid-2013, we launched our OTC line of Ocean Blue® omega-3 products. Our increase in revenue for the six months ended June 30, 3014 to 2015 was primarily related to increased yield. We currently sell our OTC line of Ocean Blue® products directly to national retail pharmacy chains, smaller regional pharmacy chains and directly to consumers via one of our websites. Our behind-the-counter line of Ocean Blue® products are sold directly to national grocery stores, which place these products behind the pharmacy counter for distribution by a pharmacist. In connection with our initial contract with each of these national retailers, each purchased a significant volume of our products to ensure that it had product in each of its stores. However, certain of these OTC products were sold under sales agreements which provided for unilateral rights of return. In late 2014 and in 2015, two of the national retail pharmacy chains carrying the OTC line of Ocean Blue® products advised us that they were discontinuing carrying these products and were placing the remaining inventory on clearance. While this decision is not expected to materially impact our 2015 revenues while the products are sold on clearance, it is expected to reduce our revenue for Ocean Blue® products by approximately $1.0 million in 2016.

For the six months ended June 30, 2015, 33% and 10% of our net product sales came from McKesson Corporation and Cardinal Health, respectively. For the six months ended June 30, 2014, 22%, 16%, 11%, and 10% of our net product sales came from McKesson Corporation, Cypress Pharmaceuticals, AmerisourceBergen, and Publix Super Markets, respectively.

For the year ended December 31, 2014, 33%, 12%, 11% and 11% of our net product sales came from McKesson Corporation, Cypress Pharmaceuticals, Inc., AmerisourceBergen, and Publix Super Markets, respectively. For the year ended December 31, 2013, 23% and 14% of our net product sales came from McKesson Corporation and Publix Super Markets, respectively.

Technologies and Services Revenue

Our technologies and services revenue is generated by services that we provide to third-party pharmaceutical companies. We offer a comprehensive range of development and manufacturing services to pharmaceutical companies at our facilities. We typically enter into master development agreements with our customers that stipulate the formulation, product development, manufacturing and clinical services that we will provide. For certain customers, we agree to provide a fixed number of hours per month in exchange for a fixed fee. These hours may then be allocated by the customer, based on its needs and the demands of the various in-process projects, between laboratory, clinical or manufacturing hours. If the agreed-upon hours are exceeded, we then bill the customer for the excess hours worked. We also enter into agreements with other pharmaceutical customers to pay us upon the achievement of agreed-upon milestones. The amounts set in these contracts are based upon our estimate of the number of hours and other labor and overhead costs that we believe will be necessary to complete the project and each milestone. Our larger customers will typically provide the raw materials and equipment necessary for the performance of our services.

 

 

 

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Our agreements with certain customers typically require that they either purchase from us a minimum supply of the products we develop and manufacture for them for the two years following commercialization or that they agree to a royalty on their net sales of such products. We are currently developing seven ANDA drug products for these customers, four of which have been submitted and are awaiting FDA approval. We are also developing an additional four 505(b)(2) NDA drug products for these our customers. We have been named as manufacturer in each of the four ANDAs submitted and expect to be named manufacturer in any future ANDA or NDA submitted by our customers for product candidates that we have been engaged to assist in the development and regulatory approval process.

Technologies and services revenue for the six months ended June 30, 2015 and 2014 and for the years ended December 31, 2014 and 2013 also includes the revenue that we recognized in connection with the warrants that we received from TherapeuticsMD, Inc., or TherapeuticsMD, as compensation for development and manufacturing services we conducted for the company, as well as other consulting services we continue to provide from time to time.

For the six months ended June 30, 2015, two customers, TherapeuticsMD and Mylan, Inc., accounted for 91% and 4%, respectively, of our technologies and services revenue. For the six months ended June 30, 2014, two customers, TherapeuticsMD and Mylan, Inc., accounted for 80% and 18%, respectively, of our technologies and services revenue.

For the year ended December 31, 2014, two customers, TherapeuticsMD and Mylan, Inc., accounted for 79% and 16%, respectively, of our technologies and services revenue. For the year ended December 31, 2013, two customers, TherapeuticsMD and Mylan, Inc., accounted for 87% and 9%, respectively, of our technologies and services revenue.

Cost of Product Sales and Technologies and Services

The primary expenses that we incur to deliver our products and provide our technologies and services to our customers are manufacturing and related costs, which include both fixed and variable costs. Variable costs consist primarily of costs for materials and personnel-related expenses for direct and indirect manufacturing and services support staff. Fixed costs include facilities, utilities and depreciation of laboratory equipment. We produce all of our tangible products and perform all of our technologies and services activities in a single production location. Our production employees support both our tangible product sales and the provision of services to our customers, and we do not track or allocate the costs of these employees by type of revenue. In addition, our products are produced using the same equipment that is used in performing many of our technologies and services activities, and we do not track or allocate the costs of equipment by type of revenue. We determine the direct cost of product sales for products sold during a reporting period based on the average manufacturing cost per unit in the period those units were manufactured. In addition to the fixed and variable costs described above, the cost of product sales and technologies and services depends on utilization of available manufacturing capacity. In addition to the costs of production, the direct research and development costs incurred in connection with the technologies and services we provide to customers and services performed in support of the commercial manufacturing process for these customers are recorded within cost of product sales and technologies and services.

Sales and Marketing Expenses

Our sales and marketing expenses include costs associated with our sales organization, including our direct sales force and sales management, our customer service personnel and the marketing funds that we contribute to our retailers’ advertising activities. These expenses consist principally of salaries, commissions, bonuses and employee benefits for these personnel, as well as travel costs related to sales,

 

 

 

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marketing and customer service activities, marketing and medical education activities and overhead expenses. During the second half of 2013 and the first quarter of 2014, we incurred significant discretionary marketing expenses arising from the launch of our OTC Ocean Blue® omega-3 products into national retail chains. We do not expect these expenses to continue to increase as we are no longer marketing certain of these products in national retail chains. We expense all sales and marketing costs as incurred. We expect our sales and marketing costs to increase over time in anticipation of the commercialization of those proprietary product candidates that we intend to commercialize ourselves, if approved.

Research and Development Expenses

Our research and development expenses include those costs associated with performing research, development, and clinical and regulatory activities in connection with the development of our proprietary product candidates. Research and development expenses include personnel-related expenses, fees for contractual and consulting services, travel costs and laboratory supplies. We expect our research and development expenses to increase significantly in the near term as more of our product candidates commence clinical trials and continue development.

General and Administrative Expenses

Our general and administrative expenses include costs for our executive, accounting and finance, legal, corporate development, information technologies and human resources functions. These expenses consist principally of salaries, bonuses and employee benefits for the personnel included in these functions, including share-based compensation and travel costs, professional services fees, such as consulting, audit, tax and legal fees, costs related to our board of directors, general corporate costs, overhead expenses and bad-debt expense. We anticipate that our general and administrative expenses will increase as a result of increased payroll, expanded infrastructure and higher consulting, legal and tax-related services associated with maintaining compliance with stock exchange listing and SEC requirements, accounting and investor relations costs, and director and officer insurance premiums associated with being a public company.

Interest Expense

Interest expense represents interest expense recognized on our credit facility, senior subordinated convertible note and installment loans.

 

 

 

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RESULTS OF OPERATIONS

Comparison of the Six Months Ended June 30, 2014 and 2015, and the years ended December 31, 2013 and 2014:

The following table summarizes our results of operations for the six months ended June 30, 2014 and 2015 and the years ended December 31, 2013 and 2014:

 

    Year Ended
December 31,
    Six Months Ended
June 30,
 
(in thousands)   2013     2014     2014     2015  
                (unaudited)     (unaudited)  

Statement of Operations Data:

       

Revenue:

       

Net product sales

  $ 4,201      $ 6,362      $ 3,518      $ 4,398   

Technologies and services revenue

    5,274        8,847        3,666        9,144   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    9,475        15,209        7,184        13,542   

Costs and expenses:

       

Direct costs of product sales related to direct material

    1,858        2,541        1,311        1,298   

Direct costs of technologies and services related to direct material and direct laboratory labor

    555        1,051        432        941   

Total unallocated costs

    3,337        6,617        2,343        3,628   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of product sales and technologies and services

    5,750        9,759        4,086        5,867   

Sales and marketing

    2,166        1,799        988        636   

Research and development

    972        2,108        499        1,879   

General and administrative

    2,217        8,298        4,040        5,488   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

    11,105        21,964        9,613        13,870   
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss income from operations

    (1,630     (6,755     (2,429     (328

Other income (expense):

       

Interest income

    6        32        7        15   

Interest expense

    (155     (201     (107     (51
 

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense

    (149     (169     (100     (36
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

    (1,779     (6,924     (2,529     (364

Benefit for income taxes

    822        189        293        104   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (957     (6,735     (2,236     (260

Preferred dividends

    (160     (1,142     (255     (873

Accretion of preferred stock to redemption value

    —          (1,016     (178     (862
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stock

  $ (1,117   $ (8,893   $ (2,669   $ (1,995
 

 

 

   

 

 

   

 

 

   

 

 

 
    (unaudited)     (unaudited)     (unaudited)     (unaudited)  

Other Financial Data:

       

EBITDA

  $ (1,126   $ (6,109   $ (2,130   $ 97   

Adjusted EBITDA

    (1,090     (3,303     (240     443   

Adjusted EBITDA Margin

    (11.5 )%      (21.7 )%      (3.3 )%      3.3

Total Revenue

The following table sets forth a summary of our net product sales revenue and technologies and services revenue for the six months ended June 30, 2014 and 2015 and the years ended December 31, 2013 and 2014:

 

     Year Ended
December 31,
     Increase/
(Decrease)
     Six Months Ended
June 30,
    

Increase/

(Decrease)

 
(in thousands)    2013      2014         2014      2015     
                          (unaudited)      (unaudited)         

Net product sales

   $ 4,201       $ 6,362       $ 2,161       $ 3,518       $ 4,398       $ 880   

Technologies and services revenue

     5,274         8,847         3,573         3,666         9,144         5,478   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue

   $ 9,475       $ 15,209       $ 5,734       $ 7,184       $ 13,542       $ 6,358   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

 

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Total revenue increased by $6.4 million, or 89%, for the six months ended June 30, 2015 as compared to June 30, 2014. This increase was primarily driven by a $0.9 million increase in revenue from our net product sales and a $5.5 million increase in revenue derived from our technologies and services. Revenue growth related to our technologies and services was primarily due to an increase in the scope of work and the number of ANDAs and NDAs on which we were working for our existing customers. The increase in net product sales was primarily driven by an increase in sales of our generic prescription prenatal vitamins and dental health products. The percentage increase (decrease) in our prenatal vitamins and dental health proprietary and co-branded products attributable to price was 69% and 0% respectively, and volume was 31% and (100%), respectively, during the six months ended June 30, 2015 as compared to the six months ended June 30, 2014. Net product sales during the six months ended June 30, 2015 also benefitted from an increase in the price of Ocean Blue® products as our promotional campaign concluded, as well as an increase in volume as two of the national retail pharmacy chains placed their supply of certain of the products on clearance during 2014. The percentage increase in net sales of our Ocean Blue® product attributable to price was 85% and volume was 15% during the six months ended June 30, 2015 as compared to the six months ended June 30, 2014.

Total revenue increased by $5.7 million, or 61%, for the year ended December 31, 2014 as compared to the year ended December 31, 2013. This increase was primarily driven by a $2.1 million increase in revenue from our net product sales and a $3.6 million increase in revenue derived from our technologies and services. Revenue growth related to our technologies and services was primarily due to an increase in the scope of work and the number of ANDAs and NDAs on which we were working for our existing customers. The increase in net product sales was primarily driven by an increase in sales of our generic prescription prenatal vitamins and dental health products and our co-branded dietary supplement products as a result of increased volume and price increases. The percentage increase (decrease) in our prenatal vitamins and dental health proprietary and co-branded products attributable to price was 16% and (1%), respectively, and volume was 53% and 16%, respectively, for the year ended December 31, 2014 as compared to the year ended December 31, 2013. We expect that revenue from our generic prescription prenatal vitamins and dental health products will increase in 2015, as one of our co-branded customers has left the market and transferred its customers directly to us. Net product sales for the year ended December 31, 2014 also benefitted from an increase in the volume of Ocean Blue® products sold, as two of the national retail pharmacy chains placed their supply of certain of the products on clearance during 2014. The percentage increase (decrease) in net sales of our Ocean Blue® product attributable to price was (10%) and volume was 26% for the year ended December 31, 2014 as compared to the year ended December 31, 2013.

Cost of Product Sales and Technologies and Services

Cost of product sales and technologies and services increased by $1.8 million, or 44%, to $5.9 million from $4.1 million for the six months ended June 30, 2015 as compared to six months ended June 30, 2014, primarily due to a combination of (1) an increase in the cost of direct laboratory labor and materials related to technologies and services to support the increase in the scope of work and the number of ANDAs and NDAs on which we were working for our existing customers and (2) an overall increase in labor and operating expenses associated with the expansion of our manufacturing facility and increased production and technologies and services activity. As a percentage of total revenue, these costs decreased by 14% from 57% to 43%, as total revenue increased 89% to $13.5 million from $7.2 million during the same period in the prior year. The primary drivers of this decrease were (1) a decrease in volume of 23% offset by an increase in price of 123% related to our product revenue and (2) our ability to better leverage our technologies and services group even as technologies and services revenue increased.

 

 

 

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Direct cost of product sales decreased by approximately $13,000, or 1%, for six months ended June 30, 2015 as compared to the six months ended June 30, 2014. As a percentage of net product sales, these costs decreased 7% from 37% to 30 % for the six months ended June 30, 2015 as compared to the six months ended June 30, 2014. This decrease was primarily due to an increase in the average selling price per unit of our prenatal vitamins.

Direct cost of technologies and services related to direct material and direct laboratory labor increased $0.5 million, or 118%, to $0.9 million from $0.4 million for the six months ended June 30, 2015 as compared to the six months ended June 30, 2014, primarily due to an increase in the number of technologies and services projects. As a percentage of technologies and services revenue, these costs decreased 2% from 12% to 10% for the six months ended June 30, 2015 as compared to the six months ended June 30, 2014, primarily due to better leverage of our workforce and facilities as the number of technologies and services projects increased.

Total unallocated costs increased by $1.3 million, or 55%, to $3.6 million from $2.3 million for the six months ended June 30, 2015 as compared to the six months ended June 30, 2014, primarily due to the increase in the number of technologies and services projects. As a percentage of total revenue, these costs decreased 6% from 33% to 27% for the six months ended June 30, 2015 as compared to the six months ended June 30, 2014, primarily due to better leverage of our workforce and facilities as the number of technologies and services projects increased.

Cost of product sales and technologies and services increased by $4.0 million, or 70%, to $9.8 million from $5.8 million for the year ended December 31, 2014 as compared to the year ended December 31, 2013, primarily due to an increase in the cost of labor and materials to support the increase in sales of our prenatal vitamins and dental health products and to support the increase in the scope of work and the number of ANDAs and NDAs on which we were working for our existing customers As a percentage of revenue, these costs increased from 64% and 61%, as total revenue increased 61% to $15.2 million from $9.5 million during the same period in the prior-year. The primary driver of this increase was additional costs to expand and strengthen our technologies and services group to support an increase in the scope of work and the number of ANDAs and NDAs on which we were working for existing customers.

Direct cost of product sales increased by $0.7 million, or 38%, to $2.5 million from $1.8 million for the year ended December 31, 2014 as compared to the year ended December 31, 2013, primarily due to an increase in the volume of units sold. As a percentage of net product sales, these costs decreased 4% from 44% to 40% for the year ended December 31, 2014 as compared to the year ended December 31, 2013, primarily due to a reduction in the average unit cost of raw materials of our Ocean Blue® omega-3 products combined with an increase in the average selling price per unit of our Ocean Blue® omega-3 products.

Direct cost of technologies and services revenue related to direct material and direct laboratory labor increased $0.5 million, or 89%, to $1.1 million from $0.6 million for the year ended December 31, 2014 as compared to the year ended December 31, 2013, primarily due to an increase in the number of technologies and services projects. As a percentage of total technologies and services revenue, these costs increased 1% from 11% to 12% for the year ended December 31, 2014 as compared to the year ended December 31, 2013, primarily due to the average wage increase.

Total unallocated costs increased by $2.8 million, or 85%, to $6.1 million from $3.3 million for the year ended December 31, 2014 as compared to the year ended December 31, 2013. As a percentage of total revenue, these costs increased 6% from 35% to 41% for the year ended December 31, 2014 as compared to the year ended December 31, 2013. These increases were both primarily a result of the expansion of our facilities and workforce during 2014 to support current and planned future growth.

 

 

 

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Sales and Marketing Expenses

Sales and marketing expenses decreased by $0.4 million, or 36%, for the six months ended June 30, 2015 as compared to the six months ended June 30, 2014. This change is primarily due to the completion in 2014 of the advertising campaigns to promote our OTC line of Ocean Blue® omega-3 products.

Sales and marketing expenses decreased by $0.4 million, or 17%, for the year ended December 31, 2014 as compared to the year ended December 31, 2013. Sales and marketing expenses mainly relate to print and social media advertising campaigns to promote our OTC line of Ocean Blue® omega-3 products.

Research and Development Expenses

Research and development expenses increased by $1.4 million, or 277%, for the six months ended June 30, 2015 as compared to the six months ended June 30, 2014, principally from an increase in our total number of scientific personnel, and expenses arising from our proprietary research and development activities.

Research and development expenses increased by $1.1 million, or 117%, for the year ended December 31, 2014 as compared to the year ended December 31, 2013, principally from an increase in our total number of scientific personnel, and expenses arising from our proprietary research and development activities.

General and Administrative Expenses

General and administrative expenses increased by $1.4 million for the six months ended June 30, 2015, or 36%, as compared to the six months ended June 30, 2014. This change was due to an increase of approximately $1.5 million in fees, wages and benefits related to an increase in personnel and to better align our compensation to industry standards to retain and attract talent, $0.5 million in legal fees for contract reviews and compliance, $0.3 million of stock based compensation, and $0.3 million related to patent and regulatory licenses fees. These increases were partially offset by a reduction in settlement expense, since general and administrative expenses for the six months ended June 30, 2014 include $1.9 million related to a settlement with a former employee. The remaining increase from 2014 to 2015 is principally due to additional corporate overhead to support our revenue growth.

General and administrative expenses increased by $6.1 million for the year ended December 31, 2014, or 274%, as compared to the year ended December 31, 2013. The increase included $1.9 million related to a settlement with a former employee, $0.8 million from the write-off of an abandoned initial public offering, and $0.8 million related to patent and regulatory licenses fees. The remainder is principally due to revenue growth which required us to expand our facility and increase our corporate support organization.

Loss from Operations

Loss from operations was $0.3 million and $2.4 million for the six months ended June 30, 2015 and 2014, respectively, as a result of the factors discussed above.

Loss from operations was $6.8 million and $1.6 million for the years ended December 31, 2014 and 2013, respectively, as a result of the factors discussed above.

 

 

 

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Interest Expense

Interest expense decreased by approximately $56,000, or 52%, for the six months ended June 30, 2015 as compared to the six months ended June 30, 2014. This was primarily due to our revolving line of credit being paid in full and closed during February 2015.

Interest expense increased by approximately $47,000, or 30%, for the year ended December 31, 2014 as compared to the year ended December 31, 2013 primarily due to increased borrowings from our revolving credit facility. The increased borrowings were used to refinance previously purchased equipment and to fund working capital needs to support our revenue growth.

Benefit from Income Taxes

For the six months ended June 30, 2015 and 2014, our benefit from income taxes was $0.1 million and $0.3 million, respectively. These tax benefits resulted in an effective income tax rate of approximately 29% and 12% for the six months ended June 30, 2015 and 2014, respectively.

For the year ended December 31, 2014 and 2013, our benefit from income taxes was $0.2 million and $0.8 million, respectively. These tax benefits resulted in an effective income tax rate of approximately 3% and 46% for the years ended 2014 and 2013, respectively.

Net deferred tax assets have been reduced by a full valuation allowance at both June 30, 2015 and December 31, 2014. After consideration of all positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations, we believe that it is more likely than not that we will not be able to utilize our net deferred assets. As a result, we have recorded a full valuation allowance against our deferred tax assets. The gross amount of the US net operating loss of $6.0 million at December 31, 2014 will expire in 2034 if not utilized by us.

Net Loss

Net loss was $0.3 million for the six months ended June 30, 2015, as compared to net loss of $2.2 million for the six months ended June 30, 2014, for the reasons noted above.

Net loss was $6.7 million for the year ended December 31, 2014, as compared to net loss of $1.0 million for the year ended December 31, 2013, for the reasons noted above.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

Our primary liquidity and capital requirements are for research and development, sales and marketing and general and administrative expenses. We fund our operations, working capital needs and investments with cash generated through operations and issuance of preferred stock. The following is a summary of our cash flows from operating, financing and investing activities for the six months ended June 30, 2014 and 2015 and for the years ended December 31, 2013 and 2014.

 

     Year Ended
December 31,
    Six Months Ended
June 30,
 
(in thousands)    2013     2014     2014     2015  
                 (unaudited)     (unaudited)  

Net cash provided by (used in) operating activities

   $ 833      $ (5,720   $ (1,961   $ (633

Net cash used in investing activities

     (1,241     (1,774     (680     (2,218

Net cash provided by (used in) financing activities

     1,423        19,015        18,921        (1,726

 

 

 

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Operating Activities

For the six months ended June 30, 2015, net cash used in operating activities was $0.6 million as compared to $2.0 million for the comparable prior-year period. The negative cash flow for the six months ended June 30, 2015 related to our net loss of $0.3 million, adjusted for, among other things, certain non-cash items including $0.4 million of depreciation, $0.3 million of stock-based compensation and an increase of $0.2 million in the provision for doubtful accounts, a decrease of $1.3 million in deferred revenue related to the timing of billings from our customers and sales of products under unilateral right of return arrangements for which payments were received, an increase in prepaid and other current assets of $0.5 million primarily due to an increase in deferred initial public offering costs, an increase of $0.4 million in receivables related to the timing of billings from our customers and sales of products, and a decrease of $0.3 million in the other long-term liability due to a payment on the settlement liability, partially offset by an increase in accounts payable and accrued expenses primarily due to the initial public offering costs as well as higher general and administration expenses, and a decrease of $0.3 million in inventory directly related to the increase in product sales.

For the six months ended June 30, 2014, net cash used in operating activities was $2.0 million. This negative cash flow related to our net loss of $2.2 million, adjusted for, among other things, certain non-cash items including $0.3 million of depreciation and an increase of $0.1 million in the provision for doubtful accounts, a $1.9 million increase in receivables related to the timing of billings from our customers and sales of products, a $0.3 million increase in inventory directly related to the timing of product sales, a $0.4 million increase in income taxes receivable and a decrease of $0.2 million in deferred revenue related to the timing of billings from our customers and sales of products under unilateral right of return arrangements for which payments were received, partially offset by an increase of $1.5 million in the other long-term liability related to the settlement liability and a $1.2 million increase in accounts payable and accrued expenses related to the purchase of raw materials to build inventory that supports our increase in sales.

For the year ended December 31, 2014, net cash used in operating activities was $5.7 million as compared to net cash provided by operating activities of $0.8 million for the comparable prior-year period. This negative cash flow for the year ended December 31, 2014 resulted from our net loss of $6.7 million, adjusted for, among other things, certain non-cash items including $0.6 million of depreciation, $0.1 million increase in the provision for doubtful accounts, an increase of $4.6 million in accounts payable and accrued expenses related to the purchase of raw materials to build inventory that supports our increase in sales, an increase of $1.5 million in other long-term liability related to an accrued settlement, a decrease of $2.8 million of deferred revenue mainly related to the timing of payment for our sales of products under unilateral right of return agreements, a $2.5 million increase in receivables and a $0.4 million increase in inventory directly related to the increase in product sales.

For the year ended December 31, 2013, net cash provided by operating activities was $0.8 million. The positive cash flow related to our net loss of $1.0 million, adjusted for, among other things, certain non-cash items including $0.5 million of depreciation, $31,000 recovery of doubtful accounts, an increase of $1.6 million in accounts payable and accrued expenses related to the purchase of raw materials to build inventory that supports our increase in sales, an increase of $4.4 million of deferred revenue mainly related to payments received in advance from our customers and sales of products under unilateral right of return agreements for which payments were received, and a $1.1 million increase in receivables.

Investing Activities

For the six months ended June 30, 2015, net cash used in investing activities was $2.2 million, as compared to $0.7 million for the comparable prior-year period. The increase was primarily due to the

 

 

 

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purchase and build out of our new office facility for approximately $1.1 million and an increase of $0.6 million in purchases of manufacturing and laboratory equipment and leasehold improvements as we continue to expand our manufacturing facility.

For the six months ended June 30, 2014, net cash used in investing activities was $0.7 million. This was primarily driven by an increase in purchases of manufacturing equipment and leasehold improvements as we expanded our manufacturing facility.

For the year ended December 31, 2014, net cash used in investing activities was $1.8 million, as compared to $1.2 million for the comparable prior-year period. The increase was due to an increase in purchases of manufacturing and laboratory equipment and leasehold improvements as we continue to expand our manufacturing facility.

For the year ended December 31, 2013, net cash used in investing activities was $1.2 million. This was primarily driven by an increase in purchases of manufacturing equipment and leasehold improvements as we expanded our manufacturing facility.

Financing Activities

For the six months ended June 30, 2015, net cash used in financing activities was $1.7 million as compared to net cash provided by financing activities of $18.9 million for the comparable prior-year period. In February 2015, we paid in full and closed our revolving credit facility and during May 2014 we received $18.6 million in net proceeds from our Series C Preferred Stock issuance.

Net cash provided by financing activities was $18.9 million for the six months ended June 30, 2014. This was primarily a result of net proceeds from our Series C Preferred Stock issuance.

For the year ended December 31, 2014, net cash provided by financing activities was $19.0 million as compared to $1.4 million for the comparable prior-year period. In 2014, we received $18.6 million in net proceeds from our Series C Preferred Stock issuance, $0.7 million in proceeds from borrowings on our line of credit, partially offset by $0.3 million of repayments of long-term debt. In addition, subsequent to the sale of our Series C Preferred Stock, we repaid all principal and interest outstanding on the senior subordinated convertible note of $0.3 million.

Net cash provided by financing activities was $1.4 million for the year ended December 31, 2013. In 2013, we received $3.2 million in proceeds from the issuance of long-term debt under our credit agreement, partially offset by $1.7 million of repayment of long-term debt under our installment loans.

As of June 30, 2015, our total debt was $0.9 million as compared to $2.8 million, net of discount, as of June 30, 2014. The decrease was primarily a result of paying off the revolving credit facility in full during February 2015.

As of December 31, 2014, our total debt was $2.7 million as compared to $2.4 million, net of discount, as of December 31, 2013. The increase was due to borrowings made under our credit agreement.

Credit Agreement

On August 27, 2013, we entered into the Credit Agreement with Capital Bank, N.A. Pursuant to the Credit Agreement, we obtained (i) a revolving line of credit loan, or Revolving Credit Facility, and (ii) a term loan, or Term Loan. Subject to certain limitations, we could incur additional indebtedness beyond our borrowings from the Credit Agreement. As of June 30, 2015, and as of the date of this prospectus,

 

 

 

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Frederick Sancilio, our Chairman, President and Chief Executive Officer, and his spouse, Carolyn Alex Sancilio, our Vice President of Corporate Development, have personally guaranteed our obligations under the Credit Agreement.

Revolving Credit Facility

The Revolving Credit Facility was for an aggregate amount of $2.25 million and carried a variable annual interest rate of prime plus 0.5% (3.75% as of December 31, 2014). Our obligations under the Revolving Credit Facility were due in full on February 27, 2015. Our total borrowing capacity under the Revolving Credit Facility was subject to a borrowing base calculation as set forth in the Credit Agreement and other restrictive covenants based on our eligible accounts receivable and inventory. As of December 31, 2014 and 2013, we had unused availability under the Revolving Credit Facility of $0.5 million and $0.8 million, respectively. We use the proceeds from the Revolving Credit Facility to fund our working capital needs, such as research and development, sales and marketing, and our general and administrative expenses. In February 2015, we paid the balance of the line of credit and closed the line.

Term Loan

The Term Loan was originally in the amount of $1.4 million and carries a fixed annual interest rate of 5.05%. The Term Loan is due and payable in equal monthly principal and interest installments of $27,000 based on a five-year amortization through August 27, 2018. We may prepay the principal of the Term Loan at any time, subject to certain prepayment penalties. We used the proceeds from the Term Loan to refinance previously purchased equipment used in our business operations. Based upon the amendment to the Credit Agreement, as of August 7, 2015, the outstanding principal amount of loans under the Credit Agreement was $0.8 million.

Restrictive Covenants

Our Credit Agreement contains a number of covenants that, among other things, restrict our ability to:

 

Ø   incur additional indebtedness;

 

Ø   create certain liens on our assets;

 

Ø   engage in mergers, consolidations, liquidation or dispositions of our assets;

 

Ø   make certain loans, advancements, guarantees or investments;

 

Ø   pay dividends and make distributions;

 

Ø   repurchase capital stock;

 

Ø   enter into certain transactions with affiliates;

 

Ø   engage in sale and leaseback transactions; and

 

Ø   engage in transactions that would result in a change of control of our company.

Our Credit Agreement previously required that we maintain certain debt-to-net worth and cash balance coverage ratios. However, on August 7, 2015, we entered into an amendment to the Credit Agreement which deleted the debt service coverage ratio and replaced it with a covenant to retain deposits with our bank of no less than two times the principal amount outstanding of loan(s) under the Credit Agreement and/or loan documents at all times. The debt-to-net worth ratio was not changed.

 

 

 

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In addition, as amended, the Credit Agreement requires us to meet certain financial covenants on a consolidated basis, including (i) maintaining a total liabilities to tangible net worth ratio not to exceed 2.0 to 1.0, measured each fiscal quarter; (ii) maintaining a tangible net worth equal to at least $3.5 million, measured each fiscal quarter and (iii) retaining deposits with our bank of no less than two times the principal amount outstanding of loan(s) under the Credit Agreement and/or loan documents at all times. The Credit Agreement also contains certain other customary affirmative covenants and events of default.

A breach of any of these covenants could result in a default of the term loan and an acceleration of the maturity of the principal. The term loan is secured by substantially all our assets. Consequently, if we were unable to repay the loan upon acceleration, the lender could foreclose on this collateral. Due to our losses in 2014, as of each of December 31, 2014 and March 31, 2015, we were not in compliance with the debt service coverage ratio previously required by the Credit Agreement. We received a waiver from the lender with respect to this noncompliance as of December 31, 2014 and as of March 31, 2015. Based upon the amendment to the Credit Agreement, as of August 7, 2015, we were in compliance with each of our covenants under the Credit Agreement. As of June 30, 2015, absent the amendment to Credit Agreement, we would not have been in compliance with a financial covenant contained in the original Credit Agreement. If we are unable to comply with these covenants, or receive a waiver upon noncompliance, and the term loan was accelerated, we believe that we will have sufficient working capital to satisfy the amounts due.

Pledged Collateral

Substantially all of our assets, excluding intellectual property and common stock purchase warrants, are pledged as collateral under the Credit Agreement to secure repayment under the Term Loan.

Series C Convertible Preferred Stock

On May 21, 2014, we closed a private placement in which we sold and issued an aggregate of 5,295,276 shares of Series C Preferred Stock, and received net cash proceeds, after placement fees and other transaction expenses, of $18.6 million. The Series C Preferred Stock (i) is convertible into common stock on a one-for-one basis, (ii) is redeemable at a redemption price equal to the greater of one and a half times the Series C original purchase price plus declared and unpaid dividends or the fair market value of a share of Series C Preferred Stock as of the date of the redemption request and (iii) accrues dividends at 8% per annum. The Series C Preferred Stock is senior in most respects to our other series of preferred stock.

Senior Subordinated Convertible Note

On August 23, 2011, we issued a convertible promissory note, or the Convertible Note, in the principal amount of $0.3 million which was convertible into shares of the same class of our equity sold in a qualified offering. The Convertible Note accrued interest at a rate of 8% per annum. In May 2014, the Convertible Note was repaid in full.

Installment Loans

In 2011 and 2012, we entered into a number of installment loans with various commercial banks. In 2013, we completely paid off the installment loans with funding from the Revolving Credit Facility.

Debt Obligations

We believe that available funds from existing cash and cash equivalents together with cash flows generated by operations remain sufficient to fund our working capital and capital expenditure requirements for at least the next twelve months.

 

 

 

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To further enhance our liquidity profile, we may choose to raise additional funds which may or may not be needed for additional working capital, capital expenditures or other strategic investments. However, we cannot provide any assurance that we will be able to raise additional capital in the future. While our management believes that we have access to capital resources through possible public or private equity offerings, debt financings, corporate collaborations or other means, if needed, we have not secured any commitment for new financing at this time, nor can we provide any assurance that new financing will be available on commercially acceptable terms, if needed.

The following table describes our line of credit and debt as of the periods indicated. During February 2015, the revolving credit facility was paid in full and closed.

 

     December 31,      June 30,
2015
 
(in thousands)    2013      2014     

Revolving Credit Facility

   $ 900       $ 1,646       $ —     

Term Loan

     1,312         1,056         895   

Senior Subordinated Convertible Note

     297         —           —     
  

 

 

    

 

 

    

 

 

 
   $ 2,509       $ 2,702       $ 895   
  

 

 

    

 

 

    

 

 

 

OFF-BALANCE SHEET ARRANGEMENTS

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the Securities and Exchange Commission.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

The following table summarizes our scheduled contractual obligations as of December 31, 2014:

 

(in thousands)    Total      Less Than
1 Year
     1-3
Years
     4-5
Years
     More Than
5 Years
 

Debt payments

   $ 2,702       $ 1,914       $ 788       $ —         $ —     

Settlement liability(1)

     1,850         350         750         500         250   

Operating leases

     2,091         461         1,466         164         —     

Capital leases

     55         40         15         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 6,698       $ 2,765       $ 3,019       $ 664       $ 250   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)   This refers to a settlement with a former employee. Payment of the total settlement amount will accelerate upon consummation of the offering contemplated by this prospectus.

 

 

 

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NON-GAAP FINANCIAL MEASURES

EBITDA and Adjusted EBITDA

In this prospectus, we provide EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin, each a non-GAAP financial measure. We define EBITDA as net (loss) income before income tax (expense) benefit, interest expense, net, and depreciation and amortization. We define Adjusted EBITDA as EBITDA less legal settlements, stock-based compensation expense and abandoned initial public offering related costs. Adjusted EBITDA Margin is calculated as Adjusted EBITDA divided by total revenues. Below is a reconciliation of EBITDA and Adjusted EBITDA to net (loss) income, the most directly comparable GAAP financial measure.

We have included EBITDA and Adjusted EBITDA in this prospectus because they are measures used by our management to understand and evaluate our core operating performance. In particular, we believe that the exclusion of the expenses eliminated in calculating Adjusted EBITDA can provide a useful measure for period-to-period comparisons of our core business. Accordingly, we believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management.

A reconciliation of net (loss) income, as reported under GAAP, to EBITDA and to Adjusted EBITDA is as follows:

 

     Year Ended December 31,     Six Months Ended
June 30,
 
(in thousands)    2013     2014     2014     2015  
     (unaudited)     (unaudited)     (unaudited)     (unaudited)  

Reconciliation of EBITDA and Adjusted EBITDA to net loss:

        

Net loss

   $ (957   $ (6,735   $ (2,236   $ (260

Plus:

        

Depreciation and amortization

     505        646        299        425   

Interest expense, net

     148        169        100        36   

Income tax expense

     (822     (189     (293     (104
  

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

     (1,126     (6,109     (2,130     97   

Plus:

        

Legal settlements

     —          1,885        1,885        —     

Stock based compensation

     36        168        5        346   

Abandoned initial public offering costs

     —          753        —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ (1,090   $ (3,303   $ (240   $ 443   
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA Margin

     (11.5 )%      (21.7 )%      (3.3 )%      3.3
  

 

 

   

 

 

   

 

 

   

 

 

 

CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT JUDGMENTS AND ESTIMATES

Our financial statements are prepared in accordance with generally accepted accounting principles in the United States of America, or GAAP. The preparation of our financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported period. We base our estimates on historical experience, known trends and events and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of

 

 

 

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assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions and conditions.

While our significant accounting policies are described in more detail in the notes to our financial statements appearing elsewhere in this prospectus, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our financial statements.

Revenue Recognition

Net Product Sales

Our net product sales consist of revenues from sales of our products, less estimates for chargebacks, rebates, sales incentives and allowances, returns and allowances as well as fees for services (collectively, revenue reserves which are classified as accrued expenses). We recognize revenue when persuasive evidence of an arrangement exists, substantially all the risks and rewards of ownership have transferred to the customers, the selling price is fixed, and determinable, the work is performed and collection is reasonably assured. Revenue and the related cost of revenue are recognized when products are delivered for all sales other than products sold under sales agreements that provide for unilateral rights of return. Total revenue is comprised of gross sales less a provision for estimated returns, chargebacks, discounts, promotions, coupons and other sales allowances, including shelf stock adjustments. The provisions are established based upon consideration of a variety of factors, including actual return and historical experience. Revenue 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 when the product has achieved market acceptance, which is typically based on dispensed prescription data and other information obtained prior to and during the period following launch.

Certain of our OTC products are sold under sales agreements that provide for unilateral rights of return. Given the limited history of our OTC products, we currently cannot reliably estimate expected returns at the time of shipment. Accordingly, for sales to retailers with these sales agreements, we defer recognition of revenue and the related cost of product sales and continue to record the products as inventory until the product is sold to the ultimate customer. At that point, revenue and the related cost of revenue are recognized.

 

 

 

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Sales Deductions

When we recognize revenue from the sale of our products, we simultaneously record an adjustment to revenue for estimated product returns, wholesaler discounts, chargebacks and rebates based on historical activity. These provisions, as described in greater detail below, are estimated based on historical experience, estimated future trends, estimated customer inventory levels, current contract sales terms with our wholesale and indirect customers and other competitive factors. 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. The following table presents the activity and ending balances for our product sales provisions for the years ended December 31, 2013 and December 31, 2014 and the six months ended June 30, 2015 (in thousands):

SALES DISCOUNTS, REBATES, CHARGEBACKS AND RETURNS ROLL FORWARD

 

(in thousands)    Chargebacks    

Other Sales

Deductions

    Total  

Balance, January 1, 2013

   $ 17      $ 3      $ 20   
  

 

 

   

 

 

   

 

 

 

Prior-year provision

     75        9        84   

Current year provision

     2,015        285        2,300   

Prior-year payments or credits

     (92     (12     (104

Current year payments or credits

     (1,889     (267     (2,156
  

 

 

   

 

 

   

 

 

 

Balance, December 31, 2013

   $ 126      $ 18      $ 144   
  

 

 

   

 

 

   

 

 

 

Prior-year provision

     355        42        397   

Current year provision

     9,534        1,147        10,681   

Prior-year payments or credits

     (481     (60     (541

Current year payments or credits

     (8,495     (1,012     (9,507
  

 

 

   

 

 

   

 

 

 

Balance, December 31, 2014

   $ 1,039      $ 135      $ 1,174   
  

 

 

   

 

 

   

 

 

 

Prior year provision

     —          —          —     

Current year provision

     6,274        775        7,049   

Prior-year payments or credits

     (983     (122     (1,105

Current year payments or credits

     (5,684     (703     (6,387
  

 

 

   

 

 

   

 

 

 

Balance, June 30, 2015

   $ 646      $ 85      $ 731   
  

 

 

   

 

 

   

 

 

 

Product Returns.    Our provision for returns consists of our estimates of future product returns. Consistent with industry practice, we maintain a return policy that allows our customers to return products 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 primary factors we consider in estimating our potential product returns include:

 

Ø   the shelf life or expiration date of each product;

 

Ø   historical levels of expired product returns; and

 

Ø   estimated returns liability to be processed by year of sale based on analysis of lot information related to actual historical returns.

 

 

 

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Wholesaler Discounts.    We offer discounts to certain wholesale distributors based on contractually determined rates.

Chargebacks.    We market and sell products directly to wholesalers, distributors, warehousing pharmacy chains and other direct purchasing groups. We also market products indirectly to independent pharmacies, non-warehousing chains, managed care organizations and group purchasing organizations, collectively referred to as indirect customers. We enter into agreements with some indirect customers to establish contract pricing for certain products. These indirect customers then independently select a wholesaler from which to purchase the products at these contracted prices. Alternatively, we may pre-authorize wholesalers to offer specified contract pricing to other indirect customers, including government entities. Under either arrangement, we provide credit to the wholesaler for any difference between the contracted price with the indirect customer and the wholesaler’s invoice price. Such credit is called a chargeback. The primary factor we consider in developing and evaluating our provision for chargebacks is average historical chargeback credits.

Other Sales Deductions.    We establish contracts with wholesalers, chain stores and indirect customers that provide for rebates, sales incentives, distribution service agreement (DSA) fees and other allowances. Some customers receive rebates upon attaining established sales volumes. We estimate rebates, sales incentives and other allowances 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:

 

Ø   direct rebates;

 

Ø   indirect rebates; and

 

Ø   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, including DSA fees paid to wholesalers under our DSA agreements, as described above. Indirect rebates are rebates paid to indirect customers which have purchased our products from a wholesaler under a contract with us. Medicaid pricing programs involve particularly difficult interpretations of statutes and regulatory guidance, which are complex and thus our estimates could differ from actual experience.

We continually update these factors based on new contractual or statutory requirements that may impact the percentage of our products subject to rebates.

We offer certain of our customers prompt pay cash discounts. Provisions for prompt pay discounts are estimated and recorded at the time of sale. We estimate provisions for cash discounts based on contractual sales terms with customers, an analysis of unpaid invoices and historical payment experience. Estimated cash discounts have historically been predictable and less subjective due to the limited number of assumptions involved and the consistency of historical experience.

We believe that the revenue reserves we have established are reasonable and appropriate based upon current facts and circumstances. Applying different judgments to the same facts and circumstances could result in the estimated amounts for sales returns, chargebacks and rebate reserves to vary. If actual results vary with respect to our sales returns, chargebacks or rebates reserves, we may need to adjust our estimates, which could have a material effect on our results of operations in the period of adjustment.

 

 

 

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Technologies and Services Revenue

We provide technologies and services pursuant to contracts with pharmaceutical companies. The contracts are typically structured as master service agreements which are supplemented with statements of work that describe the terms and pricing for each project or group of projects. The agreements, including the agreements with our two significant customers, are similar and may generally be terminated by the customer upon 30 days’ notice, by either party for the other party’s failure to substantially perform a material obligation under the agreement, or by either party as a result of certain events such as bankruptcy and insolvency. The agreements do not provide for refunds.

Our revenue arrangements with multiple elements are evaluated under the accounting standards for Revenue Arrangements with Multiple Deliverables. A delivered item is accounted for as a separate unit if the delivered item has standalone value. If a contract is deemed to have separate units of accounting, we allocate arrangement consideration based on their relative selling price and the applicable revenue recognition criteria are considered separately for each of the separate units of accounting. Where an item in a revenue arrangement with multiple deliverables, typically development and manufacturing services, does not constitute a separate unit of accounting and for which delivery has not occurred, we defer revenue until the delivery of the item is completed.

During 2014 and 2013, we delivered (a) technologies and services, including development and manufacturing services as well as ancillary (b) stability testing and (c) storage services under our arrangements. We used our best estimate of selling price when allocating multiple-element arrangement consideration. In estimating the selling price for stability testing and storage services, we consider sales of similar services by us and competitors, which represents third party evidence of selling price. We have determined that (a) technologies and services, (b) stability testing, and (c) storage services are separate units of accounting, since each deliverable has standalone value, and thus we utilize best estimate of selling price in allocating arrangement consideration. For technologies and services revenue, we determine the period in which the performance obligation occurs and recognize revenue using the proportional performance method when the level of effort to complete our performance obligations under an arrangement is able to be reasonably estimated. Revenues related to stability testing and storage have historically been minimal and are recognized when those services are provided.

Amounts received prior to satisfying the above revenue recognition criteria are recorded as deferred revenue, and we have not historically recognized any unbilled receivables.

For contracts that provide for non-refundable upfront and milestone payments, we utilize the performance-based expected revenue method of revenue recognition, which estimates the percentage of services that have already been performed in relation to the total services to be provided and then recognizes revenue equal to the portion of services to date. Because no discrete earnings event has occurred when the upfront payment is received, that amount is deferred. Under each contract, the milestones are defined, substantive effort is required to achieve the milestone, the amount of the non-refundable milestone payment is reasonable and commensurate with the effort expended, and achievement of the milestone is reasonably assured.

Income Taxes

Deferred tax assets and liabilities are determined based on the differences between the financial statement carrying amounts and tax bases of assets and liabilities using enacted tax rates in effect for years in which differences are expected to reverse. We establish valuation allowances against our deferred tax assets when it is more likely than not that the benefits will not be realized prior to expiration.

 

 

 

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We recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. The amount recognized is subject to estimate and management judgment with respect to the likely outcome of each uncertain tax position. The amount that is ultimately sustained for an individual uncertain tax position or for all uncertain tax positions in the aggregate could differ from the amount recognized.

Net deferred tax assets have been reduced by a valuation allowance of $2.0 million at December 31, 2014. After consideration of all positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations, we believe that it is more likely than not that we will not be able to utilize their net deferred tax assets. As a result, we have recorded a full valuation allowance against our deferred tax assets. The gross amount of the US net operating loss of approximately $6.0 million and the gross amount of the Florida net operating loss of approximately $6.2 million will expire in 2033 through 2034 if not utilized by us.

We are subject to income taxes in the US federal jurisdiction and various state jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. We are not subject to US federal, state and local tax examinations by tax authorities for years before 2011. Prior to January 1, 2012, we had elected to be treated as an S corporation. We revoked this election effective January 1, 2012. Penalties and tax-related interest expense associated with unrecognized tax benefits are reported as a component of income tax expense.

Contingencies

We are subject to various patent, product liability, government investigations and other legal proceedings in the ordinary course of business. Legal fees and other expenses related to litigation are expensed as incurred and included in general and administrative expenses. The factors we consider in developing our contingent accruals for product litigation and other contingent liability items include the merits and jurisdiction of the litigation, the nature and the number of other similar current and past litigation cases, the nature of the product and the current assessment of the science subject to the litigation, and the likelihood of the conditions of settlement being met. In addition, we accrue for certain product liability claims incurred, but not filed, to the extent we can formulate a reasonable estimate of the number of such claims and their estimated costs. We estimate these expenses based primarily on our historical claims experience and data regarding product usage. Contingent accruals are recorded in the consolidated statements of operations and comprehensive loss when we determine that a loss related to a litigation matter is both probable and reasonably estimable. Due to the fact that legal proceedings and other contingencies are inherently unpredictable, our assessments involve significant judgments regarding future events.

Stock-Based Compensation

We measure stock options and other stock-based awards granted to employees and directors based on the fair value on the date of grant and recognize the corresponding compensation expense of those awards, net of estimated forfeitures, over the requisite service period, which is generally the vesting period of the respective award. Generally, we issue stock options and restricted stock awards with only service-based vesting conditions and record the expense for these awards using the straight-line method.

 

 

 

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We measure stock-based awards granted to consultants and non-employees based on the fair value of the award on the date at which the related service is complete. Compensation expense is recognized over the period during which services are rendered by such consultants and non-employees until completed. At the end of each financial reporting period prior to completion of the service, the fair value of these awards is remeasured using the then current fair value of our common stock and updated assumption inputs in the Black Scholes option pricing model.

We estimate the fair value of each stock option grant using the Black Scholes option pricing model, which uses as inputs the fair value of our common stock and assumptions we make for the volatility of our common stock, the expected terms of our stock options, the risk-free interest rate for a period that approximates the expected term of our stock options and our expected dividend yield.

Valuation of Common Stock

As there has been no public market for our common stock to date, the estimated fair value of our common stock has been determined by our board of directors, with input from management. In connection with these determinations, the board engaged an independent financial advisor to provide a valuation analysis of the common stock. The board of directors took into consideration the most recent analysis and its assessment of additional objective and subjective factors that it believed were relevant and which may have changed from the date of the most recent valuation through the date of the grant. We have periodically determined the estimated fair value of our common stock at various dates using contemporaneous valuations performed in accordance with the guidance outlined in the American Institute of Certified Public Accountants’ Accounting and Valuation Guide, Valuation of Privately Held Company Equity Securities Issued as Compensation.

The assumptions we use in the valuation model are based on future expectations combined with management judgment. Estimating the fair value of our common stock required us to make complex and subjective judgments. We considered a combination valuation methodologies, including discounted cash flows, market and transaction approaches. In the absence of a public trading market, we exercised significant judgment and considered numerous objective and subjective factors to determine the fair value of our common stock as of the date of each option grant, including the following factors:

 

Ø   independent third-party valuations of our common stock performed as of December 31, 2013, May 21, 2014, July 31, 2014, September 30, 2014, October 31, 2014 and January 31, 2015;

 

Ø   the prices, rights, preferences and privileges of our preferred stock relative to our common stock;

 

Ø   our historical operating and financial performance;

 

Ø   our current business conditions and projections during the relevant period, including progress of our business model;

 

Ø   the continued development of our products and product pipeline, including the development of our research and development initiatives;

 

Ø   status of our efforts to build our management team and to retain and recruit the talent and organization required to support our anticipated growth;

 

Ø   the likelihood of achieving a liquidity event for the shares of common stock underlying these stock options, such as an initial public offering or sale of our company, given prevailing market conditions;

 

Ø   the market performance of comparable publicly traded companies in our industry; and

 

Ø   US and global capital market conditions.

 

 

 

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The assumptions underlying these valuations represent management’s best estimates, which involve inherent uncertainties and the application of management judgment. As a result, if factors or expected outcomes change and we use significantly different assumptions or estimates, our equity-based compensation could be materially different.

Following the closing of this offering, the fair value of our common stock will be determined based on the quoted market price of our common stock.

On February 4, 2015, we adopted the 2015 Equity Incentive Plan, or 2015 Plan, whereby 2,189,645 shares were reserved for issuance. The 2015 Plan became effective when adopted, and therefore no further grants will be made under the 2012 Plan.

The following table summarizes by grant date the number of shares subject to options since January 1, 2014, the per share exercise price of the options, the fair value of common stock underlying the options on date of grant and the per share estimated fair value of the options:

 

Grant Date   Number of Shares
Subject To Options
Granted
    Per Share Exercise
Price of Options
    Fair Value of Common
Stock per Share on
Option Grant Date
    Per Share Estimated
Fair Value of Options
 

April 21, 2014

    986,300      $ 0.60      $ 0.60      $ 0.34   

July 23, 2014 (modified)

    572,350      $ 1.64 (1)(2)    $ 1.64 (1)    $ 0.60   

July 28, 2014

    80,000      $ 3.69 (3)    $ 1.64 (1)    $ 0.60   

December 22, 2014 (modified)

    255,305      $ 1.66      $ 1.66      $ 1.04 (4) 

March 19, 2015

    246,295      $ 1.83      $ 1.83      $ 0.92   

March 19, 2015

    15,000      $ 1.83      $ 1.83      $ 0.94   

June 9, 2015

    45,000      $ 1.83      $ 1.83      $ 0.94   

 

(1)   The board of directors initially set the exercise price of the options granted in July 2014 based on the price at which the Series C preferred securities were issued to the investors in May 2014 and the board of directors’ expectation regarding the timing and probability of an initial public offering. In connection with the preparation of our consolidated financial statements, the board engaged a third-party appraiser to conduct a retrospective fair value assessment for accounting purposes. The amounts set forth above reflect the valuation of a share of common stock set forth in the 409A valuation received by the board.
(2)   On March 18, 2015, the board of directors approved the modification of options granted on July 23, 2014 to purchase 478,350 shares of our common stock by reducing the exercise price of each prior grant from $3.69 to $1.64 per share. Prior to this modification, 94,000 of the original options granted were forfeited. These forfeited shares are included in the above table. All other terms of these options, including, without limitation, the exercise date, vesting schedule and the number of shares to which each option pertains, remain unchanged. As a result of the modification of the options, the total remaining compensation cost of approximately $277,000 will be recognized over the modified awards requisite service period.
(3)   These options were forfeited prior to the date of the modification of options discussed in footnote 2 above.
(4)   On June 9, 2015, the board of directors approved the modification of options granted on December 22, 2014 to purchase 255,305 shares of the Company’s common stock by accelerating the vesting period of each prior grant from three years to immediate vesting on June 9, 2015. All other terms of these options, including, without limitation, the exercise price, exercise date and the number of shares to which each option pertains, remained unchanged. As a result of the modification of the options, approximately $224,000 of additional compensation cost was recognized as a result of the modified award for the period ending in June 2015.

 

 

 

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Valuation of Common Stock Purchase Warrants

We record the value of our common stock purchase warrants at fair value at the date of vesting. Fair value is calculated at each reporting period and the changes in the estimated fair value are recognized as unrealized gain or loss.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In July 2015, the Financial Accounting Standards Board, or FASB, issued final guidance that simplifies the subsequent measurement of inventories by replacing the current lower of cost or market test with a lower of cost and net realizable value test. The guidance applies only to inventories for which cost is determined by methods other than last-in first-out (LIFO) and the retail inventory method (RIM). Companies that use LIFO or RIM will continue to use existing impairment models. The guidance is effective for public business entities for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. For all other companies, the guidance is effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. Early adoption is permitted. We are currently evaluating the impact of this standard on our consolidated financial statements.

In June 2015, the FASB issued a proposed Accounting Standards Update, or ASU, on share-based payments as part of its simplification initiative. The proposed ASU simplifies several aspects of the accounting for employee share-based payment transactions for both public and nonpublic entities, including the accounting for income taxes, forfeitures, minimum statutory withholding requirements, classification in the statement of cash flows, and classification of awards with repurchase features. We are currently evaluating the impact of this standard on our consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09). ASU 2014-09 represents a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled to receive in exchange for those goods or services. This ASU sets forth a new five-step revenue recognition model which replaces the prior revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue recognition guidance that have historically existed. This ASU is effective for annual reporting periods beginning after December 15, 2016 and interim reporting periods within that reporting period. Early adoption is not permitted. Accordingly, we are currently required to adopt this ASU on January 1, 2017. On July 9, 2015, the FASB reaffirmed the guidance in its April 29, 2015 proposed ASU that defers the effective date of the new revenue recognition standard by one year and allows early adoption as of the original effective date. Companies may use either a full retrospective or a modified retrospective approach to adopt this ASU. We are currently evaluating the impact of ASU 2014-09 on our consolidated results of operations and financial position.

In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The amendments in this update will explicitly require a company’s management to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances. The new standard will be effective in the first annual period ending after December 15, 2016. Early application is permitted. We are currently evaluating the potential impact of the adoption of this standard, but we believe its adoption will have no impact on our results of operations, cash flows or financial position.

 

 

 

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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

Market risk is the risk of loss arising from adverse changes in market rates and prices, including interest rates, commodity prices and equity prices. We do not hold any market risk sensitive instruments.

EMERGING GROWTH COMPANY STATUS

The Jumpstart Our Business Startups Act of 2012, or the JOBS Act, permits an “emerging growth company” such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies. We have irrevocably elected to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards when they are required to be adopted by public companies that are not emerging growth companies.

 

 

 

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Business

OVERVIEW

We are an integrated specialty pharmaceutical company focused on developing and, in the future, commercializing products based on our proprietary Advanced Lipid Technologies, or ALT, platform. We intend to utilize our current manufacturing facility to manufacture our proprietary product candidates, if approved. ALT is designed to enhance the bioavailability, reduce the food effect and improve the efficacy of lipids and lipophilic active pharmaceutical ingredients, or APIs. Lipids are hydrophobic or amphipathic molecules and include fatty acids (such as omega-3 fatty acids and omega-6 fatty acids), steroids (including hormones) and fat-soluble vitamins (such as vitamins A, D, E and K). Our business model is to apply our ALT platform to lipids or lipophilic APIs to create unique product candidates that address the disorders and diseases resulting from imbalances of lipids in the body. In addition to our primary focus of developing our proprietary products using our ALT platform, we make use of and license rights to our proprietary ALT platform and our other technologies to third parties as part of our development and manufacture of lipophilic API-based and soft-gelatin products at our facilities.

Our proprietary product pipeline, which has been developed using our proprietary ALT platform, is currently focused on diseases and disorders for which we believe lipids can be used for treatment. Our four lead product candidates are:

 

Ø   SC411—Our proprietary product candidate SC411, which is being developed for the treatment of sickle cell disease, or SCD, has been granted orphan drug designation by the FDA. We held a pre-IND meeting with the US Food and Drug Administration, or FDA, in May 2015, during which the FDA reviewed and provided recommendations for the design of our proposed clinical trial protocol for a pivotal trial of SC411. As agreed with the FDA, we intend to submit the final study protocol and statistical analysis plan to the FDA for its review concurrently with our Investigational New Drug Application, or IND, which we expect to submit prior to the end of 2015.

 

Ø   SC403—Our proprietary product candidate SC403, which is being developed for the treatment of short bowel syndrome, or SBS, has been granted orphan drug designation by the FDA. We held a pre-IND meeting with the FDA in July 2015, during which the FDA reviewed and provided recommendations for the design of our proposed clinical trial protocol. During that meeting, the FDA requested that we conduct a second rat toxicology study on juvenile rats. We are in the process of conducting toxicity studies. We expect to submit an IND to the FDA in late 2015 or during the first quarter of 2016.

 

Ø   SC401—Our proprietary product candidate SC401 is being developed for the treatment of severe hypertriglyceridemia. We submitted an IND in July 2015, and we intend to commence two pivotal pharmacokinetic, or PK, studies in late 2015 or during the first quarter of 2016, followed by a pivotal clinical endpoint study.

 

Ø   SC410—Our proprietary product candidate SC410 is being developed for the treatment of non-alcoholic fatty liver disease, or NAFLD. We completed a preclinical trial of SC410 in late 2014 and anticipate submitting an IND to the FDA prior to the end of 2015.

Our regulatory strategy is focused on seeking the most efficient pathway to obtain drug approval while seeking the best available protections for our product candidates. To create our proprietary product candidates, we apply our ALT platform to a combination of lipophilic APIs, each of which is composed of active ingredients already approved by the FDA or active ingredients for which clinical proof of safety or efficacy is available in published literature. As a result, we believe that we are able to utilize the regulatory approval pathway provided in Section 505(b)(2) of the Federal Food, Drug, and Cosmetic Act, or FDCA. A New Drug Application, or NDA, submitted under Section 505(b)(2) of the

 

 

 

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FDCA, referred to as a 505(b)(2) NDA, contains full safety and efficacy reports but allows at least some of the information required for NDA approval, such as safety and efficacy information on the active ingredient, to come from studies not conducted by or for the applicant and for which the applicant has not obtained a right of reference. If the 505(b)(2) NDA applicant can establish that reliance on the FDA’s previous approval or relevant published literature is scientifically appropriate, it may eliminate the need to conduct certain preclinical or clinical studies of the new product. We believe that this streamlined approach will reduce the risks, costs and timing of bringing our product candidates to market. As part of our strategy to seek the best available protections for our product candidates, we have also sought, and been granted, orphan drug designation for both SC411 and SC403. As a result of this orphan drug designation, upon approval of an NDA for such orphan drug, we may be granted seven years of market exclusivity.

In connection with our licensing and related development and manufacturing services, we provide our customers with assistance throughout all phases of pharmaceutical development and product life cycle management activities, from drug design and development through commercialization. For example, we have commercial relationships with Mylan, Inc., TherapeuticsMD, Inc. and several other pharmaceutical companies. We are currently developing seven Abbreviated New Drug Application, or ANDA, drug products for third parties, four of which have been submitted and are awaiting FDA approval. We are also developing an additional four 505(b)(2) NDA drug products for third parties utilizing our proprietary technologies. We have been named as manufacturer in each of the four ANDAs submitted and expect to be named manufacturer in any future ANDA or NDA submitted by our customers. These service activities provide us with near-term revenue and operating leverage, allowing us to offset a portion of our overhead related to the development of our own products and product candidates.

We also manufacture and market over-the-counter, or OTC, and behind-the-counter lines of dietary supplements. Our dietary supplement portfolio includes highly concentrated omega-3 fatty acid supplements under our brand Ocean Blue®, prenatal vitamins, and dental health products. We market our dietary supplement products internally in the United States; while outside of the United States, we intend to utilize partners for the commercialization of these products. We believe that these activities help us defray the costs of building out our manufacturing infrastructure and enhance market awareness of our company in anticipation of the launch of our proprietary products.

OUR STRENGTHS

We believe we are well positioned to develop, manufacture and commercialize our pharmaceutical product candidates because of the following strengths:

 

Ø   Proprietary ALT platform.    We believe that our ALT platform will enable us to utilize our proprietary know-how and expertise in lipids to create unique formulations of clinically proven substances for approved and new indications. We believe that our proprietary ALT platform will enhance the bioavailability of the active drug compound, lower the effective dose, eliminate any food effects that may inhibit the absorption of the drug compound, and significantly reduce certain side effects associated with other formulations of our active ingredients. We believe our product candidates will consistently and reliably deliver lipid-based or lipid-soluble compounds, such as eicosapentaenoic acid, or EPA, docosahexaenoic acid, or DHA, and other omega-3 fatty acids, into a patient’s bloodstream to address conditions including severe hypertriglyceridemia, liver disease, pancreas-related disease, and SCD. We believe that the results of our prior human PK studies and our placebo-controlled human clinical trials of a prior formulation of SC401 and preclinical studies of SC403 demonstrate the potential impact that our ALT platform will have on the bioavailability of lipid-based therapeutics.

 

 

 

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Ø   Vertically integrated infrastructure that allows us to rapidly take products from concept to launch.     Our management and scientific personnel have significant expertise in formulation, development, clinical study services, regulatory affairs, commercialization, soft-gel manufacturing and manufacturing. We believe that this infrastructure, when used for our own product candidates, will allow us to better coordinate our regulatory objectives and our clinical trial strategy in-house, thereby advancing our product pipeline effectively and maximizing our commercial potential.

 

Ø   One of the leading US manufacturers of soft gelatin capsules.    We currently use proprietary soft gelatin encapsulation manufacturing methods to manufacture our own products and those of our customers. We believe there are a limited number of other companies in the United States that can produce soft gelatin capsules, and, to our knowledge, none of these use our proprietary methods. We believe our proprietary manufacturing methods are particularly suited to the most critical phases of the production of the capsule batches: encapsulation and drying. The one-piece soft gelatin capsules we create are flexible, hermetically-sealed, liquid-filled capsules. We have specialized expertise in the preparation of fill formulations of lipid-based compounds utilizing manufacturing techniques that allow a higher volume of production as the final drying phase of the soft gelatin capsules occurs off-line in a batch mode. We believe that our ability to use these proprietary methods in the manufacture of our proprietary product candidates will provide us with a competitive advantage and be a barrier to entry for other pharmaceutical companies.

 

Ø   Management team with significant experience in formulating, developing and commercializing products.    Our management team has extensive experience in medical and scientific research, formulations, and pharmaceutical drug development.

 

  -   Our founder and Chief Executive Officer, Dr Frederick D. Sancilio, has 40 years of experience in pharmaceutical research, development, formulation, manufacturing and commercialization. Prior to founding our company in 2006, his relevant experience includes his previous tenures at Burroughs-Wellcome Co., Schering-Plough Corporation, and Hoffmann-LaRoche, Inc., and the founding of three pharmaceutical companies AAIPharma Inc., Aesgen, Inc. and Endeavor Pharmaceuticals, Inc. Dr Sancilio has published over 20 articles in peer-reviewed scientific journals, and has been listed as an inventor on 25 domestic patents.

 

  -   Our Executive Vice President and Chief Financial Officer, Marc Wolff, has over 16 years of experience in the pharmaceutical industry. He spent 15 years in global finance leadership and general management roles at Catalent Pharma Solutions, a leader in prescription soft gelatin capsule manufacturing, drug development, delivery and supply partner of drugs, biologics and consumer health products. More recently, he served as chief financial officer of JHP Pharmaceuticals, where he was responsible for all financial aspects, including human resources and information technology, and led the successful completion of the merger with Par Pharmaceutical.

 

  -   Our Vice President of Research and Development, Dr Thorsteinn Thorsteinsson, is highly experienced in specialized soft gelatin capsule manufacturing methods and has over 20 years of experience in our industry, including his previous tenure as a formulation scientist at Banner Pharmacaps, the second largest pharmaceutical soft gelatin capsule manufacturer in the United States.

OUR STRATEGY

We intend to become a leading integrated specialty pharmaceutical company through continued execution and implementation of the following strategies:

 

Ø  

Advance our four lead product candidates.    We intend to rely on the 505(b)(2) regulatory pathway for approval of our four lead product candidates. We believe the 505(b)(2) regulatory pathway will

 

 

 

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  provide us the most cost efficient and expeditious pathway to obtain approval of our product candidates. We were granted orphan drug designation for two of our four lead product candidates and for one of our early stage product candidates. This designation could provide us with seven years of market exclusivity for any product candidate that is approved for the orphan indication.

 

Ø   Commercialize any of our product candidates that are FDA-approved.    We intend to leverage our current commercialization experience to create a small, focused sales force to commercialize, upon approval, those product candidates that target a limited, discrete population, such as our SC411 and SC403 product candidates. We may rely on out-licensing or co-promotion arrangements for the marketing of those product candidates that have the potential to treat extensive patient populations such as our SC401 and SC410 product candidates.

 

Ø   Manufacture our proprietary products in our established manufacturing facilities.    We believe our manufacturing facilities and years of manufacturing experience provide us with a competitive advantage. We currently manufacture lines of our commercialized branded and co-branded dietary supplements and dental health products, as well as clinical batches of prescription generic and prescription proprietary drugs for our third-party customers and expect to commence manufacturing commercialized levels of these generic and proprietary drugs within the next six months. We intend to leverage the economic efficiencies afforded by manufacturing our current proprietary products in our manufacturing facilities.

 

Ø   Develop additional proprietary products by applying our ALT platform to lipophilic APIs to address unmet medical needs.    We have several product candidates formulated using our ALT platform under development that target a range of unmet medical needs in the therapeutic areas of lipid disorders, cardiovascular disease and hematology disorders, including product candidates that relate to formulations of omega-3 fatty acids, omega-6 fatty acids and fat-soluble micronutrients, which are lipid and lipophilic compounds. We also utilize our proprietary ALT platform in connection with the development and manufacture of lipid-based products for our customers in the hormone area. We believe the mechanism of ALT makes it potentially applicable to expansion into other therapeutic categories.

 

Ø   Evaluate internal and external business development opportunities to accelerate and maximize the potential of our product candidates worldwide.    We intend to continue to seek new product candidates that lie within or complement our therapeutic areas of focus to which we can acquire rights through acquisition, in-licensing or co-promotion arrangements. In addition, we currently retain worldwide commercial rights to our product candidates. Consequently, we intend to seek out-licensing or co-promotion opportunities outside of the United States for any of our product candidates.

OUR PROPRIETARY PRODUCT PIPELINE

Our proprietary product pipeline is focused on developing new or improved therapeutics which utilize lipophilic APIs. Lipids are molecules that include fatty acids, steroids (including hormones), fat-soluble vitamins (such as vitamins A, D, E, and K), monoglycerides, diglycerides and triglycerides. The principal roles of lipids in the body are storing energy, intracellular signaling, and acting as structural components of cell membranes. Imbalances of lipids and lipid disorders are currently linked to numerous diseases. However, we believe the ability to treat these imbalances and disorders has been limited based on the fact that lipids, by themselves, are not readily bioavailable and must be taken with food in order to efficiently pass through the intestinal lining.

We believe that, based upon available scientific studies, currently available treatments of lipid disorders and their related diseases are inconsistently absorbed and less bioavailable, and are impacted by the

 

 

 

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presence or absence of food in the digestive tract, resulting in inconsistent product efficacy. We believe that our product candidates, which are lipid-based APIs formulated using our proprietary ALT platform, will have greater bioavailability and be more consistently absorbed than existing conventional formulations, potentially improving efficacy and lowering effective doses. Furthermore, we believe that increased consistency and bioavailability of the lipophilic APIs may facilitate the use of these lipophilic APIs for the treatment of diseases and disorders for which there is no current treatment or for which the currently available treatments have significant side effects.

Our research and development efforts have primarily concentrated on the development of formulations of product candidates based on certain essential fatty acids. We believe these products, when formulated with ALT, will be more effective in the treatment of lipid disorders and their related diseases than what is currently available in the market and may treat disorders where no treatment currently exists. All of our pipeline products contain several different fatty acids, in the form of fatty acid ethyl esters, in proprietary and complex mixtures with a blend of surfactants. In the case of SC401, the mixture contains a higher amount of EPA compared with our SC403, SC410 and SC411, where the primary fatty acid is DHA. The proportion of fatty acids included in SC403, SC410 and SC411 are the same, but the formulations for these three product candidates differ in the volume of fatty acids included in each dose, the dosage size and form, the blend of surfactants and the ratio of drug to surfactants. The surfactants are pharmaceutical excipients selected for their bioavailability and are optimized in a specific ratio to the fatty acids included in the relevant product candidate to enhance the formation of micelles using ALT.

The following table sets forth information on the status of each of our product candidates, each of which is wholly owned by us:

 

Product

Candidate

 

Indication

 

Regulatory Strategy

 

Current Status

 

Upcoming
Milestones

 

Anticipated

Commercialization
Plan

SC411

  Sickle Cell Disease  

Orphan drug designation granted April 2015.

 

Pursuing 505(b)(2) NDA.

 

Relying on published preclinical studies for IND submission.*

 

Bridging toxicity study completed July 2015.*

 

Pre-IND meeting with FDA held May 2015.

  Anticipate submitting IND to FDA prior to the end of 2015 upon completion of manufacture of clinical trial materials (“CTM”).   In-house.

SC403

  Short Bowel Syndrome  

Orphan drug designation granted June 2015.

 

Pursuing 505(b)(2) NDA.

 

Preclinical study completed in early 2015.

 

Bridging toxicity study completed July 2015.*

 

Pre-IND meeting with FDA held July 2015.

  Anticipate submitting IND to FDA in late 2015 or during the first quarter of 2016 pending completion of second toxicity study** and completion of manufacture of CTM.   In-house.

 

 

 

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Product

Candidate

 

Indication

 

Regulatory Strategy

 

Current Status

 

Upcoming
Milestones

 

Anticipated

Commercialization
Plan

SC401

  Severe Hypertriglyceridemia   Pursuing 505(b)(2) NDA.  

Relying on preclinical studies for current marketed product.

 

Bridging toxicity study completed July 2015.*

 

Pre-IND meeting with FDA held in Oct. 2014.

 

IND submitted July 2015.

  Anticipate initiating PK studies in late 2015 or during the first quarter of 2016.   Licensing or partnership arrangement with third parties.

SC410

  Non-Alcoholic Fatty Liver Disease   Pursuing 505(b)(2) NDA.   Preclinical study completed in 2014.   Anticipate submitting IND to FDA prior to the end of 2015 upon completion of manufacture of CTM.   Licensing or partnership arrangement with third parties.

 

*   As part of our IND submissions, we conducted a 28-day bridging rat toxicology study using our omega-3-acid ethyl esters formulation and our DHA formulation in direct comparison with an FDA-approved omega-3-acid ethyl ester. The study was completed in early July 2015.
**   As part of our anticipated IND submission for SC403, we are also conducting a second 28-day rat toxicology study in juvenile rats using our omega-3-acid ethyl esters formulation and our DHA formulation in direct comparison with an FDA-approved omega-3-acid ethyl ester. One of these, a 28-day study, will need to be completed before we submit our IND.

Additional information about our four lead product candidates is discussed below.

SC411 Program and Sickle Cell Disease

SCD is a group of hereditary blood disorders caused by a genetic mutation that affects hemoglobin, the molecule that delivers oxygen throughout the body via red blood cells. SCD is caused by a genetic mutation in the beta-chain of hemoglobin, which results in mutant hemoglobin known as sickle hemoglobin, or HbS. Hemoglobin is a protein in red blood cells that carries oxygen from the lungs to the body’s tissues and returns carbon dioxide from the tissues back to the lungs. Hemoglobin accomplishes this diametric function by binding and then releasing oxygen through allosterism, a process by which the hemoglobin molecule changes its shape to be high affinity for oxygen in the lungs, where oxygen is abundant, and low affinity for oxygen in the tissues, where oxygen must be released. Oxyhemoglobin, the high oxygen affinity form of hemoglobin, is formed in the lungs during respiration, when oxygen binds to the hemoglobin molecule, while deoxygenated hemoglobin, the low oxygen affinity form of hemoglobin, is formed when oxygen molecules are removed from the binding site as blood flows from the lungs to the body. In patients with sickle cell disease, deoxygenated HbS molecules polymerize, under low oxygen tension, and form long, rigid rods within a red blood cell, much like a “sword within a balloon.” As a consequence, the normally round and flexible red blood cell becomes rigid and elongated into a “sickled” shape. Sickled red blood cells do not flow properly in the bloodstream; they clog small blood vessels and reduce blood flow to the organs. Sickled red blood cells also die earlier than normal red blood cells and the bone marrow cannot make enough new red blood cells to replenish the dying ones, which causes a constant shortage of red blood cells. This results in inadequate oxygen delivery, or hypoxia, to all body tissues, which can lead to multi-organ failure and premature death.

 

 

 

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The following graphic illustrates the process by which sickling occurs in SCD patients as a result of the polymerization of deoxygenated HbS in a red blood cell, leading to occluded blood flow, in contrast to a normal red blood cell:

 

LOGO

Cells containing HbS are rigid and prone to adhesive interactions with each other, leukocytes, platelets, plasma and vessel walls. These adhesive interactions lead to vaso-occlusion in small blood vessels and severe tissue ischemia in vital organs, and ultimately permanent organ damage. Vaso-occlusion further reduces the amount of oxygen flowing into the cell and available to body tissues. Acute vaso-occlusive events are known as crises. Crises can last from hours to days. Some patients have one episode every few years while others have many episodes each year. Crises can be severe enough to require hospitalization and can be fatal. Serious symptoms and complications often accompany crises, including pain, organ damage, infection and stroke.

Signs and symptoms of SCD usually begin in early childhood. The severity of symptoms varies from person to person and it has been postulated that clinical manifestations result from complex combinations of genetic, cellular and environmental factors. Some people have mild symptoms, while others are frequently hospitalized for more serious complications. Beginning in childhood, patients suffer unpredictable and recurrent episodes or crises of severe pain due to blocked blood flow to organs, which often leads to psychosocial and physical disability. The constant destruction of red blood cells with the release of their contents into the blood often leads to damaged or diseased blood vessels, which further exacerbate blood flow obstruction and multi-organ damage.

SCD can lead to hemolytic anemia (the destruction of red blood cells within blood vessels), vaso-occlusion (blocked blood flow to tissues), progressive multi-organ damage and early death. Patients with anemia experience fatigue, weakness, shortness of breath, dizziness, headaches, and coldness in the hands and feet. Anemia can also cause delayed growth and development in children. Deprivation of oxygen-rich blood is especially deleterious to the lungs, kidneys, spleen, and brain. A particularly serious complication of SCD is pulmonary hypertension linked to blockages in the blood vessels that supply the lungs. Pulmonary hypertension occurs in about one-third of adults with SCD and can lead to heart failure.

 

 

 

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Other serious consequences of the blocked blood vessels are strokes, cognitive impairment, autosplenectomy (disappearance of the spleen), ulcers of the lower extremities, impaired vision and hearing, and priapism. Blockage of the blood vessels supplying the spleen may lead to failure of that organ, which results in serious infectious conditions such as osteomyelitis (a bone infection), cholecystitis (inflammation of the gall bladder), pneumonia and urinary tract infection. Infections in SCD may also be linked to effects of the disease on other components of the immune system, such as white blood cells and complement. As a result of the vaso-occlusion and organ damage, sickle cell patients are often in a near-continuous state of inflammation. They have elevated states of certain proteins that are markers of inflammation. Sickle cell patients also often have near continuous obstructive blood clotting activity inside the blood vessels, low level most of the time but spiking during crises. Ultimately, SCD causes multi-organ dysfunction and early death in affected individuals. Many succumb to complications of chronic organ dysfunction and eventual organ failure.

Market Opportunity and Currently Available Treatments and Their Limitations

SCD is a common inherited blood disorder in the United States, affecting an estimated 90,000 to 100,000 Americans. SCD can lead to lifelong disabilities and reduce average life expectancy. In addition, the financial cost of SCD is high, both to people with the disease and to the health care system. A study published in the American Journal of Hematology estimated the cost of SCD-related care for the average patient with SCD reaching the age of 45 to exceed $460,000.

There is no single treatment for people with SCD. The only potentially curative treatment currently available for SCD patients is bone marrow transplantation, which requires a suitable matching donor and carries significant risks of rejection, graft versus host disease and death. While there are a variety of treatment options, depending on the symptoms, each of these treatments can have significant side effects. Hydroxyurea, which was initially approved as a chemotherapy drug, was approved by the FDA in 1998 for the treatment of SCD in adults. Hydroxyurea (marketed as DROXIA or Hydrea by Bristol-Myers Squibb Company as well as in generic form) is the only therapeutic approved for SCD, and there is no approved therapeutic for SCD in pediatric patients in the United States. The use of hydroxyurea is significantly limited by its side effect profile, variable patient responses and concerns of long-term toxicity. Side effects associated with hydroxyurea include impairment of fertility and the suppression of white blood cells (neutropenia) and platelets (thrombocytopenia), which place patients at risk for infection and bleeding. In addition to hydroxyurea treatment, transfusions with normal blood are used to alleviate anemia, which is a common symptom of SCD, and reduce sickling of red blood cells. Blood transfusions, however, have a number of limitations, including the expense of treatment, lack of uniform accessibility and risks ranging from allergic reactions to serious complications such as blood-borne infection and iron overload, which can cause organ damage. Finally, patients are given palliative therapy for acute pain attacks, which typically include opiates. However, side effects associated with repeated use of opiates include sedation, dizziness, nausea or vomiting, constipation, physical dependence, tolerance, and respiratory depression. Furthermore, despite the current standard of care, including hydroxyurea, blood transfusion and palliative therapy for acute pain attacks, patients with SCD continue to suffer serious morbidity and premature mortality. As a result, we believe that a safe and efficacious oral treatment for SCD would be well-received by patients, physicians and third-party payors.

Our Solution to Address Market Need

SC411 is our proprietary product candidate that is being developed for the treatment of SCD. SC411 consists of a complex proprietary mixture of various fatty acids, primarily in the form of DHA, and surfactants formulated using ALT specifically to address the treatment of SCD. The drug is encapsulated in a soft gelatin capsule and intended to be taken orally.

 

 

 

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As early as 1991, it was suggested that omega-3 fatty acids decrease the destruction of red blood cells in mammals. It also has been found that sickle cell patients have abnormal levels of certain fatty acids in their blood; specifically, less DHA and EPA in red blood cells, white blood cells, platelets and plasma. These findings led naturally to the hypothesis that omega-3 fatty acids may be useful in the treatment of SCD.

As early as 2001, small human clinical trials showed that omega-3 fatty acids could reduce pain episodes in sickle cell patients, perhaps by reducing activity that leads to obstructive blood clotting. Other studies have shown that omega-3 fatty acids can increase hemoglobin levels, and reduce pain episodes, vaso-occlusive episodes, anemia, organ damage and other disease complications in sickle cell patients. For example, prior to joining us, our Clinical Research Director Dr Daak conducted a study on the effect of omega-3 fatty acid supplementation in patients with sickle cell anemia. The Daak et al study was a randomized, double-blind, placebo-controlled, 12-month clinical trial of the effects of an omega-3 fatty acid combination that was primarily DHA plus EPA (both omega-3 fatty acids) in SCD patients. The study was carried out at the University of Khartoum, Khartoum (Sudan) in collaboration with the London Metropolitan University, London. Inclusion criteria for the study included no evidence of fever, infection or crisis for four weeks prior to start of the study. Exclusion criteria included presence of other chronic diseases, blood transfusion in the previous four months, hydroxyurea treatment, history of overt stroke and pregnancy. There were 140 patients deemed eligible for randomization and they were distributed 1:1 between the omega-3 and placebo groups. A total of 128 patients completed the study (67 in the omega-3 group, 61 in the placebo group). The test medication (which is identified as Active in the graph below) was a capsule containing a blend of a high level of DHA plus EPA (both omega-3 fatty acids). The placebo capsule contained a high oleic acid oil blend. Both medication and placebo capsules contained vitamin E to prevent oxidation. To maintain the blind study, the capsules were matched in appearance and flavor. The dosing was based on age and weight. The primary endpoint was the annualized rate of clinical vaso-occlusive crisis, defined as painful events that lead to hospitalization. The secondary endpoints included incidence of severe anemia (Hb concentration < 50 g/L); number of inpatient days due to clinical vaso-occlusive crisis; rate of blood transfusion, school attendance, mean Hb concentration, and average cell volume. Adverse events were not collected prospectively.

The patients in the study were stratified by age and sex and randomly assigned to the drug or placebo control group. Masking was maintained throughout the study. Patient information was captured at baseline on a questionnaire and in a monthly self-assessment health diary in which the patient recorded daily pain frequency/intensity, pain medication use, and hospitalizations. During the study period, in-clinic monthly follow-ups were conducted at which time the patient diaries were reviewed. Whole blood was collected at recruitment and after one year and analyzed for fatty acid composition.

 

 

 

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At the end of the 12-month study period, the primary endpoint, clinical vaso-occlusive crises, was reduced in the test medication group compared to the placebo group (median rate: 0 compared with 1; p<0.0001). Statistical significance was also reached for some of the secondary endpoints, number of hospitalization days due to sickle cell crisis and associated complications (median rate of 0 (IQR: 1) in the drug group compared with median rate of 0 (IQR: 6) in the placebo; p<0.05) and annualized vaso-occlusive crisis regardless of hospitalization (median rate: 2.7 in the drug group, compared with 4.6 in the placebo group; p<0.01) were also reduced by omega-3 treatment. Similarly, the patients taking omega-3 had a lower incidence of severe anemia (3.2 compared with 16.4; p<0.05) and blood transfusion rate (4.5 compared with 16.4; p<0.05). Other secondary endpoints, including percentage sequestration crisis, stroke, avascular necrosis and school attendance were not significantly different. No differences in hemoglobin, average cell volume and after hematologic variables were found between the omega-3 and placebo groups at, before or after one year of intervention. In addition, the biochemical studies conducted in the context of this clinical trial showed that high DHA supplement resulted in a significant reduction (p<0.05) in lactate dehydrogenase (markers of hemolysis), chronic inflammation, white blood cell adhesion and oxidative stress. Statistical significance is denoted by a “p” value, which is the probability that the reported result was achieved purely by chance. Generally, a p-value less than 0.05 is considered statistically significant. By the data showing a statistical significance, we concluded that the observed effect reflects the treatment rather than sampling error or by chance.

 

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Ahmed A. Daak et al., Effect of omega-3 (n-3) fatty acid supplementation in patients with sickle cell anemia: randomized, double-blind, placebo-controlled trial, 97 Am. J. Clin. Nutr. 37, 37-44 (2013).

Based on the concentration of DHA contained in SC411, we believe that SC411 may provide similar benefits as those observed in the Daak, et al study. We believe that SC411 will treat SCD by decreasing blood cells adhesion, chronic inflammation and red cell hemolysis, the factors that lead to reduction in pain episodes, vaso-occlusive crises and organ damage. Based on its formulation and mechanism of action, we believe that SC411 is well-positioned to deliver therapeutic amounts of DHA to sickle cell patients. We believe that SC411 has the potential to address the inflammatory symptoms (for example, pain and fatigue) of SCD and to assist in reducing sickle cell crisis events. We believe that by consistently and reliably delivering omega-3 fatty acids into a patient’s bloodstream, the membrane of a sickle cell will become more fluid, which will prevent the cell from blocking the capillary veins. By minimizing damaged capillary veins, SC411 may be able to reduce sickle cell crisis events and related mortality.

 

 

 

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Planned Clinical Development and Regulatory Status

In April 2015, the FDA granted orphan drug designation for SC411 for the treatment of SCD. We have not initiated any clinical trials regarding SC411. We held a pre-IND meeting with the FDA in May 2015. During that meeting, the FDA reviewed and provided recommendations for the design of our proposed clinical trial protocol for a pivotal trial of SC411. The FDA has agreed to review the final study protocol and statistical analysis plan and asked us to submit the protocol and plan in a written request for a Type C meeting.

Our proposed clinical trial protocol for the SC411 study, which will be conducted at up to 30 sites in the United States, is designed as a double-blind randomized 52-week study. We currently plan to enroll a total of approximately 141 patients in the study (94 in the SC411 group and 47 in the placebo group). This sample size is based on a 2:1 randomization ratio to receive SC411 versus placebo and a 5% significance level and 90% power after accounting for a discontinuation rate of up to 35%. The population for this study is patients aged 5 to 17 years who have a diagnosis of sickle cell anemia which includes HbSS and hemoglobin S/ß-thalassemia (documented by blood tests), have had at least two documented episodes of sickle cell crises/events within 12 months of the screening visit, and have received hydroxyurea for a minimum of 12 months or who have not received hydroxyurea. Patients will be excluded if they have received any investigational therapy for sickle cell anemia or any disease within 30 days of screening and during the course of the trial. Patient will be randomized 2:1 to SC411 or placebo. Randomization will be stratified by disease severity category (Category 1: relatively moderate—two to three painful crises in the past 12 months; and Category 2: severe—four painful crises in the past 12 months) and prior hydroxyurea use at baseline (yes or no).

The primary objective of the SC411 clinical study is to determine the efficacy of oral SC411 as a therapy for SCD, as evaluated by the number of occurrences of sickle cell crises. SC411 and a soybean oil placebo will be encapsulated in soft mini gel capsules and administered orally with or without food and water. The daily dose will be calculated based on body weight. Efficacy analyses will be performed on the Intent to Treat, or ITT, Per-Protocol, or PP, and Completer Populations for the primary efficacy endpoint, and on the ITT and PP Populations for the secondary efficacy endpoints. All summaries will be performed by treatment group with patients under their randomized treatment assignment. The primary efficacy endpoint is sickle cell crisis rate, which is defined as the total number of adjudicated acute sickle cell crises divided by the total number of months in the study from randomization. Safety assessments will include adverse events, laboratory parameters, and vital signs. Efficacy assessments will include rate of sickle cell crises, the number of hospitalizations for sickle cell crises, the number of emergency room/medical facility visits for sickle cell crises, the number of hospitalization days for sickle cell crises, time to first and second crisis, and certain hematological parameters.

We intend to utilize the FDA’s 505(b)(2) NDA approval pathway, as we believe we can rely on the FDA’s previous findings of safety for a currently marketed product and published clinical data. We expect to rely on published clinical trials using a similar drug product to provide support of efficacy. Consequently, we believe we can move directly into a pivotal clinical trial. We expect to submit an IND prior to the end of 2015 and initiate the clinical trial discussed in late 2015 or in early 2016.

SC403 Program and Short Bowel Syndrome

Overview of Short Bowel Syndrome

SBS is a devastating disorder clinically defined by a failure to properly absorb nutrients (malabsorption), frequently accompanied by diarrhea, dehydration and malnutrition. SBS has numerous causes, both congenital (present at birth) and acquired. SBS in infants occurs when an infant is unable to absorb food nutrients properly due to problems with their small intestine. In children, SBS can occur as a congenital

 

 

 

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condition. For example, the small intestine might be abnormally short at birth, a section of the bowel might be missing, or the bowel does not form completely before birth (intestinal atresia). In other cases, patients develop conditions in which a large section of the small intestine has to be removed by surgery. In the neonatal age group, the most common causes of SBS are necrotizing enterocolitis (the inflammation and loss of blood flow to the intestine, leading to severe damage), complicated meconium ileus, abdominal wall defects, intestinal atresia, and volvulus (twisting of the intestine). Later in childhood, the primary causes of SBS are trauma, volvulus, and Crohn’s disease.

The link between small intestine loss and SBS is simple. Losing large amounts of the small intestine compromises the digestive and absorptive processes. In normal infants, the length of the small intestine is approximately 125 cm at the start of the third trimester of gestation and 250 cm at term. By adulthood, the small intestine grows to approximately 480 cm. In general, virtually all digestion and absorption is completed within the first 100-150 cm of jejunum in a healthy individual. Patients who have less than 100 cm of jejunum exhibit significant malabsorption. Adequate digestion and absorption cannot take place, and proper nutritional status cannot be maintained without supportive care, frequently including short-term and long-term parenteral nutrition, or PN. Whether or not a patient who at birth, or as a result of loss, has a significant decreased amount of small intestine will develop SBS depends on a number of factors. Important cofactors that help to determine whether the syndrome will develop or not include the premorbid length of the small intestine, how much intestine is lost, the age of the patient, the remaining length of small intestine and colon, the functional quality of the residual bowel, and the presence or absence of the ileocecal valve.

Market Opportunity and Currently Available Treatment Options and Their Limitations

The prevalence of SBS in the United States is difficult to estimate. According to the Short Bowel Syndrome Foundation, approximately 20,000 people in the United States suffer from SBS. In addition, according to a report published by the American Academy of Pediatrics, the incidence of SBS in infants with varying degrees of low birth weight is approximately 1% of such births. In 2013, the percentage of children born with low birth weight was 8% and the percentage born with very low birth weight was 1.4%. Researchers from the University of Michigan estimate the average cost of care for a child with SBS ranges from $1.0 million to $2.0 million over a five-year period. More important than the cost, SBS continues to contribute to infant and child mortality. Estimated mortality rates for infants and children with SBS vary substantially, depending on the definitions and causes of SBS in the sampled populations. In a 2012 report from the Pediatric Intestinal Failure Consortium, which tracked 272 infants with a gestational age of 34 weeks and birth weight of 2.1 kg for 25.7 months, 27% of the infants died, 26% underwent intestinal transplantation, and 47% were eventually weaned from PN.

There are currently no drugs approved by the FDA for use in treating SBS in infants and children, although there are three drugs that have been approved generally for the treatment of SBS (one of which is expressly prohibited from being administered to infants and children). In addition to approved drugs, the standard of care for patients with SBS often includes PN, which is the intravenous delivery of a solution containing proteins, fats, sugars and essential vitamins and minerals to the patient. However, the use of PN in pediatric populations, especially in premature infants, is frequently associated with liver injury that may ultimately result in liver failure and death. In fact, PN is itself the most important risk factor for liver disease in infants with SBS.

Recent published clinical trials using PN-fish oil instead of soy-based oils appear to slow the progression of liver disease. However, these babies have decreased ability to absorb nutrients orally and this route of administration is seldom available. In Europe, DHA is being delivered intravenously to premature infants with positive results, though this treatment method is not approved by the FDA for use in the United States and the infant still suffers from the risk of potential associated liver injury.

 

 

 

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Our Solution to Address Market Need

SC403 is our proprietary product candidate that is being developed for the treatment of SBS in premature infants. SC403 is a complex proprietary mixture of various fatty acids, primarily in the form of DHA, and a blend of surfactants formulated using ALT to specifically address the treatment of SBS. The resulting enteral drug product is then added as an additive to the mother’s breast milk or to baby formula before being fed to the infant who has SBS.

Infants with SBS typically cannot absorb sufficient fat and fluids necessary for healthy development as they have insufficient intestine to create the requisite volume of micelles for the absorption of necessary fatty acids and nutrients. In our other product candidates, which are administered via soft-gelatin capsules, micelles are created in the body upon interaction with the body’s intestinal wall, encapsulating within them the specific drug so that the micelle and drug can pass through the intestinal wall into the intestinal lining. However, SC403 is added to breast milk or to baby formula prior to its introduction to the body. Based on our preclinical studies, it appears that when SC403 is mixed with breast milk or baby formula, stable micelles are immediately formed which encapsulate the fatty acids of SC403, as expected, as well as the other nutrients that are present in the breast milk or baby formula. These micelles are then ingested by the baby and the fatty acids that comprise SC403 and the other nutrients now encapsulated in the micelle are able to pass through into the intestinal lining. By virtue of its formulation and mechanism of action, we believe SC403 (i) will increase fatty acid absorption, especially DHA, in patients with SBS and (ii) may also increase their absorption of other vital nutrients. Furthermore, by delivering nutrients to the intestinal walls, SC403 may be able to contribute to the growth of the intestinal cells.

A one-week study of SC403 using a piglet model was conducted by Harvard Medical School and Baylor University in January 2015. In this study, the piglets had their bowel shortened by surgery. One group was administered omega-3 fatty acids, primarily DHA, and the other group was administered SC403. The group that received SC403 exhibited statistically significant (p<0.05) increased levels of both DHA and EPA in their plasma as compared to the control group.

The piglets that received SC403 gained more weight than the control group (696 grams vs. 132 grams), and grew at a faster rate (65 g/kg/day vs. 13 g/kg/day), which may correlate to faster recovery. The charts below show the changes in the levels of DHA and EPA for the piglet group that received SC403 and the control group and the changes in weight of the subjects.

 

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General clinical characteristics and weight trends (Median)

 

      Control    SC403

Male, n (%)

   4 (80)    3 (60)

Weight at start, g (min-max)

   2,490 (2,354-2,715)    2,474 (2,200-2,810)

Weight at finish, g (min-max)

   2,594 (2,560-3,366)    3,170 (2,381-3,688)

Change in weight, g (min-max)

   132 (24-651)    696 (181-878)

Growth velocity, g/kg/d (min-max)

   13 (2-57)    65 (19-75)

Weight change, % (min-max)

   3 (0.9-24)    28 (8-31)

We believe that SC403 may permit babies and children to reduce or eliminate their use of PN, thereby reducing the risks associated with PN. Furthermore, we believe that SC403 may allow babies and children to absorb more nutrients than possible with PN or other supplements and thrive.

 

 

 

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Planned Clinical Development and Regulatory Status

In June 2015, the FDA granted orphan drug designation for SC403 for the treatment of SBS. We have not initiated any clinical trials regarding SC403 and we have not yet submitted an IND for SC403, but expect to submit an IND to the FDA in late 2015 or during the first quarter of 2016.

In July 2015, we held a pre-IND meeting with the FDA to review our proposed protocol. The FDA requested that we (i) conduct two additional rat toxicology studies, a 28-day study and a 90-day study, both in juvenile rats using our omega-3-acid ethyl esters formulation and our DHA formulation in direct comparison with an FDA-approved omega-3-acid ethyl ester, (ii) either provide support for the safety of an excipient in SC403 or conduct a preclinical study to qualify the impurities and (iii) conduct a dose-ranging clinical trial before initiating a pivotal trial. The 28-day rat study will need to be completed before submitting the IND.

We intend to utilize the FDA’s 505(b)(2) NDA approval pathway, as we believe we can rely on the data from the preclinical study conducted for us, the FDA’s previous findings of safety for a currently marketed product, and published clinical data. We expect to rely on published clinical trials using a similar drug product. Consequently, we believe we can move directly into a pivotal clinical trial after completing the requested preclinical studies and dose- ranging clinical trial.

Based on discussion with the FDA at our pre-IND meeting, we intend to conduct a 28-day dose-ranging clinical trial designed to evaluate the safety and efficacy of two doses of enterally administered SC403 administered with PN, compared to placebo administered with PN, in infants and children with SBS ages six months and older. During the course of the trial, we plan to measure several endpoints including fatty acid absorption, the percent change in the need for PN, growth parameters, bowel adaptation and improvements in hepatic function. We expect to initiate this clinical trial in late 2015 or in early 2016. We plan to use this study to inform the design of a pivotal clinical trial. We currently believe that the primary endpoint for a pivotal clinical trial would be percent change in the need for PN or growth parameters. We currently estimate that a pivotal clinical trial will evaluate approximately 40 patients for about 90 days, but these parameters may be changed based on the results of our dose-ranging clinical trial.

SC401 Program and Severe Hypertriglyceridemia

Overview of Severe Hypertriglyceridemia

Hypertriglyceridemia refers to a condition in which patients have levels of triglycerides in their blood above 200 mg/dL, and severe hypertriglyceridemia refers to a condition involving levels of triglycerides equal to or above 500 mg/dL. Triglycerides are fats that are carried in the blood, together with cholesterol, within lipoproteins. Triglycerides above 200mg/dL is considered by the medical community as problematic, whereas, blood levels above 500mg/dL are considered severe and markedly increase risk for cardiovascular disease, pancreatitis and related events such as myocardial infarction, ischemic heart disease and stroke. Hypertriglyceridemia occurs due to both genetic and environmental factors, including obesity, sedentary lifestyle and high-caloric diets. Hypertriglyceridemia is also associated with comorbid conditions such as diabetes, chronic renal failure and nephrotic syndrome.

Market Opportunity

According to a recent National Health and Nutrition Examination Survey (1999-2004) of dyslipidemia in the United States, it is estimated that approximately 3.5 million individuals in the United States are diagnosed with severe hypertriglyceridemia. Dyslipidemia is characterized as the elevation of low-density lipoprotein (“bad”) cholesterol, or LDL-C, or low levels of high-density lipoprotein (“good”) cholesterol, or HDL-C. The percentage of patients with severe hypertriglyceridemia has risen sharply along with the dramatic increase in obesity.

 

 

 

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Currently Available Treatment Options and Their Limitations

For patients with severe hypertriglyceridemia (defined as triglyceride levels equal to or above 500 mg/dL), the goal of treatment is to provide significant reductions in blood levels of triglycerides. Currently available treatments consist of dietary modifications to lower the intake of dietary fat and the use of FDA-approved drugs, including statins, drugs containing either omega-3 fatty acids or fibrates. However, we believe these treatments are often inadequate to lower levels of triglycerides below 500 mg/dL, and if the patients are left untreated, their high level of triglycerides can predispose the patient to develop acute pancreatitis, a sudden inflammation of the pancreas which can result in severe complications and has a high mortality rate despite treatment.

The leading FDA-approved treatments to lower triglyceride levels are fibrates (fenofibrate and gemfibrozil), statins, and prescription omega-3 fatty acid treatments. The use of fibrates has been shown to possess a risk of abnormal increases in liver enzymes and creatinine (a marker of kidney function) and, when combined with a statin, rhabdomyolysis (muscle breakdown). Niacin, a B vitamin has also long been used to increase HDL-C, but it has not proven particularly effective for use in lowering triglycerides and is considered difficult to tolerate, due to the potential for severe flushing in patients. Prescription omega-3 fatty acid treatments include Lovaza, which is marketed in the United States by GlaxoSmithKline and as Omacor in Europe; Lipanthyl, which is marketed by Abbott Laboratories outside the United States; Tricor, Trilipix and Niaspan, which are currently marketed by AbbVie, Inc.; Vascepa which is currently marketed by Amarin; and Omtryg, for which Trygg Pharma AS gained FDA approval in April 2014. In addition, AstraZeneca/Omthera Pharmaceuticals received approval for Epanova, but it is not yet being marketed.

Because of the severely elevated levels of triglycerides in our target patient population (with some as high as 2,000 mg/dL), reducing levels of triglycerides below 500 mg/dL may require reductions in levels of triglycerides of 75% or more. Few individual therapies can reduce triglyceride levels to this degree, and although we have not tested any of our product candidates in patients with triglyceride levels above 500 mg/dL, we believe that our ALT platform will enable our SC401 product candidate to provide a more substantial reduction than existing treatments. For example, Lovaza has been shown to reduce levels of triglycerides by an average of only approximately 45% in patients with baseline levels of triglycerides between 500 mg/dL and 2,000 mg/mL. Although fibrates have been shown to reduce levels of triglycerides by approximately 55% in patients with baseline levels of triglycerides between 500 mg/dL and 1,500 mg/dL, the effect of fibrates in patients with baseline levels of triglycerides greater than 2,000 mg/dL is not known with certainty. Moreover, patients with triglyceride elevations of intestinal origin may be less responsive to fibrates, which act in the liver. Given the need for significant reductions in levels of triglycerides in these patients, single or even combination therapies are often insufficient for many of these patients.

Further, the current FDA-approved therapies for the treatment of severe hypertriglyceridemia include therapies containing omega-3 fatty acids as well as EPA-only therapies, both categories of which are, we believe, poorly absorbed by the body, in part due to a significant effect of the food ingested by the patient prior to the dosage on the absorption of the therapy. The result is that some approved omega-3 therapies require patients to take four large capsules per day, sometimes split into twice-daily dosing, and each dose may have to be taken with a meal to achieve optimal absorption. Furthermore, bioavailability studies demonstrate large variances in absorption of the therapy based on the fat content of the pre-dosing meal. In addition, although many dietary supplements containing fish oils or other omega-3 fatty acid formulations are currently available on the market, many of these supplements have lower concentrations of active ingredients than our products and product candidates contain, and are not approved to treat hypertriglyceridemia.

 

 

 

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Our Solution to Address Market Need

SC401 is our proprietary product candidate that is being developed for the treatment of severe hypertriglyceridemia. SC401 consists of a complex proprietary mixture of various fatty acids, primarily in the form of EPA and DHA, formulated using ALT to specifically address the treatment of severe hypertriglyceridemia. The drug is encapsulated in a soft gelatin capsule and intended to be taken orally. We originally had two formulations of SC401 under development. While both of the formulas were comprised of a mixture of fatty acids, primarily in the form of EPA and DHA, the actual percentage of the EPA and DHA in the mixture varied as did the purity of the EPA and DHA. We have decided to pursue the second formulation of SC401 which has substantially the same ratio of EPA and DHA as Lovaza. We believe that this approach will allow us to rely on some of the prior clinical data previously approved by FDA in connection with its approval of Lovaza and therefore could significantly reduce the time for development and regulatory approval. Although SC401 has the same ratio of EPA and DHA as Lovaza, it is not deemed a generic because it has been formulated differently utilizing our proprietary ALT platform and, based on the resulting superior and more consistent bioavailability, is proposed to have a different dosing and labeling.

We believe that SC401 has the potential to treat patients with severe hypertriglyceridemia with a lower dosage than currently approved treatments: one or two capsules a day as compared to up to four capsules of certain other FDA-approved treatments, specifically Lovaza, while achieving consistent efficacy under both fasted and fed conditions, thus potentially eliminating the need to be taken with a meal, as the labels of some approved omega-3 treatments recommend.

Clinical Trial Data for Our First Formulation of SC401

We conducted two PK studies and two Phase II studies using our first formulation of SC401. We believe that these PK studies and Phase II studies support the efficacy of our second formulation of SC401 as each of them measured the aggregate amount of omega-3 fatty acids (both DHA and EPA) in the patient system, not either omega-3 fatty acid individually. As the aggregate percentage of omega-3 fatty acids (both DHA and EPA) present in the two formulations of SC401 is materially the same, we do not expect the relative percentages of DHA and EPA within the formulation to have any clinical impact on the efficacy of SC401.

In Phase I PK studies of SC401, the formulation achieved higher levels of EPA and DHA absorption as compared with published data available from third-party studies conducted on Lovaza® and Epanova®, both of which are omega-3 fatty acid therapies currently approved by the FDA. Further, it was shown that the EPA and DHA contained in SC401 were absorbed by the body at the same rate within the error bars regardless of whether dosing occurred with a high fat meal (fed state) in the first PK study or without a meal (fasted state) in the second PK study. Although we are not currently pursuing the first formulation of SC401, we believe that the results of the PK studies and the Phase II studies for this formulation are indicative of the PK performance that we will see in the second formulation of SC401 and reflect the effectiveness of our ALT technologies when applied to lipophilic APIs.

 

 

 

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The following charts combine results from our Phase I PK studies of our first formulation of SC401 with published data available from third-party studies conducted on Lovaza and Epanova and demonstrated the total concentration of lipids (EPA and DHA) in the patients based on the passage of time.

 

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The first Phase II clinical study of our first formulation of SC401 was a randomized, non-inert placebo-controlled clinical study, called FASTRI, of 45 patients conducted at Micro Therapeutics Research Laboratories, or MTR, for 14 days with 3,360 mg per day. The primary endpoint was the triglyceride lowering effects compared to Lovaza in patients with hypertriglyceridemia (200-499mg/dL) under fasting conditions. Our first formulation of SC401 demonstrated similar triglyceride-lowering effects compared to Lovaza when patients did not receive a pre-dose meal and had fasted prior to receiving the therapy. No adverse events were observed in the FASTRI study. The following chart shows dose-adjusted changes in triglycerides, or TG from baseline for each group.

 

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These results were confirmed in a 28-day study, called FASTRII, of 36 patients, using the same primary endpoint, also conducted at MTR where SC401 lowered the triglycerides by approximately 43% (p<0.05). The results showed that SC401 lowered triglycerides at all time-points measured. Compared to the inert placebo, the mean percent change from baseline was statistically significant at Days 14 (p=0.01) and 21 (p=0.02), but not at Days 7 (p=0.41) and 28 (p=0.06). The “p-values” referred to in this paragraph represent the probability of a false positive, where positive is concluding a difference between groups. Also, no adverse events were observed in the FASTRII study. The following chart shows the changes in triglycerides from baseline for our first formulation of SC401 and placebo at 28 days.

 

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Planned Clinical Development and Regulatory Status of Our Second Formulation of SC401

In October 2014, we held a pre-IND meeting with the FDA to discuss our development plans for a second formulation of SC401. In that meeting, the FDA requested preclinical safety data for the inactive components of the second formulation of SC401 and also provided guidance regarding comparative bioavailability studies. We intend to conduct one pivotal PK study that will compare our second formulation of SC401 and Lovaza. This PK study is designed to compare the relative bioavailability of EPA and DHA in plasma from a single oral dose of SC401 and a single oral dose of Lovaza in healthy subjects under fed conditions. We plan to randomize approximately 24 patients in the study which is expected to last approximately six to seven weeks. We will also conduct a second pivotal PK study that will test the effect of food on bioavailability. The primary objective of this PK study is to assess the effect of food on the rate and extent of absorption of SC401 following a single oral dose in healthy subjects when administered under fasted, low-fat meal, and high-fat meal conditions. We plan to randomize approximately 24 patients in the study which is expected to last approximately four to five weeks.

In our pre-IND meeting, the FDA also commented generally on the need for and design of a final pivotal clinical study of safety and effectiveness, and offered to provide more detailed guidance after it has reviewed the results of the bioavailability studies. Based on our discussions with the FDA at our pre-IND meeting and the studies that were conducted in connection with the approval of Lovaza, we expect the pivotal clinical trial, if initiated, to be a short-term placebo-controlled, double-blinded randomized study with the primary endpoint of lowering triglyceride levels in patients. We expect that 60 to 100 patients will be randomized in the study, which is expected to last between 45 and 90 days. We submitted an IND for our second formulation of SC401 in July 2015 and expect to initiate the two pivotal PK studies in late 2015 or early 2016. We will then discuss these results with the FDA and intend to subsequently initiate a pivotal clinical trial of safety and effectiveness.

 

 

 

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SC410 Program and Non-Alcoholic Fatty Liver Disease

Overview of Non-Alcoholic Fatty Liver Disease

NAFLD is a common condition associated with the buildup of excess fatty acid triglycerides in liver cells not caused by alcohol use. It occurs in patients who drink little or no alcohol, and is the most common cause of chronic liver disease in North America. Most patients are asymptomatic and do not experience any complications from the disease. However, the fat that accumulates in some patients with NAFLD can cause inflammation and scarring in the liver. This more serious form of NAFLD is called nonalcoholic steatohepatitis, or NASH. NASH is liver inflammation caused by a buildup of fat in the liver which causes decreased liver function and can lead to cirrhosis, liver failure and end-stage liver disease. While NASH is most common in insulin-resistant obese adults with diabetes and abnormal serum lipid profiles, its prevalence is increasing among juveniles as obesity rates rise within this patient population. It can slowly progress to a loss of hepatic function, irreversible liver damage and ultimately cirrhosis and hepatocellular carcinoma. NASH is the third-leading and fastest growing cause of liver transplantation in the United States, accounting for approximately 7.4% of liver transplants in 2010.

Studies have shown that metabolic abnormalities, such as diabetes, hypertension, dyslipidemia and obesity, are associated with a significant increase in the number of NAFLD patients progressing to NASH and advanced fibrosis. NAFLD is the most common liver disorder among adults in the Western world. Normally the liver contains some fat, but if more than 5-10% of the liver’s weight is fat, then it is referred to as a fatty liver, or steatosis. The spectrum of NAFLD ranges from simple steatosis to NASH, which can ultimately progress to end-stage liver disease. In addition to the accumulation of fat in the liver, NASH is characterized by inflammation and cellular damage with or without fibrosis. NASH can lead to fibrosis and eventually progress to cirrhosis, portal hypertension, esophageal varices, ascites and/or liver failure. Progression to cirrhosis and other late stage complications can occur within 5 to 10 years after initial NASH diagnosis. NASH patients with obesity and/or type-2 diabetes are at a significantly higher risk of disease progression. Once the disease advances beyond NASH to these life-threatening conditions, liver transplantation is the only alternative.

The following image provides an overview of the progression of NAFLD from a healthy liver to cirrhosis:

 

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Risk factors for developing NASH are similar to those for NAFLD. People with type 2 diabetes appear to have an increased risk of developing NAFLD and have a higher risk of developing fibrosis and cirrhosis associated with NASH. Studies to date have described a 74% prevalence of NAFLD and a 22% prevalence of NASH in diabetics. NAFLD affects 10-30% of the general population in the United States and is increasing. Estimates of prevalence in other parts of the world are as high as 37%.

 

 

 

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Market Opportunity and Currently Available Treatments and Their Limitations

NASH represents a substantial unmet medical need. According to the National Digestive Diseases Information Clearinghouse, 2-5% of Americans, or 6 million to 16 million individuals, suffer from this disease. According to the World Gastroenterology Organization, an estimated 600,000 have been identified as having progressed to NASH-related cirrhosis. NASH is becoming more common, largely believed to be related to the widespread increase in obesity. From 1980 to 2010, the rate of obesity in the United States alone has more than doubled in adults and more than tripled in children and is expected to increase by an additional 33% over the next two decades. Globally, the rate of obesity has also nearly doubled since 1980 and is expected to increase by 65% by 2030 if nothing is done to reverse the epidemic. NASH is one of the main causes of liver cirrhosis, behind hepatitis C and alcoholic liver disease, and is the fastest growing cause of liver transplantation in the United States.

Currently, NASH and NAFLD are underdiagnosed due to poor disease awareness, the insufficiency of non-invasive diagnostic tools and the lack of effective approved therapies. As a confirmed diagnosis of NASH currently requires a liver biopsy, patients are often diagnosed after a blood test demonstrating elevated levels of liver enzymes, alanine aminotransferase, and aspartate aminotransferase.

Despite the rapidly increasing incidence of NASH, there are no therapies currently approved for the treatment of this common liver disorder. The NASH market has a significant unmet need for pharmacological options that are effective and well tolerated. Current options for managing patients with NASH are suboptimal and primarily rely on changes in lifestyle to reduce weight, off-label pharmacotherapy and bariatric surgery for weight loss. Weight loss is the first recommendation for NASH patients and is associated with a significant improvement in steatosis and overall severity of NASH. However, such improvement is only statistically significant when patients are able to reduce more than 7% of their body weight over a sustained period of 48 weeks, which occurs in less than 50% of NASH patients. Products utilized off label in the management of NASH comorbidities include vitamin E, insulin sensitizers such as metformin and pioglitazone, which are used for diabetic patients, and anti-hyperlipidemic agents, pentoxifylline, and ursodiol. High-dose vitamin E has been shown in a clinical study of non-diabetic patients to reduce inflammation but not fibrosis. Vitamin E is not recommended for NASH patients with type-2 diabetes due to lack of data, therefore the use of vitamin E is limited. While other off-label pharmacotherapies demonstrate inconsistent benefits or are associated with significant side effects. Bariatric surgery is believed to impact NASH through dramatic weight loss, but it has significant complications and drawbacks. These include a host of perioperative risk factors, the need to adhere to post-surgical diet and nutritional regimens and high costs. A relatively small number of these procedures are performed annually on NASH patients compared to the overall NASH population, which we believe is due to the complications and drawbacks of bariatric surgery relative to NASH patient numbers. We believe widespread increased adoption of bariatric surgery for NASH is impractical based on cost and the large number of patients who would require it. In addition, some retrospective and prospective studies have indicated that the procedure may worsen fibrosis. Liver transplant is a last resort for life-threatening complications progressing from NASH. NASH is currently the third most common reason for liver transplants in United States and is projected to surpass alcohol-based cirrhosis and viral hepatitis to become the leading indication for liver transplant by 2020. The availability of liver donors is extremely limited and the cost of a liver transplant is a significant economic burden, with an estimated cost per procedure of approximately $577,000. Studies have demonstrated that approximately 22% of patients do not survive the five-year period post-transplant.

 

 

 

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Our Solution to Address Market Need

SC410 is our proprietary product candidate that is being developed for the treatment of NAFLD. SC410 consists of a complex proprietary mixture of various fatty acids, primarily in the form of DHA, formulated using ALT to specifically address the treatment of NAFLD. The drug is encapsulated in a soft gelatin capsule and intended to be taken orally.

We believe SC410 can substantially reduce the triglycerides in the blood and therefore, reduce the amount of fat around the liver. Recent research showed that increasing the amount of omega-3 fatty acids delivered to the membrane of the red blood cells resulted in a reduction of fat in the liver. A member of our scientific advisory board, Dr Philip Calder, recently conducted a placebo controlled, double-blind, randomized clinical trial of 103 patients to study the effects of EPA and DHA on NAFLD. The results of that study were recently released in a report entitled “Effects of purified eicosapentaenoic and docosahexaenoic acids in non-alcoholic fatty liver disease: results from the WELCOME (Wessex Evaluation of fatty Liver and Cardiovascular markers in NAFLD with Omacor Therapy) study”. In a randomized, placebo-controlled trial, the Welcome Study tested the hypothesis that 15-18 months treatment with a high dose (4 g/day) of DHA and EPA was effective in ameliorating the early stages of NAFLD, with primary outcomes related to: a) liver fat measured by magnetic resonance spectroscopy scan in three discrete liver zones, and b) two algorithmically derived, histologically validated, liver fibrosis scores. The study monitored adherence to the intervention in the DHA and EPA group, and potential contamination in the placebo group, by measuring erythrocyte enrichment of DHA or EPA between baseline and end of the study.

Briefly, subjects were eligible: (i) with histological confirmation of NAFLD, or (ii) imaging evidence of liver fat (ultrasound, magnetic resonance imaging or, computerized tomography scan), features of metabolic syndrome, and exclusion of other liver conditions causing liver fat accumulation or cirrhosis. Subjects were also excluded if alcohol consumption was >35 units (1 unit is 7.9 g alcohol) per week for women and >50 units per week for men, which is the threshold for harmful alcohol consumption. Additional exclusion criteria were pregnancy, breast feeding and hypersensitivity to DHA+EPA, soya or the excipients. There were 105 patients deemed eligible for randomization and they were distributed 1:1 between the Omacor and placebo groups. A total of 95 patients completed the study (47 in the Omacor group; 48 in the placebo group). The test medication was a capsule containing 380 mg DHA and 460 mg EPA. The placebo capsule contained 4g of olive oil. To maintain the blind, the capsules were matched in appearance and flavor. The primary endpoint was liver fat measured by magnetic resonance spectroscopy, or MRS. The secondary endpoints included two histologically-validated liver fibrosis bio marker scores.

The patients were stratified by age and sex and randomly assigned to the drug or placebo control group. Masking was maintained throughout the study. Patient information was captured at baseline and at the end of the study. At the end of the 18-month study period, the primary endpoint, clinical liver fat was reduced in the test medication group compared to the placebo group.

 

     Placebo      Treatment      Adjusted Change
from Baseline
DHA Only*
 

Primary Outcomes

   Baseline      End of
Study
     Baseline      End of
Study
     P Value  

Liver Fat %

     21.7         19.7         23.0         16.3         P=0.007   

Plasma Triglyceride (mmoI/L)

     1.4         1.8         1.8         1.5         P=0.007   

 

*Adjusted for baseline measurement of the outcome plus age, sex, change in weight (kg) between baseline and end of study and change in CK18 concentration between baseline and end of study.

 

 

 

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    Unstandardized
Coefficients
 

Standardized

Coefficients(ß)

  95%
Confidence
Intervals
  p
     B   Std. Error     Lower   Upper  

Age

  0.005   0.09   0.003   -0.19   0.19   0.96

Sex

  3.065   2.09   0.098   -1.09   7.22   0.14

Weight difference

  0.639   0.24   0.177   0.14   1.13   0.01

MRS (average of segments 8, 5 and 3) Baseline ³5%

  0.661   0.05   0.848   0.55   0.76   <0.0001

CK 18 M65

  0.003   0.003   0.070   -0.003   0.01   0.31

DHA change %

  -1.694   0.61   -0.199   -2.90   -0.48   0.007

 

R2= 0.664 Adjusted R2= 0.64 p<0.0001

Plasma lipids and serum liver enzymes at baseline and follow up according to treatment group

 

     Placebo    Omacor
Variables    Baseline    End of
study
   p-value    Baseline    End of
study
   p-value

Triglycerides (mmol/L)

   1.5 (0.5)    1.8 (0.6)    0.05    1.8 (0.7)    1.5 (1.2)    0.018

Cholesterol (mmol/L)

   4.5 (0.8)    4.8 (1)    0.28    4.9 (1.1)    4.7 (1.1)    0.17

LDL-cholesterol (mmol/L)

   2.7 (0.7)    2.8 (0.8)    0.38    3.0 (0.9)    2.8 (0.9)    0.12

HDL-cholesterol (mmol/L)

   1.1 (0.3)    1.1 (0.2)    0.91    1.0 (0.2)    1.1 (0.3)    0.0001

ALT (iu/L)

   59.5 (45)    48.5 (25)    0.06    55.0 (51)    44.0 (34)    0.89

AST (iu/L)

   50.0 (25)    35.0 (17)    0.03    39.0 (24)    30.0 (27)    0.97

Although the study was not able to prove there was a significant effect of the intervention on the primary outcomes in the ITT analyses; in the secondary analyses, the results indicated that erythrocyte DHA enrichment with DHA and EPA treatment is linearly associated with decreased liver fat percentage, and substantial decreases in liver fat percentage may be able to be achieved with high percentage DHA enrichment.

We believe that this study provides support for our belief that combining a unique ratio of omega-3 fatty acids that is predominantly DHA, formulated using ALT, will result in a higher amount of these polyunsaturated fatty acids being delivered and incorporated into the cell membrane of erythrocytes and may reduce the triglyceride level in the liver and may slow the disease’s progression to NASH.

In addition, a nine-week preclinical study of SC410 using a mouse model was conducted by a CRO in Japan.

The three study groups were (i) control group, with placebo, with mice from five to nine weeks, (ii) SC410 with mice from five to nine weeks of age and (iii) SC410 with mice from six to nine weeks of age. The study found that body weight gradually increased during the treatment period in all groups. There was no difference in mean body weight between groups. In addition, the liver weight of the subjects in the SC410 groups was less than that of the subjects in the control group, although the difference was not statistically significant. The liver triglycerides tended to decrease in the SC410 five to nine weeks and significantly decreased in the SC410 six to nine week group as demonstrated in the graph below. The results suggest that SC410 might improve lipid and glucose metabolism in the liver of this mouse model.

 

 

 

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LOGO

 

n.s. = not significant

Planned Clinical Development and Regulatory Status

We have not initiated any human clinical trials of SC410. We expect the member of our scientific advisory board who conducted previous clinical studies in humans, Dr Calder, to help us to perform our clinical trials of SC410. We intend to utilize the FDA’s 505(b)(2) NDA approval pathway, as we believe we can rely on the FDA’s previous findings of safety for a currently marketed product and published clinical data. We expect to rely on published clinical trials using a similar drug product. We plan to conduct a Phase II study of SC410. We have not had discussions with FDA regarding the design of this study. However, we currently expect that the Phase II study of SC410 will evaluate the safety and tolerability of two dose levels of SC410 capsules versus a placebo in the treatment of adult patients with NAFLD. We also intend to explore certain endpoints for preliminary assessment of efficacy trends. We expect the study to last up to 55 weeks and involve 60 adults between the ages of 18 and 65. We expect to submit an IND prior to the end of 2015 and commence our Phase II clinical trial in 2016.

Commercialized Products

Ocean Blue® Dietary Supplement Products

We currently sell various lines of highly concentrated omega-3 fatty acid products to help support cardiovascular and metabolic health under the brand Ocean Blue® to wholesalers, other health care product companies, national and regional retail chain pharmacies, group purchasing organizations and hospitals in the United States and to consumers via our website. Certain of these products are sold directly to the consumer without a prescription in a retail environment, while others, at our request, are sold only behind-the-counter in pharmacies.

Our behind-the-counter products are available through pharmacies located within Publix Super Markets, Kroger’s and Winn-Dixie stores. In mid-2013, we launched an OTC line of products that is nationally distributed and available over-the-counter at retail directly to consumers. We also offer these OTC products directly to consumers via our website and intend to opportunistically evaluate other marketing opportunities.

 

 

 

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Our principal Ocean Blue® products include:

Behind-the-Counter

 

Ø   Ocean Blue® Professional Omega-3 2100™, which contains among the highest amounts of omega-3 fatty acids of any product available without a prescription.

Over-the-Counter

 

Ø   Ocean Blue® OmegaPower™, which contains a highly concentrated, pharmaceutical grade fish oil.

 

Ø   Ocean Blue® Omega-3 MiniCaps®, which contains highly concentrated fish oil and are 1/3 of the size of our full-sized soft gels.

 

Ø   Ocean Blue® Omega-3 + Vitamin D3 MiniCaps®, which is similar to our Omega-3 MiniCaps® but also contain Vitamin D3.

Hospital-Only

 

Ø   Omega-3 United Dose Hospital Pack, which is the same dosage as our Ocean Blue® Professional Omega-3 2100™ but is designed and packaged for hospital use. We believe we are the only company to have a unit dose of omega-3 available for use in hospitals.

Prenatal Vitamins and Dental Health Products

We offer dietary supplements in niche markets, such as dental and women’s health. Currently, we offer a number of dental health supplements containing fluoride, including drops, tablets and a rinse marketed as dietary supplements. Our fluoride products are intended to be used as a substitute for fluoridated water for individuals living in areas where drinking water is non-fluoridated. Our fluoride products cannot be purchased over-the-counter; we require that the pharmacist obtain a prescription from a dentist or a doctor before dispensing.

We also offer two prenatal vitamins, for which we require prescriptions, that provide vitamin and nutritional supplementation throughout pregnancy and during the postnatal period for both the lactating and non-lactating mother. These products contain no artificial color, flavors, sugars, or dyes, and are gluten and saccharin free.

The products that we currently require pharmacies to dispense only under prescription include:

 

Dosage Form   Name   Health Category

Tablet

  Ludent® Sodium Fluoride Chewable Tablets   Dental

Tablet

  MVC® Multi-Vitamin with Fluoride Chewable Tablets   Dental

Liquid Drops

  Tri-Vitamin Drops with Fluoride   Dental

Liquid Drops

  Sodium Fluoride Drops   Dental

Liquid

  Neutral Sodium Fluoride Rinse 0.2%   Dental

Tablet

  PNV Prenatal Health™ Prenatal Vitamins Plus Multivitamin Tablets   Women’s Health

Tablet

  PNV Prenatal Health™ Folic Acid + Iron Multivitamin Chewable Tablets   Women’s Health

OUR PROPRIETARY ADVANCED LIPID TECHNOLOGIES PLATFORM

ALT is our proprietary platform that uses proprietary formulation and manufacturing techniques to create product candidates that we believe increase the bioavailability and permit consistent absorption of lipophilic APIs. As a result, we believe that our ALT platform can be applied to various formulations of

 

 

 

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lipophilic APIs to increase their efficacy, which we believe can enhance the bioavailability and improve the pharmacokinetic profile of existing known lipid based therapeutics. Furthermore, we believe that our proprietary ALT platform has broad potential applicability in multiple new therapeutic areas that can be potentially treated with lipophilic substances by increasing bioavailability and consistent absorption of the lipids.

The Challenge of Lipophilic APIs

Lipophilic APIs are comprised of substances that are either soluble in oils or generally not soluble in water. Traditional drug research has focused on hydrophilic materials (that is, materials that are water soluble) as they are easily absorbed into the body. By comparison, lipophilic substances including fats, oil soluble small molecules and oils themselves have a unique way of digestion in humans. By themselves, they are not readily bioavailable. In order for the body to digest or absorb lipophilic materials, it produces bile and cholesterol which surround the lipid creating a “ball-like” particle called a micelle. Without bile and cholesterol, ingested lipids are eliminated in the feces. However, bile is only produced by the body when large amounts of food enter the digestive system. Hence, micelles are only produced when someone has eaten.

When biologically active materials (a drug) that are also lipids are ingested with food, micelles are produced and digestion takes place. Micelles are small spherical particles consisting of an aqueous outer shell and a lipophilic core that entraps various lipases, or digestive enzymes, that convert fatty acid esters and triglycerides, or fat, into free (or unesterified) fatty acids and monoglycerides, or lipid molecules. Natural micelles rupture when the particles come into contact with the brush barrier of the body’s intestinal wall, and the free fatty acids and monoglycerides are then released and absorbed into the intestinal lining. Our research shows that natural micelles that form around lipids have two characteristics that limit their effectiveness. First, the micelles form only when food is present in the patient’s stomach. Second, the micelle production is less effective if the patient has eaten a low-fat meal prior to ingesting the drug compound, and not effective at all if the patient has fasted prior to ingesting the drug compound. Consequently, bioavailability of lipophilic drugs varies with food intake from almost nothing (when taken on an empty stomach) to super-bioavailable when taken with certain high fat foods or alcohol. This variability has been called the “food effect” for many drug substances and impacts the effectiveness of many therapies. To overcome this food effect, patients must take a large dosage of the drug in order to achieve effectiveness. For example, Lovaza, a lipophilic drug to treat hypertriglyceridemia, requires four large one gram capsules to be taken per day. Side effects associated with the administration of currently available drugs containing fatty acid esters (for example, susceptibility to the food effect, large doses to attain efficacy, and the resulting aftertaste, unpleasant smell, and burping) are known to significantly reduce patient compliance, which can potentially lead to dangerous acute episodes for the patient and an increased burden on the healthcare system.

How ALT Works and Our Self Micellization Solutions

Attempts to create artificial micelles have generally resulted in artificial micelles that are fragile and break easily, making it difficult for the particles to deliver adequate amounts of free fatty acids and monoglycerides to the intestinal lining for absorption. Our unique and proprietary ALT platform focuses on spontaneously and efficiently creating engineered micelles that overcome certain deficiencies of both artificial and natural human micelles in the delivery of fatty acids, while at the same time mimicking some of the important characteristics of natural human micelles. Our ALT platform consists of proprietary formulation and drug delivery technologies that, we believe, permits us to create micelles so that maximum absorption occurs under almost any condition. Although the application of our ALT platform to different lipophilic APIs will result in unique formulations, the structure and function of the micelles are always

 

 

 

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similar to one another and closely resemble those created naturally. The plurality of micelles is always uniform, about five microns in diameter and will carry its cargo of drugs (or lipophilic materials) to and through the intestinal cell wall thereby making the drug bioavailable. The graphics below demonstrate how micelles formed with ALT assist the body to absorb the lipids without reliance on the presence of food.

 

LOGO

Our Current Product Candidates Formulated with our ALT Platform

Each of our product candidates is comprised of a proprietary and customized mixture of fatty acids, including omega-3 fatty acids, and at least one surfactant, which have been specifically formulated to address the specific indication for which it is being developed. The surface active agents are pharmaceutical excipients, or substances included in the dosage form, selected for their bioavailability and are optimized in a specific ratio to the lipid, and enhance the formulation of micelles using ALT. Drug compounds formulated with our ALT platform are designed not to require lipase or bile salts in order for them to be absorbed, and micelles are formed when the compounds come into contact with digestive fluids and remain stable almost indefinitely. Micelles formed using ALT form around lipids and entrap both fats and enzymes, allowing rapid digestion and the formation of free fatty acids and monoglycerides, which allows absorption of the drug compound. ALT provides a mechanism that permits consistent formulation of micelles, whether or not food is present in the body, and whether food that is present in the body is high or low in fat. Further, these factors should allow lower and/or less frequent dosing, as few as one to two capsules a day, and eliminates the pill burden, aftertaste, unpleasant smell and burping typically associated with currently available treatments.

Future Potential Application of our ALT Platform

Over the past decades, many lipophilic new chemical entities have not been developed into drugs. When a promising new drug was found to be lipophilic, efforts were directed toward changing the characteristics to one that was hydrophilic (water soluble). This was done by creating salt forms of drugs or various esters. In other cases, lipophilic drugs were simply not developed further because the lowest effective dose was impractical. In addition, there are many lipophilic drugs currently on the market that have significant food effect or are poorly bioavailable. We believe that we may be able to increase the bioavailability of certain of these lipophilic drugs through the application of our ALT platform, thereby

 

 

 

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potentially reducing doses to practical levels or reducing side-effects, thereby making it possible for the continued development of such products.

We believe that ALT has broad potential applicability in multiple therapeutic areas that can be potentially treated with lipophilic substances including, but not limited to: attention deficit hyperactivity disorder, age-related macular degeneration, Barrett’s syndrome, bipolar syndrome, dementia, fibrotic diseases, hormone “mono and combination” therapies, traumatic brain injury and peripheral neuropathy.

PRODUCT COMMERCIALIZATION

Product Candidates

Our anticipated commercialization strategy of our product portfolio depends on the product candidate. Our goal is to retain significant control over the commercialization of our product candidates once they obtain approval, if at all, for a condition for which we have obtained an orphan drug designation. Because orphan drug candidates target the treatment of rare diseases, the additional staff needed for the sales, marketing and distribution of those product candidates is not significant due to the small patient markets.

We currently have sales, marketing and distribution capabilities established for our other commercialized products. If and when SC403 and SC411 are approved by the FDA for commercialization, we will expand our capabilities to sell into the approved product’s specific therapeutic category. Further, we expect a small, technical and focused sales team for these two specialty drug candidates will be more efficient than a traditional pharmaceutical sales force, as the important clinical customers are located in a small number of key locations. To develop the appropriate commercial infrastructure internally, we would have to invest financial and management resources.

For SC401 and SC410, we intend to out-license the commercial rights for each product, if approved, while retaining control over the manufacturing and development process. We believe selectively entering into collaboration agreements and licenses with collaborators with marketing expertise in the specific therapeutic areas for SC401 and SC410 will facilitate a faster entry into the market and minimize sales execution risk.

In addition, we currently retain worldwide commercial rights to our product candidates. Consequently, we intend to seek out-licensing or co-promotion opportunities outside of the United States for any of our product candidates which are approved.

Commercialized Products

We sell and market our commercialized products in the United States using a variety of distribution channels dependent upon product type. Our products are distributed through the following channels:

 

Ø   Wholesalers.    We have agreements with five major drug wholesalers in the United States: McKesson Corporation, Cardinal Health Inc., AmerisourceBergen Corporation, Anda, Inc. and H.D. Smith, as well as access to their respective retail source programs. We currently sell our prenatal vitamins and dental health products through these drug wholesalers.

 

Ø   Retail Market Chains.    We conduct business with major retail pharmacy chains as well as various in-store retail pharmacies in the United States including: Walgreens, CVS, Rite Aid, Publix, BI-LO/Winn-Dixie, Kroger and other smaller regional chain pharmacies and stores.

 

 

 

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Ø   Group Purchasing Organizations.    We have contracts with Group Purchasing Organizations, or GPOs, in the United States, such as Premier, Inc., Econdisc and Optisource.

 

Ø   Direct Sales Via Website.    We market and sell our OTC lines of Ocean Blue® dietary supplement products directly to consumers via one of our websites.

Our customers include wholesalers, other health care product companies, national and regional retail chain pharmacies, GPOs and hospitals. We primarily sell our Ocean Blue® products to national and regional retail pharmacy chains and to a lesser extent, to pharmaceutical wholesalers and via one of our websites. Our pharmaceutical wholesaler customers resell our products to retail pharmacy chains and other customers.

We also sell our prenatal vitamins and dental health products indirectly to certain retail pharmacy chains. These retail pharmacy chains are referred to as “indirect” customers. We have entered into agreements with some of these indirect customers to establish contract pricing for certain products that we require they dispense only under prescription. These indirect customers then independently select a wholesaler from which to purchase the products at these contracted prices. Alternatively, certain wholesalers may enter into agreements with indirect customers that establish contract pricing for certain prescription products, which the wholesalers provide. Under either arrangement, we provide credits to the wholesaler for any difference between the contracted price with the wholesaler and the indirect customer and the wholesaler’s invoice price. In addition, we provide credits to the indirect customer for any difference between the contracted price we have established with the indirect customer and the indirect customer’s invoice price from the wholesaler. Such credit is called a chargeback. See the Critical Accounting Policies section of our “Management’s Discussion and Analysis of Results of Operations and Financial Condition” for more information on chargebacks.

In the United States, wholesalers and retail drug chains have undergone, and are continuing to undergo, significant consolidation, which may result in these groups gaining additional purchasing leverage. In addition, wholesalers are increasingly entering into agreements with retail pharmacy chains to provide them with logistics, warehousing, procurement and fulfillment services, leading to the closing of retail pharmacy chain distribution centers and the shift from our selling directly to the retail pharmacy chains to indirectly by way of these wholesalers.

Our sales are generated primarily by our own sales force, with the support of our senior management team, customer service, and distribution employees. In addition, we employ pharmaceutical representatives to engage with and educate customers and pharmacists about our products. A substantial portion of our total revenue is derived from a limited number of customers.

Consistent with industry practice, we have a return policy that allows our customers to return products within a specified period prior to and subsequent to the expiration date. See the “Critical Accounting Policies” section of our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a discussion of our more significant revenue recognition provisions.

TECHNOLOGIES AND SERVICES

We offer a comprehensive range of development and manufacturing services to third party pharmaceutical companies at our facilities primarily in connection with the licensing of our ALT platform. These services include formulation development, analytical, microbiological and stability testing services, production scale-up, regulatory and quality consulting, and manufacturing. Our

 

 

 

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customers range in size, and are focused on the commercialization of branded and generic pharmaceutical products. We assist with all phases of development from concept to market, and our services generally are provided on a fee-for-service basis. We always seek to become the registered manufacturer for the projects for which we offer development services.

Since 2009, we have contributed to the submission, approval or continued marketing of several products on behalf of our customers, encompassing a wide range of therapeutic categories and technologies. We believe that our ability to offer an extensive portfolio of high quality drug development and support services enables us to generate cash flows to support the cost of our internal research and development program, and use these same services to advance our own product candidates through the development cycle. Our customers are actively pursuing development of their respective product candidates. As of the date hereof, we are currently developing seven ANDA drug products for our customers, four of which have been submitted and are awaiting FDA approval. We have been named as the manufacturer in each of the four ANDAs submitted. We are also developing an additional four 505(b)(2) NDA drug products for our customers. We manufacture clinical materials for these customers in support of their INDs and expect to be named manufacturer in any NDAs they submit for product candidates that we have been engaged to assist in the development and regulatory approval process.

Master Services Agreement with TherapeuticsMD

On January 30, 2015, we entered into a master services agreement with TherapeuticsMD. This agreement provides for the overall terms of the preclinical and clinical drug development and manufacturing services that we provide to TherapeuticsMD and is supplemented, from time to time, with statements of work that describe the terms and pricing for each particular project or group of projects. The master services agreement will continue until December 31, 2015 and may be extended by mutual agreement of the parties upon 60 days’ notice prior to its expiration. The agreement may be terminated by TherapeuticsMD upon 30 days’ notice, by either party for the other party’s failure to substantially perform a material obligation under the agreement, or by either party as a result of certain events such as bankruptcy and insolvency.

We currently have two outstanding statements of work under the master services agreement with TherapeuticsMD. The first statement of work, which was subsequently amended, governs multiple projects under development, and stipulates that we provide a fixed number of hours per month in exchange for a fixed fee. These hours may be allocated by TherapeuticsMD, based on its needs and the demands of the various in-process projects, between laboratory, clinical or manufacturing hours. If the agreed-upon hours are exceeded, we then bill TherapeuticsMD for the excess hours worked. The second statement of work that governs one project is for a fixed monthly amount for the duration of the project and does not provide us the ability to bill for excess time expended on the project.

The intellectual property owned by TherapeuticsMD and supplied to us pursuant to the terms of the master services agreement remains the property of TherapeuticsMD. Any inventions (whether or not patentable), processes, techniques, improvements, discoveries, designs, formulae, copyright, trademark, trade secrets, know-how, developments, confidential information, computer software, data and documentation, and all similar intellectual property created, discovered or reduced to practice by us solely or jointly in the course of performing the services for TherapeuticsMD will be assigned to TherapeuticsMD pursuant to the agreement; provided, however, that any intellectual property that is subject in whole or in part to a claim of any patent application or issued patent that is owned or controlled by us or that incorporates any of our processes, inventions, techniques, know-how, or trade secrets that we own or control will remain our property and we will grant to TherapeuticsMD a non-exclusive, non-transferable, worldwide, royalty-free, fully paid license to use such intellectual property in

 

 

 

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connection with the procurement, use, sale and marketing of any commercial product or process arising under the agreement.

MANUFACTURING AND QUALITY CONTROL

We maintain office premises, a manufacturing facility, research, production and logistics facilities, and a warehouse in Riviera Beach, Florida. We have approximately 92,600 square feet of total space, of which 51,450 square feet are specifically dedicated to manufacturing, laboratory and warehouse space. At our manufacturing facility, which is subject to periodic inspection by the FDA, our capabilities include a complete continuum of support for our product candidates and our customers, including manufacture of the products and product candidates, and performance of the regulatory, quality assurance testing and in-house validation processes. Our office facility in Riviera Beach, Florida is used for executive offices, stability storage and laboratory space.

We have developed systems and processes to track, monitor and oversee our activities, including a quality assurance program intended to ensure that we comply with cGMPs and various other quality control measures. Our quality assurance team establishes process controls and documents and tests at appropriate stages of the manufacturing process to ensure we meet product specifications and that our finished products contain the correct ingredients, purity, strength, and composition in compliance with FDA regulations. We test incoming raw materials and finished goods to ensure they meet or exceed FDA and US Pharmacopeia standards, including physical, chemical and microbiological assays as applicable.

Our manufacturing facility is registered with the FDA and operates following dietary supplement and drug cGMP requirements as applicable. We were inspected in August 2013 by the FDA for compliance with the dietary supplement cGMP requirements. Four minor non-conformances were identified, which we believe have been addressed. We expect inspection by the FDA for compliance with the drug cGMP regulations because we are identified as the manufacturer in pending ANDA applications. We are subject to inspections by the FDA and other US government authorities. We must continually expend time, money and effort in production, recordkeeping and quality assurance and control to ensure our manufacturing facility meets applicable regulatory requirements. We also employ outside third parties, such as IHL Consulting Group, Inc., to provide rigorous quality audits of our facility for independent cGMP certification. Our customers may also engage a third-party auditor to audit our facility in connection with a given project. As a result of these efforts, we believe that we are in substantial compliance with cGMP requirements.