An
investment in our common stock involves significant risks. You should carefully consider the risks described below and the other information in this Quarterly Report on Form 10-Q, including our financial statements and related notes, before you
decide to invest in our common stock. If any of the following risks or uncertainties actually occurs, our business, results of operations or financial condition could be materially harmed, the trading price of our common stock could decline and you
could lose all or part of your investment. The risks and uncertainties described below are those that we currently believe may materially affect us; however, they may not be the only ones that we face. Additional risks and uncertainties of which we
are unaware or currently deem immaterial may also become important factors that may harm our business. Except as required by law, we undertake no obligations to update any risk factors.
Risks Related to the Commercialization of Korlym
and Development of Mifepristone and Our Other Proprietary GR-II Antagonists
We depend
heavily on the success of Korlym, which we began to sell in the United States in April 2012. If we are unable to increase revenues of Korlym to the levels that investors expect, or experience significant delays in doing so, our stock price will
likely decline.
We anticipate that for the foreseeable future our ability to generate meaningful revenues and achieve
profitability will be solely dependent on the successful commercialization of Korlym. Many factors could harm our efforts to commercialize Korlym, including:
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an inability to generate meaningful revenue due to low product usage, inadequate coverage and reimbursement or other factors;
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competition from Novartiss Signifor and from other companies with greater financial, technical and marketing resources than ours;
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an inability to manufacture Korlym or the active ingredient in Korlym in commercial quantities and at an acceptable cost;
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the cost-effectiveness of Korlym and the availability of third-party insurance coverage and reimbursement, in particular from government payors such as
Medicare and Medicaid, for patients using Korlym;
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political concerns relating to other uses of mifepristone, or RU-486, that could limit the market acceptance of Korlym;
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negative, inconclusive or otherwise unfavorable results from any post-approval studies we conduct;
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previously unknown, serious side effects that may be identified; and
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rapid technological change making Korlym obsolete.
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Even if we are able to commercialize Korlym successfully, we cannot predict the rate at which success will occur.
As our current ability to generate revenue is wholly dependent upon the commercialization of Korlym, its rate of sale will directly and materially affect our results of operations. There are inherent
difficulties in predicting the volumes of Korlym that will be sold, which are heightened by our limited experience commercializing Korlym or other products. Failure of our revenue to meet the expectations of investors could cause our stock price to
decline. See also the discussion below under If our operating and financial performance in any given period does not meet the guidance that we provide to the public, estimates published by research analysts or other investor expectations, our
stock price may decline.
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Physicians may accept Korlym slowly or may never accept it, which would adversely affect our financial
results.
Even though the FDA has approved Korlym, physicians may not adopt it as a treatment for their eligible patients.
Physicians will prescribe Korlym only if they determine, based on experience, clinical data, side effect profiles and other factors, that it is preferable to other products or treatments currently in use, even if those products are not approved for
Cushings syndrome. Because Cushings syndrome is rare, most physicians are inexperienced in the care of patients with the illness and it may be difficult to persuade them to prescribe a newer treatment, such as Korlym, even with clinical
trial results that suggest it may be a compelling treatment for them to consider.
Other factors that may affect the market
acceptance and commercial success of Korlym include:
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the effectiveness of Korlym, including any side effects, as compared to alternative treatment methods;
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the rate of adoption of Korlym by physicians and by target patient populations;
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the possible preference of some physicians for more familiar, long-standing off-label treatments for Cushings syndrome or for Novartis
drug, Signifor, for the treatment of Cushings disease;
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the cost-effectiveness of Korlym and the availability of third-party insurance coverage and reimbursement, in particular from government payors such as
Medicare and Medicaid, for patients using Korlym;
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the product labeling required by the FDA for Korlym;
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the extent and success of our efforts to manufacture, commercialize, market, distribute and sell Korlym; and
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negative publicity concerning Korlym, RU-486, Mifeprex
®
or mifepristone.
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The
failure of Korlym to achieve market acceptance would prevent us from generating meaningful revenue.
The Orphan Drug
designation for Korlym may not provide protection from competition. We may face competition from companies that attempt to develop mifepristone or other compounds for the treatment of Cushings syndrome, which could limit our future revenues
from the commercialization of Korlym and which could have a negative impact on future revenues from the commercialization of Korlym for any indication. These companies may have significantly more resources than we do.
Although we have received Orphan Drug designation in both the United States and the EU, we cannot be assured that we will recognize the
potential benefits of these designations. Even after an orphan drug is approved for its orphan indication, the FDA or EMA can subsequently approve a different drug for the same condition if it concludes that the later drug is safer, more effective
or makes a major contribution to patient care. In addition, the FDA or EMA may, during the orphan drug exclusivity period, approve the same drug for a different indication or different drug for the same indication. Upon expiration of the orphan drug
exclusivity period, we may be subject to competition from manufacturers offering a generic form of mifepristone at a lower cost and our business could be harmed.
Notwithstanding Korlyms Orphan Drug designation in both the United States and the EU, in 2012 Novartis received approval in both jurisdictions to market its somatostatin analogue Signifor for adult
patients with Cushings disease (a subset of Cushings syndrome that afflicts approximately 70 percent of all Cushings syndrome patients) for whom pituitary surgery is not an option or has not been curative. Novartis also announced
that is undertaking an investigational study of an experimental compound (LC1699) to determine whether it can safely reduce the level of urinary free cortisol in patients with Cushings disease and to examine the compounds safety and
efficacy. Novartis has substantially more resources and experience than we do and may provide significant competition.
We are
aware that Laboratoire HRA Pharma has received Orphan Drug designation in the United States and the EU for the use of mifepristone to treat a subtype of Cushings syndrome. HRA had begun a Phase 2 clinical trial in Europe and the United States
for this indication, which has been terminated. We are also aware that Exelgyn Laboratories, which operates as a subsidiary of Medi Challenge (Pty) Ltd., received Orphan Drug designation for mifepristone to treat Cushings syndrome in the EU,
but it has stated that it has not yet conducted any clinical trials.
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If another drug with mifepristone as its active ingredient is approved in the EU for
Cushings syndrome before our drug, we will not receive the ten years of marketing exclusivity from the date of drug approval in the EU and other potential benefits.
If we cannot continue to obtain acceptable prices or adequate coverage and reimbursement for Korlym from third-party payors, we will be unable to generate significant revenues.
The commercial success of our medications in both domestic and international markets depends on whether third-party coverage and
reimbursement is available for them. Government payors, including Medicare and Medicaid, health maintenance organizations and other third-party payors are increasingly attempting to contain healthcare costs by limiting both coverage and the level of
reimbursement of new medicines, and, as a result, they may not cover or provide adequate payment for our medications. Our near-term dependence on the commercial success of Korlym makes us particularly susceptible to any such cost containment or
reduction efforts. Accordingly, even though Korlym has been approved for commercial sale, unless government and other third-party payors continue to provide adequate and timely coverage and reimbursement, physicians may not prescribe it and patients
may not purchase it. In addition, meaningful delays in insurance coverage for individual patients may increase our costs and reduce our revenues. Further, we may need to obtain approvals from hospital formularies before Korlym can be covered for
in-patient treatment. If we fail to obtain such approvals, this will reduce the level of revenues that we are able to attain.
In some foreign markets, pricing and profitability of prescription pharmaceuticals are subject to government control. In the United
States, we expect that there will continue to be federal and state proposals for similar controls. Also, the trends toward managed health care in the United States and recent laws and legislation intended to reduce the cost of government insurance
programs could significantly influence the purchase of health care services and products and may result in lower prices for our products or the exclusion of such products from reimbursement programs.
The PPACA, which was passed in 2010, included, among other things, the following measures:
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annual, non-deductible fees on any entity that manufactures or imports certain prescription drugs and biologics;
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increases in Medicaid rebates owed by manufacturers under the Medicaid Drug Rebate Program for both branded and generic drugs;
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expansion of eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid coverage to additional individuals
and by adding new mandatory eligibility categories for certain individuals with income at or below 133% of the federal poverty level, thereby potentially increasing a manufacturers Medicaid rebate liability;
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expansion of access to commercial health insurance coverage through new state-based health insurance marketplaces, or exchanges;
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a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in and conduct comparative clinical research;
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new requirements for manufacturers to discount drug prices to eligible patients by 50 percent at the pharmacy level and for mail order services in
order for their outpatient drugs to be covered under Medicare Part D;
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an increase in the number of entities eligible for discounts under the Public Health Service pharmaceutical pricing program; and
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establishment of a licensure framework for follow-on biologic products.
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The PPACA provisions on comparative clinical effectiveness research extended the initiatives of the American Recovery and Reinvestment
Act of 2009, also known as the stimulus package, which included $1.1 billion in funding to study the comparative effectiveness of health care treatments. This stimulus funding was designated for, among other things, conducting, supporting or
synthesizing research that compares and evaluates the risks and benefits, clinical outcomes, effectiveness and appropriateness of products. The PPACA also appropriated additional funding to comparative clinical effectiveness research. Although
Congress has indicated that this funding is intended to improve the quality of health care, it remains unclear how the research will impact current Medicare coverage and reimbursement or how new information will influence other third-party payor
policies. It also is unclear what the full impact of PPACAs extension of coverage to previously uninsured individuals will be on the demand for our products.
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In addition, other legislative changes have been proposed and adopted in the United States
since the PPACA was enacted. In August 2011, the Budget Control Act of 2011 among other things, created the Joint Select Committee on Deficit Reduction to recommend proposals in spending reductions to Congress. The Joint Select Committee did not
achieve its targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, triggering the legislations automatic reduction to several government programs. This includes aggregate reductions to Medicare payments to
providers of two percent per fiscal year, which went into effect on April 1, 2013 and will stay in effect through 2024 unless additional Congressional action is taken. On January 2, 2013, President Obama signed into law the American
Taxpayer Relief Act of 2012, or the ATRA, which, among other things, further reduced Medicare payments to several providers, including hospitals, imaging centers and cancer treatment centers, and increased the statute of limitations period for the
government to recover overpayments to providers from three to five years.
These new laws and the regulations and policies
implementing them, as well as other healthcare reform measures that may be adopted in the future, may have a material adverse effect on our industry generally and on our ability to successfully develop and commercialize our products.
We will need to continue to develop our medical education, sales and marketing capabilities to successfully commercialize Korlym and our other
proprietary, selective GR-II antagonists.
To achieve commercial success for any approved product, we must either develop
sales and marketing capabilities internally or enter into arrangements with third parties to market and sell our current and future products, and we may not be successful in doing so. We continue to hire experienced field and internal personnel to
commercialize Korlym in the United States, which is expensive and time consuming. Any failure or delay in the development or failure to maintain effectively our internal capabilities for the marketing and sales of Korlym would adversely impact the
commercialization of the product. If our efforts to develop an internal commercial marketing and sales team are not successful, cost-effective and timely, we may not achieve profitability.
We will need to increase the size of our organization, and we may experience difficulties in managing growth.
We expect that the further development of our commercial organization and the likely future expansion of our research and development efforts will strain our administrative, operational and management
resources. Future growth will impose significant added responsibilities on members of management, including the need to identify, recruit, maintain and integrate additional employees. To date, we have relied on a small management team, including a
number of part-time contributors. Our future financial performance and our ability to compete effectively will depend, in part, on our ability to manage any future growth effectively.
To that end, we must be able to:
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integrate additional management, clinical development, administrative and sales and marketing personnel;
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expand the size and composition of our management team;
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develop our administrative, accounting and management information systems and controls;
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hire and train additional qualified personnel;
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manage our sales and marketing efforts effectively;
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manage our supply chain effectively;
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manage our clinical trials effectively; and
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manage our research and development efforts effectively.
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We may not be able to accomplish these tasks, and our failure to accomplish any of them could harm our business.
Public perception of the active ingredient in Korlym, mifepristone (also known as RU-486), may limit our ability to market and sell Korlym.
The active ingredient in Korlym, mifepristone (RU-486), is approved by the FDA in another drug for the termination of early pregnancy. As
a result, mifepristone has been and continues to be the subject of considerable ethical and political debate in the United States and elsewhere. Public perception of mifepristone may limit our
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ability to engage alternative manufacturers and may limit the commercial acceptance of Korlym by patients and physicians. Even though we have taken measures to minimize the likelihood of the
prescribing of Korlym to a pregnant woman, physicians may choose not to prescribe Korlym to a woman simply to avoid any risk of unintentionally terminating a pregnancy. We have taken measures to control the distribution of Korlym to reduce the
potential for diversion and this controlled distribution may negatively impact sales of Korlym.
We have no manufacturing capabilities and
we currently depend on third parties to manufacture the active ingredient and the tablets for Korlym, both of which are single-source suppliers. If these suppliers are unable or unwilling to continue manufacturing Korlym and we are unable to
contract quickly with alternative sources, or if these third-party manufacturers fail to comply with FDA regulations or otherwise fail to meet our requirements, our business will be harmed.
We currently have no experience in, and we do not own facilities for, nor do we plan to develop facilities for, manufacturing any
products. We depend on a single-source, third-party contract manufacturer, PCAS, to supply the active pharmaceutical ingredient, or API, in Korlym. We entered into a long-term agreement with PCAS in March 2014. We also depend on a single-source,
third-party contract manufacturer, AAI, to produce Korlym tablets. In April 2014, we entered into a long-term agreement with AAI. If either of these manufacturers is unable or unwilling to meet our future demands required, we may not be able to
manufacture our product in a timely manner. Our current arrangements with these manufacturers are terminable by such manufacturers, subject to certain notice provisions. If we are unable to obtain the API or Korlym tablets from our contract
manufacturers, we may not be able to manufacture our required quantities or identify alternate manufacturers of mifepristone or Korlym tablets in a timely manner or on reasonable terms, if at all, which would harm our business. In addition, we
expect to use third-party manufacturers and suppliers if and when our other product candidates are approved.
The facilities
used by our contract manufacturers to manufacture our products must be approved by the FDA pursuant to inspections. We do not control the manufacturing processes of, and are completely dependent on, our contract manufacturing partners for compliance
with the regulatory requirements, known as current good manufacturing practices, or cGMPs. If our contract manufacturers cannot successfully manufacture material that conforms to our specifications and the strict regulatory requirements of the FDA
or others, they will not be able to secure and/or maintain regulatory approval for their manufacturing facilities. In addition, we have no control over the ability of our contract manufacturers to maintain adequate quality control, quality assurance
and qualified personnel. If the FDA or a comparable foreign regulatory authority does not approve these facilities for the manufacture of our products or if it withdraws any such approval in the future, we may need to find alternative manufacturing
facilities, which would significantly impact our ability to develop, obtain regulatory approval for or market our products. In addition, sanctions could be imposed on us, including fines, injunctions, civil penalties, failure of regulatory
authorities to grant marketing approval of our product candidates, delays, suspension or withdrawal of approvals, seizures or recalls of products, operating restrictions and criminal prosecutions, any of which could harm our business. If our
suppliers fail to manufacture tablets on a timely basis in the quantities that we require, or fail to maintain manufacturing capabilities that meet FDA standards, we would likely experience a lengthy delay in our manufacturing processes.
If we or others identify previously unknown, serious side effects of mifepristone, we may be required to perform lengthy additional clinical trials,
change the labeling of Korlym or withdraw it from the market, any of which would hinder or preclude our ability to generate revenues.
The FDAs approval of Korlym requires that we conduct a study of the interactions between Korlym and ketoconazole, an anti-fungal agent sometimes used to treat patients with Cushings syndrome.
It also requires us to study drug utilization to better characterize the reporting rates of adverse events associated with the long-term use of Korlym. If we or others identify previously unknown, serious side effects of mifepristone:
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regulatory authorities may withdraw their approvals;
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we may be required to conduct additional clinical trials, make changes in labeling, implement changes to or obtain re-approvals of our manufacturing
facilities;
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we may experience a significant drop in the sales of Korlym;
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our reputation in the marketplace may suffer; and
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we may become the target of lawsuits, including class action lawsuits.
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Any of these events could harm or prevent sales of the affected products or could increase
the costs and expenses of commercializing and marketing Korlym.
We may have substantial exposure to product liability claims and may not
have adequate insurance to cover those claims.
We may be subject to product liability or other claims based on
allegations that the use of our products has resulted in adverse effects or that our product candidates are not effective, whether by participants in our clinical trials for Korlym or other product candidates, or by patients using Korlym. A product
liability claim may damage our reputation by raising questions about Korlym or any of our product candidates safety or efficacy and could limit our ability to sell a product by preventing or interfering with product commercialization. In some
cases, less common adverse effects of a pharmaceutical product are not known until long after the FDA approves the product for marketing. The active ingredient in Korlym is used to terminate pregnancy. Therefore, clinicians using the medicine in our
clinical trials and physicians prescribing the medicine to women with childbearing potential must take necessary and strict precautions to ensure that the medicine is not administered to pregnant women. The failure to observe these precautions could
result in significant product claims.
We have only limited product liability insurance coverage, with limits that we believe
to be customary for a company beginning to commercialize its first pharmaceutical product. We intend to expand our product liability insurance coverage to any product candidates for which we obtain marketing approval. However, this insurance may be
prohibitively expensive or may not fully cover our potential liabilities. Our inability to obtain adequate insurance coverage at an acceptable cost could prevent or inhibit the commercialization of Korlym or any of our product candidates, or result
in meaningful underinsured or uninsured liability. Defending a lawsuit could be costly and significantly divert managements attention from conducting our business. If a third party successfully sues us for any injury caused by our product
candidates, our liability could exceed our total assets.
Even if we receive regulatory approval for our product candidates, we will be
subject to ongoing and continued regulatory review, and if we are unable to maintain regulatory approval of Korlym, or if we fail to comply with regulatory requirements, we will be unable to generate revenue or may be subject to penalties and our
business will be harmed.
Even after we obtain U.S. regulatory approval for a product, the FDA may still impose
significant restrictions on the approved indicated uses for which the product may be marketed or on the conditions of approval. For example, a products approval may contain requirements for potentially costly post-approval studies and
surveillance, including Phase 4 clinical trials, to monitor the safety and efficacy of the product. The FDAs approval of Korlym was subject to limitations on the indicated uses for which the product may be marketed and requirements for
post-marketing follow-up studies and information reporting. In addition, the FDAs approval of Korlym requires that we conduct a study of the interactions between Korlym and ketoconazole, an anti-fungal agent sometimes used to treat patients
with Cushings syndrome. It also requires us to conduct a drug utilization study to better characterize the reporting rates of adverse events associated with the long-term use of Korlym.
We are subject to ongoing obligations and continued regulatory review by the FDA and other regulatory authorities in the United States
and other countries with respect to the research, testing, manufacturing, labeling, distribution, adverse event reporting, storage, selling, advertising, promotion, recordkeeping and marketing of products. These requirements include submissions of
safety and other post-marketing information and reports, annual updates on manufacturing activities and continued compliance with current good manufacturing practices, or cGMPs, and current good clinical practices, or cGCPs, for any clinical trials
that we conduct post-approval. cGMPs and cGCPs are regulations and guidelines enforced by the FDA and comparable foreign regulatory authorities through periodic inspections of manufacturing sites, trial sponsors, clinical investigators and clinical
sites. Later discovery of previously unknown problems with a product, including adverse events of unanticipated severity or frequency, or with our third-party manufacturers or manufacturing processes, or failure to comply with FDA regulations and
other applicable foreign and U.S. regulatory requirements may result in, among other things, warning letters, civil and criminal penalties, injunctions, holds on clinical trials, product seizure or detention, refusal to permit the import or export
of products, restrictions on product marketing, withdrawal of the product from the market, voluntary or mandatory product recalls, total or partial suspension of production, refusal to approve pending NDAs or supplements to approved NDAs, and
suspension or revocation of product approvals.
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The FDAs policies may change and additional governmental regulations may be enacted
that could prevent, limit or delay regulatory approval of our product candidates. If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory
compliance, we may place at risk the FDA marketing approval for Korlym and any other marketing approval that we may obtain, which would adversely affect our business, prospects and ability to achieve or sustain profitability.
The sale of our products is subject to regulatory approvals, and our business is subject to extensive regulatory requirements, and if we are unable to
obtain regulatory approval for future product candidates, including mifepristone for the treatment of triple-negative breast cancer, we will be limited in our ability to commercialize such product candidates and our business will be harmed.
We are not permitted to market or promote any of our product candidates before we receive regulatory approval from the
FDA or comparable foreign regulatory authorities and, while we have received FDA marketing approval for Korlym, we may be unable to maintain such approval and we may never receive such regulatory approval for any of our product candidates. Obtaining
regulatory approval of a new drug is an uncertain, lengthy and expensive process, and success is never guaranteed. Despite the time, resources and effort expended, failure can occur at any stage. In order to receive approval from the FDA for each
product candidate, we must demonstrate that the new drug product is safe and effective for its intended use and that our manufacturing processes for the product candidate comply with the FDAs cGMPs. cGMPs include requirements related to
production processes, quality control and assurance, and recordkeeping. The FDA has substantial discretion in the approval process for human medicines. The FDA may require substantial additional clinical testing or find our drug products do not
satisfy the standards for approval. Our inability or the inability of our suppliers to comply with applicable FDA and other regulatory requirements can result in, among other things, delays in or denials of new product approvals, warning letters,
fines, consent decrees restricting or suspending manufacturing operations, injunctions, civil penalties, recall or seizure of products, total or partial suspension of sales, and/or criminal prosecution. Any of these or other regulatory actions could
materially adversely affect our business and our financial condition.
Future governmental action or changes in FDA law,
policy or personnel may also result in delays or rejection of an NDA in the United States. In addition, because the only other currently FDA-approved use of mifepristone is the termination of pregnancy, we expect that the label for mifepristone for
any indication will include, as Korlyms does, some limitations, including a so-called black-box warning that it should not be used by pregnant women or women seeking to become pregnant.
If we receive regulatory approval for our future product candidates, including mifepristone for the treatment of triple-negative breast
cancer, we will be subject to ongoing FDA obligations and continued regulatory oversight and review, such as continued safety reporting requirements; and we may also be subject to additional FDA post-marketing restrictions and obligations. If we are
not able to maintain regulatory compliance, we may not be permitted to market our product candidates and/or may be subject to product recalls or seizures.
Any regulatory approvals that we receive for our future product candidates may also be subject to limitations on the indicated uses for which the medicine may be marketed or contain requirements for
potentially costly post-marketing follow-up studies. In addition, if the FDA approves any of our product candidates, we will be subject to ongoing and continuing regulatory requirements. See also the discussion above under Even if we receive
regulatory approval for our product candidates, we will be subject to ongoing and continued regulatory review, and if we are unable to maintain regulatory approval of Korlym, or if we fail to comply with regulatory requirements, we will be unable to
generate revenue or may be subject to penalties and our business will be harmed.
If we market products in a manner that violates FDA
regulations or health care fraud and abuse laws, we may be subject to civil or criminal penalties.
In the United States,
we are subject to FDA regulations governing the promotion of health care products. Although physicians are permitted, based on their medical judgment, to prescribe drugs for indications other than those approved by the FDA, manufacturers are
prohibited from promoting their products for such off-label uses. In the United States, we are marketing Korlym for treatment of hyperglycemia secondary to hypercortisolism in adult patients with endogenous Cushings syndrome who
have type 2 diabetes mellitus or glucose intolerance and have failed surgery or are not candidates for surgery and provide promotional materials and training programs to physicians regarding the use of Korlym for this indication. Although we believe
our marketing materials and training programs for physicians do not constitute off-label promotion of Korlym, the FDA may disagree. If the FDA determines that our promotional materials, training or other activities by our
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employees or agents constitute off-label promotion of Korlym, it could request that we modify our training or promotional materials or other activities or subject us to regulatory
enforcement actions, including the issuance of a warning letter, injunction, seizure, civil fine and criminal penalties. It is also possible that other federal or state enforcement authorities might take action if they believe that the alleged
improper promotion led to the submission and payment of claims for an unapproved use, which could result in significant fines or penalties under other statutory authorities, such as laws prohibiting false claims for reimbursement. Even if it is
later determined that we are not in violation of these laws, we may be faced with negative publicity, incur significant expenses defending our position and have to divert significant management resources from other matters.
In addition, there are health care fraud and abuse regulations and enforcement by both the federal government and the states in which we
conduct our business. The laws that may affect our ability to operate include:
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the federal Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully soliciting, receiving, offering or paying
remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual for, or the purchase, order or recommendation of, any good or service for which payment may be made under federal health care programs such as
the Medicare and Medicaid programs;
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federal false claims laws, which prohibit 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. Pharmaceutical companies have been prosecuted under these laws for a variety of promotional and marketing activities, such as allegedly providing
free product to or entering into sham consulting arrangements with customers to induce such customers to purchase, order or recommend the companys products in violation of the Anti-Kickback Statute and federal false claims laws and
regulations; reporting to pricing services inflated average wholesale prices that were then used by certain governmental programs to set reimbursement rates; engaging in the promotion of off-label uses that caused customers to submit
claims to and obtain reimbursement from governmental payors for non-covered off-label uses; and submitting inflated best price information to the Medicaid Drug Rebate Program;
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the federal Health Insurance Portability and Accountability Act of 1996 (HIPAA), which created federal criminal laws that prohibit executing a scheme
to defraud any health care benefit program or making false statements relating to health care matters;
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federal sunshine laws that require transparency regarding financial arrangements with health care providers, such as the reporting and
disclosure requirements imposed by the PPACA on drug manufacturers regarding any transfer of value made or distributed to prescribers and other health care providers, and ownership or investment interests held by physicians and their
immediate family members. The period between August 1, 2013 and December 31, 2013 was the first reporting period, and manufacturers were required to report aggregate payment data by March 31, 2014, and were required to report detailed
payment data and submit legal attestation to the accuracy of such data by June 30, 2014. Thereafter, manufacturers must submit reports by the 90
th
day of each calendar year;
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HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009 (HITECH) and their respective implementing
regulations, which impose obligations on covered healthcare providers, health plans, and healthcare clearinghouses, as well as their business associates that create, receive, maintain or transmit individually identifiable health information for or
on behalf of a covered entity, with respect to safeguarding the privacy, security and transmission of individually identifiable health information; and
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state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by
any third-party payor, including commercial insurers; state laws that require pharmaceutical companies to comply with the pharmaceutical industrys voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal
government or otherwise restrict payments that may be made to healthcare providers; state laws that require drug manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or
marketing expenditures; and state laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance
efforts.
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The risk of our being found in violation of these laws and regulations is increased by the fact
that many of them have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations. Moreover, recent health care reform legislation has strengthened these laws. For
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example, the PPACA, among other things, amended the intent requirement of the federal anti-kickback and criminal health care fraud statutes; a person or entity no longer needs to have actual
knowledge of these statutes or specific intent to violate them. In addition, the PPACA provided that the government may assert that a claim including items or services resulting from a violation of the federal anti-kickback statute constitutes a
false or fraudulent claim for purposes of the false claims statutes. If our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we may be subject to penalties, including
civil and criminal penalties, damages, fines, exclusion from governmental health care programs, and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our financial
results.
Clinical drug development involves a lengthy and expensive process with an uncertain outcome, and results of earlier studies and
trials may not be predictive of future trial results.
Clinical development is a long, expensive and uncertain process,
and data obtained from clinical trials and supportive studies are susceptible to varying interpretations, which could delay, limit or prevent regulatory approval. The results from early clinical trials may not be predictive of results eventually
obtained in later clinical trials. Product candidates in later stages of clinical trials may fail to show the desired safety and efficacy traits despite having progressed through preclinical studies and initial clinical trials. A number of companies
in the biopharmaceutical industry have suffered significant setbacks in advanced clinical trials due to lack of efficacy or adverse safety profile of their medication candidate, despite promising results in earlier trials. Clinical trials may not
demonstrate sufficient safety and efficacy to obtain regulatory approval. For example, in May 2014, we discontinued our Phase 3 study of mifepristone for treatment of psychotic depression (Study 14) after receiving the report of a data monitoring
committee that the trial was unlikely to reach its primary endpoints based on an analysis of interim data.
Our ongoing Phase
1 study of mifepristone in combination with chemotherapy to treat triple-negative breast cancer is too small to demonstrate definitively the safety or efficacy of mifepristone for that indication. Even if the trial generates positive results, those
results would have to be confirmed in at least one substantially larger, more expensive, and lengthier trial if we are to have sufficient basis for seeking regulatory approval.
Moreover, the commencement and completion of clinical trials may be delayed by many factors that are beyond our control, including:
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delays obtaining regulatory approval to commence a trial;
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reaching agreement on acceptable terms with contract research organizations, or CROs, and clinical trial sites;
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obtaining institutional review board, or IRB, approval at each site;
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slower than anticipated patient enrollment;
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scheduling conflicts with participating clinicians and clinical institutions;
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negative or inconclusive results;
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patient noncompliance with the protocol;
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adverse medical events or side effects among patients during the clinical trials;
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negative or problematic FDA inspections of our clinical operations or manufacturing operations; and
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real or perceived lack of effectiveness or safety of mifepristone.
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We could encounter delays if a clinical trial is suspended or terminated by us, the IRBs of the clinical trial sites in which such trials
are being conducted, by the Data Safety Monitoring Board for such trial 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, failure to demonstrate a benefit from using a drug, changes in governmental regulations or administrative actions or lack of adequate funding to continue the clinical trial.
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Over the course of clinical development of any product candidate, we may decide, or the FDA
or other regulatory authorities may require us, to pursue clinical or preclinical studies in addition to those we had initially anticipated. Additional trials or studies may require additional funding, the availability of which is not assured. Also,
it is possible that additional trials or studies that we decide are necessary or desirable will delay or prevent the completion of our development programs. Even if we are able to conduct all of the clinical trials and supportive studies that we
consider appropriate, we may never receive regulatory approval to market mifepristone for the treatment of triple-negative breast cancer or any other product candidates or indications.
We depend on third parties to conduct and manage many of our clinical trials and to perform related data collection and analysis and, if these third parties do not successfully carry out their
contractual duties or meet expected timelines, we may face costs and delays that may prevent or delay us from obtaining regulatory approval for or commercializing our product candidates, which could substantially harm our business.
We rely on clinical investigators and clinical sites to enroll patients and other third parties such as clinical research organizations
(CROs) to manage many of our trials and to perform related data collection and analysis. We control only certain aspects of these third parties activities. Nevertheless, we are responsible for ensuring that each of our studies is conducted in
accordance with the applicable protocol, legal, regulatory and scientific standards, and our reliance on third parties does not relieve us of our regulatory responsibilities. We and these third parties are required to comply with cGCPs. If we or any
of the third parties working on or conducting our trials fail to comply with applicable cGCPs, the clinical data generated in our clinical trials may be deemed unreliable and the FDA or comparable foreign regulatory authorities may require us to
perform additional clinical trials before approval of our marketing applications, if at all. We cannot assure you that upon inspection by a given regulatory authority, such regulatory authority will determine that any of our clinical trials complies
with cGCP requirements. In addition, our clinical trials must be conducted with product produced under cGMP regulations. Our failure to comply with these regulations may require us to repeat clinical trials, which would delay the regulatory approval
process. Moreover, we may not be able to control the timing of identification and selection of appropriate sites for our planned trials and the amount and timing of resources that the clinical sites that conduct the clinical testing may devote to
our clinical trials. If our clinical investigators and clinical sites fail to enroll a sufficient number of patients in our clinical trials or fail to enroll them on our planned schedules, we will be unable to complete our trials or to complete them
as planned, which could delay or prevent us from completing the clinical development of mifepristone for the treatment of triple-negative breast cancer or other development programs.
We have an agreement with the CRO that is conducting our Phase 1 trial of mifepristone for the treatment of triple-negative breast cancer
to supervise and monitor clinical site performance and to perform investigator supervision, data collection and analysis for this trial. The conduct of future clinical trials may also be conducted through the use of CROs and third party clinical
sites. We may not be able to maintain relationships with this or other CROs or with the clinical investigators and the clinical sites through the completion of all trial activities without delays in anticipated timing of trial activities or
excessive expenditures. If any of our relationships with CROs or other third parties terminates, we may not be able to enter into arrangements with alternative CROs or third parties on commercially reasonable terms, or at all. If these CROs,
clinical investigators, clinical sites or other third parties do not carry out their contractual duties or obligations or fail to meet expected deadlines, or if they need to be replaced or if the quality or accuracy of the clinical data they obtain
is compromised due to their failure to adhere to our clinical protocols or regulatory requirements or for other reasons, our clinical trials may be extended, delayed or terminated and we may be unable to obtain regulatory approval for, or
successfully commercialize, mifepristone for the treatment of triple-negative breast cancer.
Failure to obtain regulatory approval in
foreign jurisdictions will prevent us from commercializing Korlym and our other product candidates abroad.
We may seek to
commercialize our products and product candidates in international markets with the help of one or more partners or on our own. Outside the United States, we may commercialize a product only if we receive a marketing authorization and, in many
cases, pricing approval, from the appropriate regulatory authorities, whose approval processes include all of the risks associated with the FDA approval process, and, in some cases, additional risks. The approval procedure varies among countries and
can involve additional testing, and the time required to obtain approval may differ from that required to obtain FDA approval. Other than seeking and receiving Orphan Drug designation in the EU and the submission of our MAA to the EMA in October
2013, we have not taken any actions to obtain foreign approvals. We may not develop our product candidates in the clinic in order to obtain foreign regulatory approvals on a timely basis, if at all.
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Approval by the FDA does not ensure approval by regulatory authorities in other countries,
and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries or by the FDA, but a failure or delay in obtaining regulatory approval in one country may have a negative effect on the
regulatory process in others. We may not be able to file for regulatory approvals and may not receive necessary approvals to commercialize our product candidates in any foreign market.
We face competition from companies with substantial financial, technical and marketing resources, which could limit our future revenues from the commercialization of mifepristone for the treatment of
triple-negative breast cancer or for other indications.
The biotechnology and pharmaceutical industries are intensely
competitive and subject to rapid and significant technological change. Our present and potential competitors include major pharmaceutical companies such as the makers of the drugs identified above, as well as specialized pharmaceutical firms,
universities and public and private research institutions. Moreover, we expect competition to intensify as technical advances are made. These competitors, either alone or with collaborative parties, may succeed with the development and
commercialization of medicinal products that are superior to and more cost-effective than mifepristone. Many of our competitors and related private and public research and academic institutions have greater experience, more financial and marketing
resources and larger research and development staffs than we do. In addition, many of these competitors, either alone or together with their collaborative partners, have significantly greater experience than we do in developing human medicines,
obtaining regulatory approvals, manufacturing and commercializing products.
Accordingly, mifepristone may not be an effective
competitor against established treatments and our present or potential competitors may succeed in developing medicinal products that are superior to mifepristone or render mifepristone obsolete or non-competitive. If we are unable to establish
mifepristone as a superior and cost-effective treatment for triple-negative breast cancer, or any future use, we may be unable to generate the revenues necessary to support our business.
Our efforts to discover, develop and commercialize new product candidates beyond mifepristone are at a very early stage. If we fail to identify and develop additional uses for GR-II antagonists, we may
be unable to market additional products.
To develop additional potential sources of revenue, we believe that we must
identify and develop additional product candidates or new therapeutic uses for mifepristone. We own or have exclusively licensed issued U.S. patents covering the use of GR-II antagonists to treat triple-negative breast cancer, mental disorders by
optimizing mifepristone levels in plasma serum, mild cognitive impairment, weight gain due to treatment with antipsychotic medication, stress disorders, early dementia, delirium, gastroesophageal reflux disease, Downs Syndrome, catatonia,
psychosis associated with cocaine addiction, psychosis associated with Interferon-alpha therapy, migraine headaches, and to increase the therapeutic response to ECT. In addition, we have six U.S. method of use patent applications covering GR-II
antagonists for the treatment of a number of other metabolic and psychiatric disorders, six U.S. composition of matter patents covering specific GR-II antagonists, and one additional U.S. composition of matter patent application is pending. We have
also filed patent applications in the major international markets.
The use of GR-II antagonists may not be effective to treat
these conditions or any other indications. Moreover, we could discover that the use of GR-II antagonists in these patient populations has unacceptable side effects or is otherwise not safe. Due to the risks of efficacy and side effects inherent in
developing novel compounds, we are likely to enter multiple compounds into development, which would increase our rate of spending with no assurance that we will be successful in developing new drugs that are safe and effective.
In addition, we may not develop or continue to develop product candidates for any of the indications or compounds covered by our patents
and patent applications. Typically, there is a high rate of attrition for product candidates in preclinical and clinical trials, and our product development efforts may not lead to commercially viable products. For example, although we plan to
advance at least two of the new compounds to the clinic over the next year, we may fail to do so.
We may elect to enter into
collaboration arrangements with respect to one or more of our product candidates. If we do enter into such an arrangement, we would be dependent on a collaborative partner for the success of the product candidates developed under the arrangement.
Any future collaborative partner may fail to successfully develop or commercialize a product candidate under a collaborative arrangement.
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We only have significant clinical experience with mifepristone and we may determine that
mifepristone is not desirable for uses other than for the treatment of Cushings syndrome and, potentially, triple-negative breast cancer. For example, we do not intend to develop mifepristone for mitigation of the weight gain associated with
the use of Zyprexa, Risperdal or other atypical antipsychotics, even though we have reported positive results in the proof of concept studies. We may pursue other GR-II antagonists for this use. The compounds developed pursuant to our early
clinical, preclinical and discovery research programs may fail to become viable product candidates regardless of the resources we may dedicate to the program. Even if product candidates are identified, we may abandon further development efforts
before we reach clinical trials or after expending significant expense and time conducting clinical trials due to financial constraints, concerns over the safety or efficacy of the product candidates, manufacturing difficulties or other reasons.
Moreover, governmental authorities may enact new legislation or regulations that could limit or restrict our development efforts. If we are unable to successfully discover and commercialize new uses for GR-II antagonists, we may be unable to
generate sufficient revenue to support our operations.
If we lose our key personnel or are unable to attract and retain additional skilled
personnel, we may be unable to pursue our product development and commercialization efforts.
Our ability to operate
successfully and manage our potential future growth depends significantly upon retaining key research, technical, sales, marketing, managerial and financial personnel, and attracting and retaining additional highly qualified personnel in these
areas. For example, we do not currently employ a Chief Medical Officer to manage our clinical development efforts, although our efforts to hire such an executive are ongoing. We depend substantially on the principal members of our management and
scientific staff. We do not have agreements with any of our executive officers that provide for their continued employment with us or employment insurance covering any of our key personnel. Any officer or employee can terminate his or her
relationship with us at any time and work for one of our competitors. The loss of these key individuals could result in competitive harm because we could experience delays in our product research, development and commercialization efforts without
their expertise.
We face intense competition for qualified personnel from numerous companies, as well as universities and
nonprofit research organizations in the highly competitive San Francisco Bay Area. Although we believe that we have been successful in attracting and retaining qualified personnel to date, we may not be able to attract and retain sufficient
qualified personnel in the future. The inability to attract and retain these personnel could result in delays in the research, development and commercialization of our potential products.
Rapid technological change could make our product and product candidates obsolete.
Pharmaceutical technologies have undergone rapid and significant change and we expect that they will continue to do so. Our future will depend in large part on our ability to maintain a competitive
position with respect to these technologies. Korlym and any products and processes that we develop may become obsolete or uneconomical before we recover any or all expenses incurred in connection with their development. Rapid technological change
could make Korlym and our product candidates obsolete or uneconomical, which could materially adversely affect our business, financial condition and results of operations.
The occurrence of a catastrophic disaster or other similar events could cause damage to our own or our manufacturers facilities and equipment, which could require us to cease or curtail
operations.
Because our executive offices are located in the San Francisco Bay Area and some of our current manufacturers
are also located in earthquake-prone areas, our business is vulnerable to damage from various types of disasters or other similarly disruptive events, including earthquake, fire, flood, power loss and communications failures. In addition, political
considerations relating to mifepristone may put us and our manufacturers at increased risk for terrorist attacks, protests or other disruptive events. If any disaster or other similar event were to occur, we may not be able to operate our business
and our manufacturers may not be able to produce Korlym or our product candidates. Our insurance may not be adequate to cover, and our insurance policies may exclude coverage for, our losses resulting from disasters or other business interruptions.
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We rely significantly on 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.
Despite the implementation of security measures, 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 clinical and
commercialization activities and business operations, in addition to possibly requiring substantial expenditures of resources to remedy. The loss of clinical trial data could result in delays in our regulatory approval efforts and significantly
increase our costs to recover or reproduce the data. 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 disclosure of confidential or proprietary information, we
could incur liability and our product research, development and commercialization efforts could be delayed.
Risks Related
to Our Capital Needs and Financial Results
We may need additional capital in order to complete the development and commercialization
of mifepristone for the treatment of triple-negative breast cancer or other indications or for the development and commercialization of our proprietary, selective GR-II antagonists. Additional capital may not be available to us at all or on
favorable terms, which could adversely affect our business.
We may need to raise additional funds to continue and expand
the development of mifepristone for the treatment of triple-negative breast cancer and of our proprietary, selective GR-II antagonists in various indications. We may also raise additional funds for other research and development activities,
including clinical trials, and working capital and for other general corporate purposes, or to acquire or invest in businesses, products and technologies that are complementary to our own.
Factors impacting our cash position and future prospects of liquidity include the following:
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the amount and timing of revenues from the commercialization of Korlym;
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the pace at which physicians adopt Korlym as a treatment;
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the willingness of insurance companies, the government and other third-party payors to provide coverage for Korlym at reasonable rates;
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changes in the coverage and reimbursement policies of third-party insurance companies or government agencies;
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the costs, timing of site selection and enrollment of our clinical trials;
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the results of our research efforts and clinical trials;
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the need to perform additional clinical trials and other supportive studies;
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the timing and outcome of our Phase 1 study of mifepristone for the treatment of triple-negative breast cancer and further clinical development related
to this indication;
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developments or disputes concerning patents or proprietary rights, including announcements of claims of infringement, interference or litigation
against us or our licensors;
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actual or anticipated fluctuations in our operating results;
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changes in our growth rates; and
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changes in our research and development plans for our proprietary, selective GR-II antagonists.
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Consequently, we may need additional funding sooner than anticipated. In addition, we may choose to raise additional capital due to
market conditions or strategic considerations even if we believe we have sufficient funds for our current and future operating plans.
We cannot be certain that additional funding will be available on acceptable terms or at all. Even though we have raised funds a number of times in the past, market and economic conditions may make it
difficult for us to raise any or sufficient additional capital. Our sales of common stock and warrants and the exercises of warrants have been dilutive to stockholders and any exercise of outstanding warrants and additional equity financing could
cause further dilution to stockholders. Debt financing, if available, may involve restrictive covenants. If we obtain funds through collaborations with others, these arrangements may be on unfavorable
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terms or may require us to relinquish certain rights to Korlym, our technologies or product candidates, which we would otherwise seek to develop on our own. If adequate funds are not available,
we may be required to delay, reduce the scope of or eliminate one or more of our research or development programs or we may be required to discontinue operations.
We have incurred losses since inception and we may incur net losses in the future.
We have a limited history of operations and have focused primarily on clinical trials. We have begun to commercialize Korlym and, if the outcome of our clinical trials supports it, we plan to seek FDA
regulatory clearance to market mifepristone for the treatment of triple-negative breast cancer and, potentially, other indications. Historically, we have funded our operations primarily from the sale of our equity securities. We have incurred losses
in each year since our inception in 1998. As of June 30, 2014, we had an accumulated deficit of $314.1 million. We began to sell our first commercial product, Korlym, in the United States in April 2012. Based on this limited experience
marketing Korlym, it is difficult for us to predict the magnitude or timing of future product sales. We expect our research and development expenses to increase in connection with the clinical trials and other development activities for mifepristone
and for other product candidates. We expect to incur significant expenses related to commercializing Korlym. We are unable to predict the extent of any future losses or whether or when we will become profitable.
We may not be able to pursue all of our product research and development opportunities if we are unable to generate sufficient revenue or secure
adequate funding for these programs.
The costs required to start or continue many of the programs that our intellectual
property allows us to consider for further development are collectively greater than the funds currently available to us. For example, we have successfully discovered three series of compounds that are selective GR-II antagonists but do not appear
to block the progesterone receptor. Further development of these proprietary compounds or any further development stemming from our method of use patents may be delayed or cancelled if we determine that such development may jeopardize our ability to
complete the clinical development of mifepristone for the treatment of triple-negative breast cancer.
Global economic conditions could
adversely affect our liquidity and financial condition.
In the United States and globally, market and economic conditions
have been volatile over the past few years, with significantly tighter credit conditions in the markets in which we conduct our operations. Renewed concerns about the recent recession and the systemic impact of adverse economic conditions, such as
unstable global financial markets, adverse effects on the cost and availability of capital, high corporate, consumer and governmental debt levels and high unemployment may cause lenders and institutional investors to reduce, and in some cases,
cease, to provide credit to businesses. Renewed or increased turbulence in the global markets and economies may adversely affect our liquidity and financial condition.
If we do not have sufficient cash flow to continue operating our business and are unable to borrow funds or raise equity or debt capital, we may need to find alternative ways to increase our liquidity.
Such alternatives may include, without limitation, curtailing clinical or drug development activity, or limiting our commercial efforts, product manufacturing or sales and marketing support, which would have an adverse effect on our business,
results of operations, cash flows and financial condition.
If we acquire other selective GR-II antagonists or other technologies or
potential products, we will incur a variety of costs and may never realize the anticipated benefits of the acquisition.
If appropriate opportunities become available, we may attempt to acquire other GR-II antagonists, particularly GR-II antagonists that do
not terminate pregnancy. We may also be able to acquire other technologies or potential products that are complementary to our operating plan. We currently have no commitments, agreements or plans for any acquisitions. The process of acquiring
rights to another GR-II antagonist or any other potential product or technology may result in unforeseen difficulties and expenditures and may absorb significant management attention that would otherwise be available for ongoing development of our
business. In addition, we may fail to realize the anticipated benefits of any acquired potential product or technology. Future acquisitions could dilute our stockholders ownership interest in us and could cause us to incur debt, expose us to
future liabilities and result in amortization or other expenses related to goodwill and other intangible assets.
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Failure to meet our obligations under our Financing Agreement with Biopharma Secured Debt Fund II Sub,
S.àr.l (Biopharma), could adversely affect our financial results and liquidity.
Pursuant to our Financing
Agreement with Biopharma entered into in August 2012, we are obligated to make payments to Biopharma equal to 20 percent of our net product sales of Korlym, any future mifepristone-based products and our next-generation selective GR-II antagonists
(Covered Products), subject to certain quarterly caps, as well as an un-capped 20 percent of any upfront, milestone or other contingent payments we receive with respect to Covered Products, until such payments to Biopharma total $45.0 million.
Pursuant to this agreement, we may not: (i) incur indebtedness greater than the sum of earnings before interest, taxes,
depreciation and amortization, including such items as non-cash stock-based compensation, for the four calendar quarters preceding such incurrence, which we refer to as the Indebtedness Covenant; (ii) pay a dividend or other cash distribution,
unless we have cash and cash equivalents in excess of $50.0 million after such payment; (iii) amend or restate our certificate of incorporation or bylaws unless such amendments or restatements do not affect Biopharmas interests under the
transaction; and (iv) encumber any of the collateral securing our performance under the agreement.
The percentage used
to calculate our payments to Biopharma would increase to 50 percent and any applicable payment caps would lapse if we (i) fail to provide Biopharma with certain information regarding our promotion and sales of Covered Products, (ii) do not
devote a commercially reasonable amount of resources to the promotion and marketing of the Covered Products or (iii) violate the Indebtedness Covenant and, in each case, fail to cure within the applicable cure period.
Upon a Corcept change of control transaction, as defined in the agreement, Biopharma will be automatically entitled to receive any
amounts not previously paid, up to our maximum repayment obligation of $45.0 million. As defined in the agreement, Change of Control includes, among other things, (i) a greater than 50 percent change in the ownership of Corcept,
(ii) certain changes in Board composition of Corcept and (iii) the licensing of Korlym to a third party for sale in the United States.
To secure our obligations under the agreement, we granted Biopharma a security interest in our rights in patents, trademarks, trade names, domain names, copyrights, know-how and regulatory approvals
related to the Covered Products, all books and records relating to the foregoing and all proceeds of the foregoing, which we refer to as the Collateral. If we (i) fail to deliver a royalty payment when due and do not remedy that failure within
30 days, (ii) fail to maintain a first-priority perfected security interest in the Collateral in the United States and do not remedy that failure within five business days of receiving notice of such failure or (iii) become subject to an
event of bankruptcy, then Biopharma may attempt to recover up to $45.0 million (after deducting any payments we have already made).
We cannot assure that we will not breach the covenants or other terms of, or that an event of default will not occur under this agreement and, if a breach or event of default occurs, we cannot assure that
we will be able to cure the event within the time permitted. Any failure to pay our obligations when due, any breach or default of our covenants or other obligations, or any other event that causes an acceleration of payment at a time when we do not
have sufficient resources to meet these obligations, could have a material adverse effect on our business, results of operations, financial condition and future viability.
The acceleration of the payment obligation in the event of a change of control transaction may make us less attractive to potential acquirers, and the payment of such funds out of our available cash or
acquisition proceeds would reduce acquisition proceeds for our stockholders.
Risks Relating to Our Intellectual Property
If Korlym or future product candidates conflict with the patents of others or if we become involved in other intellectual property
disputes, we may have to engage in costly litigation or obtain a license and we may be unable to commercialize our product candidates.
Our success depends in part on our ability to obtain and maintain adequate patent protection for the use of mifepristone for the treatment of triple-negative breast cancer and other potential uses of
GR-II antagonists. If we do not adequately protect our intellectual property, competitors may be able to use our intellectual property and erode our competitive advantage.
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To date, we own fifteen issued U.S. method of use patents and have exclusively licensed
three issued U.S. method of use patents. We have six U.S. method of use patent applications pending for GR-II antagonists. We own six composition of matter patents and have one composition of matter patent application pending. We have applied, and
will continue to apply, for patents covering our product candidates as we deem appropriate. We have also filed, where we deemed appropriate, foreign patent applications corresponding to our U.S. patents and applications.
We have exclusively licensed three issued U.S. patents from Stanford University for the use of GR-II antagonists, including mifepristone,
in the treatment of psychotic major depression, which is commonly referred to as psychotic depression, cocaine-induced psychosis and early dementia, including early Alzheimers disease. We have also exclusively licensed from the University of
Chicago allowed U.S. patent claims for the use of mifepristone in the treatment of triple-negative breast cancer, which claims are covered in U.S. Patent Application No. 13/071,363 Methods and Compositions Related to Glucocorticoid
Receptor Antagonists and Breast Cancer. On August 8, 2013 the U.S. Patent and Trademark Office notified the University of Chicago that certain claims in the application had been allowed, although the patent has not yet issued.
We bear the costs of prosecuting, protecting and defending the rights to these patents. In order to maintain the exclusive license to
these patents until their expiration, we are obligated to make milestone and royalty payments to both universities. If we become noncompliant with our obligations under our agreements, we may lose the right to commercialize mifepristone for the
treatment of cocaine-induced psychosis, early dementia and triple-negative breast cancer and our business would be materially harmed. In addition, if Stanford University were to terminate our mifepristone license due to breach of the license on our
part, we would not be able to commercialize mifepristone for the treatment of cocaine-induced psychosis or early dementia. If the University of Chicago were to terminate our license, we would not be able to commercialize mifepristone for the
treatment of triple-negative breast cancer.
Our patent applications and patents licensed or issued to us may be challenged by
third parties and our patent applications may not result in issued patents. For example, in 2004, Akzo Nobel (now a division of Merck & Co.) filed an observation challenging the claims of our exclusively licensed European patent application
with claims directed to psychotic depression. In this instance, the patent later issued and, in 2007, we received notice from the European Patent Office that there will be no opposition proceedings in Europe in regard to this patent.
Our presently pending and future patent applications may not issue as patents, and any patent issued to us may be challenged,
invalidated, held unenforceable or circumvented. For example, the arguments presented by Akzo Nobel could be raised in the United States either before the U.S. Patent and Trademark Office or in a court of law. Furthermore, the claims in patents
which have been issued to us, or which may be issued to us in the future, may not be sufficiently broad to prevent third parties from producing competing products. In addition, the laws of various foreign countries in which we compete may not
protect our intellectual property to the same extent as do the laws of the United States. If we fail to obtain adequate patent protection for our proprietary technology, our competitors may produce competing products based on our technology, which
would impair our ability to compete.
If a third party were successful in asserting an infringement claim against us, we could
be forced to pay damages and prevented from developing, manufacturing or marketing our potential products. We do not have liability insurance for patent infringements. A third party could require us to obtain a license to continue to use their
intellectual property, and we may not be able to do so on commercially acceptable terms, or at all. We believe that significant litigation will continue in our industry regarding patent and other intellectual property rights. If we become involved
in litigation, it could consume a substantial portion of our resources. Regardless of the merit of any particular claim, defending a lawsuit takes significant time, is expensive and diverts managements attention from other business.
If we are unable to protect our trade secrets and proprietary information, our ability to compete in the market could be diminished.
In addition to patents, we rely on a combination of confidentiality, nondisclosure and other contractual provisions, laws
protecting trade secrets and security measures to protect our trade secrets and proprietary information. Nevertheless, these measures may not adequately protect our trade secrets or other proprietary information. If they do not adequately protect
our rights, third parties could use our proprietary information, which could diminish our ability to compete in the market. In addition, employees, consultants and others who
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participate in the development of our product candidates may breach their agreements with us regarding our trade secrets and other proprietary information, and we may not have adequate remedies
for the breach. We also realize that our trade secrets may become known through means not currently foreseen. Notwithstanding our efforts to protect our trade secrets and proprietary information, our competitors may independently develop similar or
alternative products that are equal or superior to our product candidates without infringing on any of our proprietary information or trade secrets.
Our licensed patents covering the use of mifepristone to treat triple-negative breast cancer, psychotic depression, cocaine-induced psychosis and early dementia, including Alzheimers disease,
cover only mifepristones method of use and not its composition of matter, which may make it more difficult for us to prove patent infringement if physicians prescribe another manufacturers mifepristone or if patients acquire mifepristone
from other sources, such as the internet or underground market.
We have exclusively licensed three U.S. patents from
Stanford University for the use of GR-II antagonists, including mifepristone, for the treatment of psychotic depression, cocaine-induced psychosis and early dementia, including Alzheimers disease. We also have an exclusive license from the
University of Chicago to certain allowed patent claims covering the use of mifepristone to treat triple-negative breast cancer. A method of use patent covers only a specified use of a particular compound, not a particular composition of matter.
Because none of the patents we have licensed from Stanford University and none of the allowed patent rights we have licensed from the University of Chicago cover the composition of mifepristone, we cannot prevent others from commercializing
mifepristone in indications not covered by these or our other method of use patents. Although any such off-label use would violate our patents, effectively monitoring compliance with our patents may be difficult and costly.
In addition, we cannot be assured that patients will not obtain mifepristone from other sources. As with other pharmaceutical products,
patients may be able to purchase mifepristone through the internet or underground market. Mifepristone is also sold in the United States by Danco Laboratories for the termination of early pregnancy. While distribution is limited to a single dose
provided in the physicians office and covered by other restrictions, we cannot be certain that Cushings syndrome patients will not be able to obtain mifepristone from this source or others, should another company receive approval to
market mifepristone for another indication.
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Risks Related to Our Stock
The market price of our common stock has been and is likely to continue to be highly volatile due to the limited number of shares of our common stock held by non-affiliates or factors influencing the
stock market and opportunities for sale at any given time may be limited.
We cannot assure you that an active trading
market for our common stock will exist at any time. Holders of our common stock may not be able to sell shares quickly or at the market price if trading in our common stock is not active. During the 52-week period ended August 4, 2014, our
average daily trading volume was approximately 393,000 shares and the intra-day sales prices per share of our common stock on The NASDAQ Stock Market ranged from $1.47 to $4.49. As of August 4, 2014, our officers, directors and principal
stockholders controlled 35 percent of our common stock. The trading price of our common stock has been and is likely to continue to be highly volatile and could be subject to wide fluctuations in price in response to various factors, many of which
are beyond our control, including:
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the pace of market acceptance of Korlym or the timing and level of coverage and reimbursement attained;
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our cash and short-term investment position;
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actual or anticipated timing and results of our clinical trials;
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new products or services introduced or announced by us or our competitors;
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actual or anticipated regulatory approvals of our product candidates or of competing products;
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changes in laws or regulations applicable to our product candidates or our competitors products;
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changes in the expected or actual timing of our development programs or our competitors potential development programs;
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actual or anticipated variations in quarterly operating results, including potential product returns and timing of revenue recognition;
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announcements of technological innovations by us, our collaborators or our competitors;
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general market and economic conditions;
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changes in financial estimates or recommendations by securities analysts;
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conditions or trends in the biotechnology and pharmaceutical industries;
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changes in the market valuations of similar companies;
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announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments;
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additions or departures of key personnel;
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disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for
our technologies;
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developments concerning collaborations;
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trading volume of our common stock;
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limited number of shares of our common stock held by our non-affiliates;
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maintaining compliance with the listing requirements of the stock exchange on which we are listed;
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success of additional financing efforts; and
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purchases or sales of our common stock by us, our officers, directors or our stockholders.
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In addition, the stock market in general, The NASDAQ Stock Market and the market for biotechnology and life sciences companies in
particular have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. These broad market and industry factors may seriously harm the market price of our
common stock, regardless of our operating performance. In the past, following periods of volatility in the market, securities class-action litigation has often been instituted against companies. Such litigation, if instituted against us, could
result in substantial costs and diversion of managements attention and resources.
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If our operating and financial performance in any given period does not meet the guidance that we provide
to the public, estimates published by research analysts or other investor expectations, our stock price may decline.
We
have provided guidance as to our expected 2014 net revenue. Our guidance is only an estimate of what management believes is realizable as of the date of the release of such guidance. Our actual results may vary from our guidance and the variations
may be material.
There are a number of reasons why we might fail to meet our financial guidance or other expectations about
our business, including, but not limited to, the risks and uncertainties described in this report and in our other public filings and public statements. In particular, there are inherent difficulties in predicting the amount of Korlym that will be
sold. For example, the rate of physician adoption of Korlym is uncertain. Research analysts who cover our business have put forth a wide range of revenue estimates, based on their own analyses. We believe research analysts will consider the guidance
we have provided as one factor in determining their own annual revenue estimates. Estimating our net revenue for future periods is difficult and you should rely on our guidance and the estimates of research analysts at your own discretion. If, in
the future, our operating or financial results for a particular period do not meet our guidance, analyst estimates or the expectations of investors, or if we reduce our guidance for future periods, our stock price may decline.
Research analysts may not continue to provide or initiate coverage of our common stock or may issue negative reports, which may have a negative impact
on our common stocks market price.
Securities analysts currently covering our common stock may discontinue research
coverage. Additional securities analysts may elect not to provide research coverage of our common stock. A lack of research coverage may adversely affect our common stocks market price. The trading market for our common stock may be affected
in part by the research and reports that industry or financial analysts publish about us or our business. If one or more of the analysts who elects to cover us downgrades our stock, our stock price would likely decline rapidly and significantly. If
one or more of these analysts ceases coverage of our company, we could lose visibility in the market, which in turn could cause our stock price to decline. In addition, rules mandated by the Sarbanes-Oxley Act of 2002, and a global settlement
reached in 2003 between the SEC, other regulatory analysts and a number of investment banks have led to a number of fundamental changes in how analysts are reviewed and compensated. In particular, many investment banking firms are required to
contract with independent financial analysts for their stock research. It may be difficult for companies such as ours with smaller market capitalizations to attract independent financial analysts that will cover our common stock. This could have a
negative effect on our market price.
Sale of a substantial number of shares of our common stock may cause the price of our common stock to
decline.
Sales of a substantial number of shares of our common stock in the public market could harm the market price of
our common stock. As additional shares of our common stock become available for resale in the public market, whether as a result of equity financings by us or due to the release of trading restrictions, the supply of our common stock will increase,
which could decrease the price. Substantially all of the shares of our common stock are eligible for sale, subject to applicable volume and other resale restrictions.
We may be required to pay significant penalties if we are not able to meet our obligations under our outstanding registration rights agreements.
We have entered into registration rights agreements in connection with certain of our securities offerings. We may be obligated to pay
liquidated damages if we do not meet our obligations under those agreements.
If we are required to pay significant amounts,
such as the liquidated damages described above, under these or future registration rights agreements, it could have a material adverse effect on our financial condition and ability to finance our operations.
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Our officers, directors and principal stockholders, acting as a group, will be able to significantly
influence corporate actions.
As of August 4, 2014, our officers, directors and principal stockholders control
35 percent of our common stock. As a result, these stockholders, acting together, will be able to significantly influence all matters requiring approval by our stockholders, including the election of directors and the approval of mergers or
other business combination transactions. The interests of this group of stockholders may not always coincide with our interests or the interests of other stockholders and may prevent or delay a change in control. This significant concentration of
share ownership may adversely affect the trading price of our common stock because investors often perceive disadvantages to owning stock in companies with controlling stockholders.
Changes in laws and regulations may result in increased costs to us, which may harm our financial results.
New laws and regulations, as well as changes to existing laws and regulations, affecting our company, including the provisions of the PPACA requiring the reporting of aggregate spending related to health
care professionals, the provisions of the Sarbanes-Oxley Act of 2002 and rules adopted by the SEC and by The NASDAQ Stock Market have and will likely continue to result in increased costs to us as we respond to their requirements. We are investing
resources to comply with evolving laws and regulations, and this investment may result in increased selling, general and administrative expenses and a diversion of managements time and attention from revenue-generating activities to compliance
activities.
In addition, new rules and regulations could make it more difficult or costly for us to obtain certain types of
insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur higher costs to obtain the same or similar coverage. The impact of these events could also make it more
difficult for us to attract and retain qualified persons to serve on our Board of Directors, or our board committees, or as executive officers. At present, we cannot predict or estimate the amount of the additional costs related to new rules and
regulations or the timing of such costs.
Compliance with public company obligations, including the securities laws and regulations, is
costly and requires significant management resources, and we may fail to comply.
We are a small company with limited
resources.
The federal securities laws and regulations, including the corporate governance and other requirements of the
Sarbanes-Oxley Act of 2002, impose complex and continually changing regulatory requirements on our operations and reporting. These requirements have increased and will continue to increase our legal compliance costs.
Section 404 of the Sarbanes-Oxley Act of 2002 requires that we evaluate and determine the effectiveness of our internal controls
over financial reporting and provide a management report on the internal control over financial reporting. This same legislation also requires that the independent registered public accounting firm auditing our financial statements must attest to
and report on the effectiveness of our internal controls over financial reporting. If we are unable to complete the required assessment as to the adequacy of our internal control over financial reporting in future years or if our independent
registered public accounting firm is unable to provide us with an unqualified report as to the effectiveness of our internal control over financial reporting as of future year ends, investors could lose confidence in the reliability of our financial
reporting.
Changes in or interpretations of accounting rules and regulations could result in unfavorable accounting charges or require us
to change our accounting policies or operating practices.
Accounting methods and policies for business and marketing
practices of pharmaceutical companies are subject to continual review, interpretation and guidance from relevant accounting authorities, including the SEC. Although we believe that our accounting practices are consistent with current accounting
pronouncements, changes to or interpretations of accounting methods or policies in the future may require us to reclassify, restate or otherwise change or revise our financial statements. Any such changes could result in corresponding changes to the
amounts of assets, liabilities, revenues, expenses and income. Any such changes 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.
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If we fail to continue to meet all applicable NASDAQ Stock Market requirements, our stock could be
delisted by The NASDAQ Stock Market. If delisting occurs, it would adversely affect the market liquidity of our common stock and harm our business.
If we are unable to meet any of The NASDAQ listing requirements in the future, including, for example, if the closing bid price for our common stock is below $1 per share for 30 consecutive trading days,
The NASDAQ Stock Market could determine to delist our common stock, the delisting could adversely affect the market liquidity of our common stock and the market price of our common stock could decrease. During the 52-week period ended August 4,
2014, the intra-day sales prices per share of our common stock on The NASDAQ Stock Market ranged from $1.47 to $4.49. Such delisting could also adversely affect our ability to obtain financing for the continuation of our operations and could result
in the loss of confidence by investors, suppliers and employees.
Anti-takeover provisions in our charter and bylaws and under Delaware law
and payment acceleration provisions under the Biopharma Financing Agreement may make an acquisition of us or a change in our management more expensive or difficult, even if an acquisition or a management change would be beneficial to our
stockholders.
Provisions in our charter and bylaws may delay or prevent an acquisition of us or a change in our
management. Some of these provisions allow us to issue preferred stock without any vote or further action by the stockholders, require advance notification of stockholder proposals and nominations of candidates for election as directors and prohibit
stockholders from acting by written consent. In addition, a supermajority vote of stockholders is required to amend our bylaws. Our bylaws provide that special meetings of the stockholders may be called only by our Chairman, President or the Board
of Directors and that the authorized number of directors may be changed only by resolution of the Board of Directors. These provisions may prevent or delay a change in our Board of Directors or our management, which is appointed by our Board of
Directors. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law. Section 203 may prohibit large stockholders, in particular those owning 15 percent
or more of our outstanding voting stock, from merging or combining with us. In addition, our payment obligations to Biopharma accelerate in the event of a change of control transaction. See Risk Factors Failure to meet our obligations
under our Financing Agreement with Biopharma Secured Debt Fund II Sub, S.àr.l, could adversely affect our financial results and liquidity. These provisions in our charter and bylaws and under Delaware law and the Financing Agreement
could reduce the price that investors might be willing to pay for shares of our common stock in the future and result in the market price being lower than it would be without these provisions.